Chief Economist at the National Stock Exchange of India
Global markets have had a good 2024 thus far, led by markets in developed countries, specifically the US (Read Nvidia, before the recent slide), while emerging markets have underperformed, weighed down by China and, to some extent India. Markets across the world continue to trade near lifetime high levels, coursing through meaningful recent events (Fed pause, Nvidia slide, far-right tilt in Europe, elections in India, etc.) The financial consequences of an extended pause on rates by the Fed are visible in the Yen’s slide to 160—the lowest since 1986, and in spite of the recent measures taken in Japan, and in the drop in EM currencies—the economic consequences are less conspicuous, but equally important; with countries having to deal with extended periods of positive real interest rates, despite getting inflation largely under control. The so-called ‘last mile’ on the inflation front has proven more difficult than anticipated thus far, and recent weather-related spikes in food inflation might add to the load. Markets, however, seem to be seeing through it as we show later in the report, and so have the Indian investors.
In general, equities in India had a tentative May, but returned to jovial spirits after the general elections, with strong corporate earnings and higher-than-expected GDP growth adding to why domestic players—both direct and indirect— have been major players in the markets, as foreign interest recedes. FPIs have sold US$2.8bn this year, while domestic players (DIIs and individuals) have put in a combined total of over US$34bn. Who’s selling amidst all the buying? The market’s run over the past few years has led to a sustained trend of promoter selling each year since the 2020 in the pandemic, and this year has not been any different.
India’s entry into the JP Morgan EM Bond Index (first announced in 2023) would begin in late June. FPI inflows this year on the equity channel have been muted, with outflows of US$2.8bn, but the debt channel has had inflows of ~US$8bn. Market estimates of the expected inflows from India’s ~10% weight in the index are in the range US$25- 30bn. Performance-wise, Indian debt tracked the trend seen in the US, and rallied in May, aided by lower-than expected inflation, lower-than-budgeted provisional fiscal deficit for FY24, higher FPI demand, sovereign rating outlook upgrade and benign MSP hikes. Consequently, the 10-year G-sec yield softened by 21bps in May, and remained broadly steady in June at 7%, translating into a decline of 19bps in the year thus far.
Our Story of the Month in this edition of Market Pulse looks at the corporate earnings season and finds steady top-line growth in the last quarter, led by Financials and the Consumer Discretionary. For the whole year, net sales growth at 9.3%/7.9% for Nifty50/Nifty 500 companies has reflected the overhang of muted nominal growth (Also seen in the nominal GDP figures), while profits at the operating (ex-Financials) and net income level did better, rising 19.2%/24.6% and 27%/ 33.1% respectively. Barring the two sectors we mentioned earlier, PAT growth for Nfity50 was just 3.4% in Q4! A weakening global outlook has amplified the contrast between global and domestic sectors in FY24. While IT and Commodities have seen earnings downgrades, the bulk of profits was by the two domestic sectors we mentioned above. Earnings growth this year and the next is expected to moderate to 10.9% and 16.7% respectively, reflecting in the flat-lining ERI (Earnings Revision Indicator).
Our macro section this time has a number of additional, interesting notes, beyond the monthly indicators. In FY24, India’s economy grew by 8.2%, surpassing expectations. After 9.7% in FY22, 7.0% in FY23, this marks the third consecutive year of 7%+ growth, and as we know, growth this year is expected to be 7.2% by the RBI. India remains the world’s fastest growing large economy.
Beyond growth, policy rates were kept steady in the latest MPC meeting for reasons we have mentioned earlier. On the external front, India’s balance of payments was stable with a US$5.7 billion current account surplus in Q4 FY24, the first in ten quarters, and S&P upgraded our sovereign rating outlook to 'Positive.' Despite this, early FY25 showed a widening trade deficit and mixed industrial activity, while bank credit and deposit growth slowed. The fiscal deficit improved to 5.6% of GDP in FY24, 20bps lower than the revised budget estimate, due to higher tax collections and expenditure rationalization. Retail inflation hit a one-year low in May 2024, but wholesale inflation rose to a 15-month high. Elevated food prices, driven by heatwave conditions, contributed to slow disinflation. Monsoon progress was weak, with an 18% rainfall deficit; MSPs were raised for all 14 kharif crops.
The March edition of the Market Pulse had written about Indian investors crossing the nine-crore mark. Despite the moderated pace of incremental growth, we have seen addition of another half-a-crore investors since then; the figure was 7.5 crore around the same time last year. Where are they from? Well, North and East India have each added a third as much over their respective totals last year. Uttar Pradesh continues to lead in new investor additions. The Market activity section in the report adds a number of additional indicators this time around, ranging from age of investors to their average trade sizes.
As we head into the second half of the year, the Union Budget in July, commentary and next steps by the Fed and the RBI would be important marks for the macro and markets in the near future. Increasing climate and weather-related events have increased seasonal vagaries, reflecting in elevated volatility in the agricultural commodity complex, and related spillovers to headline numbers. The last mile is turning out to be harder than expected.