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Dear Investors,

Warm Greetings!

After a strong 6.5% rally in month of May 2021, Indian Equity Market (as measured by Nifty 50 Index) consolidated during June, registering gains of 0.9%. The breadth though was positive with both midcap and small cap indices gaining by 3.6% and 6.9% respectively. Indian markets marginally outperformed both US and emerging markets during the month.

Positive sentiments were driven by steady decline in covid cases, pick up in vaccination, easing of lockdown like restrictions.  Key concern though was a rise in inflation and likely impact of Delta Plus variant of Covid on a probable third wave. Sectorally, IT, Pharma and Consumer goods outperformed while Metals, Banking and Oil & Gas underperformed.

RBI’s Monetary Policy Committee (MPC) voted unanimously to keep the policy rates unchanged (Repo at 4%, Reverse Repo at 3.35%) while maintaining an accommodative stance, as long as it is necessary to sustain growth on durable basis. Inflation guidance marginally increased: RBI projected Consumer Price Inflation (CPI) 5.1% for FY22, with a marginal increase of 20-30bps from 2QFY22 onwards. While RBI’s CPI quarterly projection for Q1 at 5.2% was retained, it raised guidance for subsequent 3 quarters. They Inflation has been revised up to 5.4% (5.2% earlier) in Q2, 4.7% (4.4% earlier) in Q3, 5.3% (5.1% earlier) in Q4.

As per the RBI, rural demand remains strong and normal monsoon expected bodes well for sustaining in coming period. However, the increased spread of COVID-19 infections in rural and urban areas has dented the demand recovery. Taking these factors into consideration, RBI expects real GDP growth at 9.5% in FY22 down from earlier estimates of 10.5%. The sharpest cut in GDP estimates is in Q1FY2022 to 18.5% from previous estimates of 26.2%, despite the favourable base effect. Similarly, the GDP estimates were cut to 7.9% from 8.3% for Q2FY2022. The growth for Q3 and Q4 has been revised to 7.2% (5.4% earlier) and 6.6% (6.2% earlier) in Q4 respectively.

The US Federal Reserve maintained status quo, with an accommodative stance, and most importantly, hinted at tapering. On the tapering of USD120bn quantitative easing (QE) programme, the Fed noted that it is a function of ‘substantial further progress’ of the labour market and economic recovery. The Fed sounded more upbeat on US economic recovery than in its previous meet, as it raised 2021 GDP forecast by 50bps and inflation projections – Personal Consumption Expenditure (PCE) and core PCE – by 100bps and 80bps, respectively. As far as the ‘dot plots’ are concerned, 13 out of 18 members expect rate hikes in 2023. 

Consumer Price Index (CPI) data released for May showed a spike which is 30bps above RBI’s upper target band of 6%. The surge was much higher than expected and was primarily led by food and beverages, pulses, fuel prices, edible oils, transport and household goods and services – these components increased by 220bps on an average YoY and 130bps on a month-on-month basis.              

Amid favourable base effects, April Index of Industrial Production (IIP) registered an uptick of 134% YoY despite a fall in momentum owing to state-wide lockdowns.  On QoQ basis IIP declined by 13% after year end activity in March, implying production actually held up well despite the restrictions. Probably the fact that lockdowns were more localised in nature and most manufacturing units were allowed to function despite the restrictions did help.  

In terms of flows, foreign portfolio investors (FPIs) bought US$1.6 bn of Indian equities while domestic institutional investors (DIIs) bought US$943mn. On a Year-to-date basis FPIs have invested USD8.23bn while DIIs have reduced their negative outflows to USD 462mn. 

Sanjay Chawla

Chief Investment Officer

Source:, RBI, Kotak Securities, Edelweiss Financial

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