Chief Economist at the National Stock Exchange of India
Indian markets whipped around after a placid June, steadily rising through the month before profit-booking took some money off the table. Global markets followed a similar, albeit subdued trajectory after two months of negative returns, as expectations on the Fed raising interest rates by 75bps for the second consecutive month matched with recession worries in the US, followed by the rest of the developed world. Now that the Fed has indeed acted on expected lines, the trillion-dollar question is: If recession does materialize soon enough, would the central banks hike less than expected? And with that, would the relentless rise of the greenback stop?
Inflation would continue to be the focal point for global central banks, but markets would do well with a lower dose of the bitter medicine of rates. Recession worries also weighed on commodities—Brent crude is down 6% in the month, and the greenback continues its inexorable rise, up 1.3% MTD, but 10% this year. The consequences of a hardening dollar range are visible in sovereign default (Sri Lanka), rising trade deficit (June trade deficit at an all-time high US$26bn), capital outflows (FX reserves down US$50bn and counting) etc.
The S&P500 is up 4.1% this month (on July 25th)—rising through the month until the FOMC meeting scheduled later this week brought back the reality of a slowdown—but in 2022, the developed world remains close to bear market territory (-17% YTD), in 2022. Closer home, market benchmark NIFTY was up 5.4% for the month (as of July 25th), thanks to a pause in the hitherto relentless selling by FIIs (+US$53m MTD, vs. -US6.4bn in June, -US$28.3bn YTD), even as inflows from domestic players continued to ease, after two stellar years. The NIFTY is down 4.2% for the year, meaningfully divergent from the EM pack—the MSCI EM is down ~19.8% YTD. Part of this carnage is driven by dollar depreciation—the INR breached 80, and is down 7.3% for the year, and some of the EM counterparts have fared worse. The Euro and the Pound are down 10%, and the Yen, 18%.
In line with the equity markets, global bond markets had a reckoning with the prospects of recession too, in their ongoing war against inflation. Rising rates across the board in the wake of tightening by global markets have led to the flattening of yield curves as markets account for a lower growth trajectory, eventually leading to an inversion, as the spread between the short- and long-end fell below zero. The US 2s10s—an early-warning indicator of a recession— briefly went negative in March—the first time since 2007—and then did so comprehensively in July. Would the US economy indeed go into a recession? If so, when, and would the rest of the world follow? Our Chart of the Month takes a deeper look at previous recessions in the US and the macro underpinnings surrounding such events. Indian markets reflected similar worries as the long end of curve eased despite the follow-through 50bps repo hike by the RBI in June. Our Market Round-up has more detail.
We profile the primary markets in the country this month, in our Story. Capital raising through this important channel of the economy peaked out in FY22, after a steady seven years of growth. Rising rates led to debt mobilisations falling 23% to Rs6trn, while equities remained largely steady Rs2.3trn, but with a shift towards fresh listings and FPOs, by large companies. We also briefly discuss 10 years of SME listings since the platforms came up in 2012.
On the macro front, industrial production remained high (+19.6%) on a low base, even as the realistic three-year CAGR growth remained at 0.6%. CPI inflation at 7% remained above the 6% tolerance bounds for the sixth month in a row, but has likely peaked out, with mild moderation, thanks to the excise duty cuts on auto fuels. Wholesale inflation fell to a three-month low of 15.2%, while the CPI-WPI gap widened. The RBI PMC minutes highlighted concerns on inflationary concerns becoming broad-based amidst optimism on growth. Members unanimously agreed to change the monetary stance to ‘withdrawal of accommodation’ to reflect the policy view going forward. Meanwhile the Southwest monsoon reached our shores in time and picked up after a sluggish overture. Overall rainfall has been above normal thus far, but quite divergent across states.
It was a busy month on engagements, beginning with the NSE-ICRIER Conference on ‘Getting Agri Markets Right’ on July 6th, with a panel on optimal price discovery and risk management, and then another on the role of agri-tech start- ups and FPOs in the value-chain. Prof. Bidisha Chakrabarty from St. Louis University held forth on ‘Capital markets, trading and technology’ on July 11th. The NSE-Pahle India Foundation seminar series has had insightful sessions on ESG Ratings and on Green Bonds. Policy briefs from the discussions would be posted soon.
A highly cited paper summarised by the CAF team at the Indian School of Business uses Bayesian Variable Selection and Markov Chain Monte Carlo to extract asset pricing characteristics from a set of 88 factors and then compares them with a few standard benchmark pricing models like CAPM and the Fama-French Five-Factor, and machine-learning based models using Principal Components and LASSO. Another highly cited paper summarised by the same team examines a facet of Kahneman and Tversky’s Prospect Theory, the disposition effect in behavioural finance, where investors sell profit-making assets while keeping loss-making ones.
Illustratively, rising retail interest in the markets has been one of the defining characteristics of the Indian markets for the past two years. Our detailed and regular provision of information on client category participation in the markets helps analyse this phenomenon in the light of the recent correction.