Market Watch

Market Watch

Equity Market Overview – March 2024



Domestic Equity Market Update

Indian equities ended the month on a mixed note. Large cap-oriented S&P BSE Sensex and Nifty 50 ended higher to the tune of 1.6% month-on-month (MoM). While the S&P BSE Midcap & S&P BSE Small cap indices ended lower by 0.1%, & 4.6% (MoM) respectively.

In terms of BSE sectoral indices, Capital Goods was the top performer. In contrast, IT, Realty and FMCG underperformed the most.

During the month, FPIs were net buyers in equities to the tune of Rs 351 bn.

Indian equities ended the month on mixed note as heavy sell-off was witnessed across the segments, especially in the mid-cap and small-cap segments, before the release of the stress test result on Mid-cap & Small-cap schemes on March 15, 2024. However, sentiments were boosted following the robust preliminary domestic business activity data i.e. PMI of March 2024 that expanded at the fastest rate in eight months. Robust direct tax collection number of domestic economy also aided to boost the sentiment.

Global Market Updates

US equites ended the month on a positive note due to the latest monetary policy announcement by the U.S. Federal Reserve. As anticipated, the U.S. Federal Reserve kept interest rates constant, but the central bank also maintained its forecast for three interest rate cuts this year. High frequency data in the US continued to remain positive and the GDP growth for Q4 CY23 also came above expectations.

European equities ended the month on a positive note on hopes that several central banks will likely cut interest rates sooner than later as the European Central Bank suggested a probable interest rate cut in June 2024. 

Brent crude price rose from USD 83.62 per barrel to USD 87.52 per barrel owing to unexpected drawdown in US crude inventories, a bigger-than-expected drop in US gasoline stocks and supply concerns after Ukrainian attacks on Russian refineries.

Most of the Domestic Macro data points showed a strong picture

As per RBI Governor, the Indian economy is likely to grow more than the NSO estimate of 7.6% YoY in FY24 and it could be close to 8% YoY.

Global rating agency Moody's raised India's growth forecast for CY 2024 to 6.8% YoY, from 6.1% YoY estimated earlier, on the back of 'stronger-than-expected' economic data of 2023 and fading global economic headwinds.

The S&P global ratings upped India’s FY25 GDP forecast by 40 bps to 6.8% YoY, but also stressed that lower fiscal deficit would dampen economic growth.

According to Fitch, the Indian economy should continue its strong expansion, with Real Gross Domestic Product forecasted to increase by 7.0% YoY in FY 25, which starts in April, 2024 a 50-bps increase from its December 2023 forecast.

According to RBI, the amount flowing into non-resident Indians’ (NRIs’) deposits surged 70.35% to USD 10.1 bn in the first 10 months of FY24, from USD 5.96 bn in the year-ago period.

As per the Reserve Bank of India (RBI), India's current account deficit declined to USD 10.5 bn or 1.2% of the GDP in Q3 FY24 from USD 11.4 bn in Q2 FY24 and USD 16.8 bn in Q3FY23.

As per the survey released by HSBC, the manufacturing sector gathered momentum in February 2024 on the back of expansion in new export orders and easing of pricing pressures as the headline Purchasing Managers Index (PMI) climbed to a five-month high. It touched 56.9 during the month from 56.5 in January 2024.

The seasonally adjusted HSBC India Services Business Activity Index stood at 60.6 in February 2024, down from 61.8 in January 2024. Despite having slipped, the headline index was comfortably above the neutral mark of 50.0.

As per NSO, India’s unemployment rate dropped to 3.1% in 2023 from 3.6% in the preceding year, reflecting continued improvement in the labour markets.

As per NSO, India's Industrial Production grew by 3.8% YoY in January 2024. Factory output measured in terms of the IIP witnessed a growth of 5.8% in January 2023.

According to estimates released by the World Bank, the inward remittances to India in 2023 rose 12.3% to USD 125 bn, accounting for 3.4% of its GDP.

As per RBI, the personal loan segment grew 21% YoY in January 2024, compared to the 22.3% YoY growth registered in October 2023.

Fitch Ratings said that the net interest margins of Indian banks are likely to narrow 10-20 bps in FY25 & FY26 on rising funding costs due to greater competition for deposits, fuelled by the normalising liquidity conditions and elevated loan growth.

As per CareEdge Ratings, banks' bad loans have fallen to record lows as recoveries rise and many missed payments are regularized. Lenders anticipate stress and are building buffers. Bad loans fell 21% to Rs 4.85 trillion.

As per CareEdge Ratings, with the rise in domestic natural gas production, India’s dependency on imported LNG or liquefied natural gas, which stood at 53% of total consumption in FY21, has gradually declined over the last three years and is expected to remain at around 45% by FY26.

According to rating agency ICRA, with increased risk weights and exposure reaching sectoral limits, bank direct lending to non-banking finance companies (NBFCs) in India is expected to be Rs 1.7-1.9 trillion in FY25.

According to the Ministry of Civil Aviation's data, the average daily domestic air traffic jumped by 3.78 % MoM to 439,464 passengers in February 2024, On the other hand, as the international travel season is receding in India along with the winter season, the average daily international air traffic decreased by 3.07% MoM to 205,946 passengers in February 2024.

As per Commerce Ministry, after 16 years of negotiations, involving 21 formal rounds, India and the four European Free Trade Association (EFTA) countries signed a free-trade agreement (FTA), which may be instrumental in India receiving USD 100 bn as FDI in 15 years with 1 mn jobs.

According to the data released by the Commerce department, India’s merchandise exports grew at the fastest pace in 20 months at 11.9% YoY in February 2024, overcoming the Red Sea crisis and falling commodity prices. Merchandise imports grew 12.2% YoY, a 17-month high to USD 60.1 bn in February 2024, leading to a trade deficit of USD 18.7 bn during the month.

As per SIAM, the total production of Passenger Vehicles, Three Wheelers, Two Wheelers, and Quadricycle in February 2024 was 22,94,411 units. Domestic sales of passenger vehicles in February 2024 were at 3,70,786 units, three-wheelers at 54,584 units and two-wheelers at 15,20,761 units.

Outlook & Investment Strategy

Going forward, Indian equity markets are likely to be driven by incoming macro data points, global geopolitical developments and FPI flows.

US Economy is seeing resilience with the PMI data stabilising while the employment data remains strong. While a higher GDP and inflation are a deterrent for the US Federal Reserve to cut interest rates, the Federal Reserve Chair Jerome Powell said the latest US inflation data was along the lines of what is expected. This comes as a reassurance to market participants in the US that the three rate cuts in 2024, as guided by the Fed to actually materialise.

In India, the market continues to expect domestic driven sectors across the board to outperform in the medium term, led by an improving capex cycle and steady demand conditions. Most of the macro data in India remain quite strong, suggestive of continued traction for corporate earnings. In the interim budget the government has pushed its Capex spending estimates for FY25 by 16% YoY to INR 11.1 trillion (FY25 Budget Estimates vs FY24 Revised Estimates). This is likely to support the ongoing investment activities in the economy. Equity valuations in many cyclical sectors have gradually moved into the higher end of the fair value zone, yet they continue to move higher on expectation of longevity of their growth trajectory. With the dates for general elections being announced, the run up to the elections and its result would become the biggest near-term event to impact the market sentiments.

In terms of valuations, the Largecap indices seems to be relatively reasonably valued than the Smallcap and Midcap indices, despite the recent correction. However, the correction in the smallcap index was meaningful bringing its valuations lower compared to its recent highs. Overall, the valuations across the board are relatively high. Asset allocation rules should be adhered to strictly at this time in the market and the investors should lower their return expectations from the equity markets as the returns witnessed in the past couple of years may not be repeated in the medium term.

Given rich market valuations, we maintain the investment deployment strategy to 40% lumpsum and the balance 60% to be staggered over the next 5-6 months. Investors could focus mostly on categories such as Largecap, Flexicap, Multicap, Multi asset and Hybrid Equity funds in line with their risk profile and product suitability.

Debt market overview for the month of March 2024


Domestic banking system liquidity majorly remained in the deficit during the month. Banking system liquidity as measured by the Reserve Bank of India’s (RBI) net Liquidity Adjustment Facility (LAF) stood at a daily average deficit of ~Rs. 444 bn in March 2024 as against a daily average deficit of ~Rs. 1.86 trillion in the previous month.

The call money market traded in the range of ~5.75%-6.70% during the month.

Domestic G-secs yields closed lower in March 2024, and the 10-year benchmark 7.18%, 2033 bond ended at 7.06%, compared to the previous month’s close of 7.08%. Indian G-sec yields traded lower due to value buying from the Foreign Portfolio Investors (FPI) and market participants ahead of index inclusion. The US Federal Reserve’s (Fed) decision to keep the interest rate unchanged with an outlook for three rate cuts this calendar year also aided in the fall in yields. Furthermore, the government’s planned borrowing calendar for the H1 FY25, substantially lower than the market expectations, weighed down on yields. However, the fall in yields was restricted due to the rise in US Treasury yields and the record supply of securities in state auctions.

In the US and Europe, inflation remains above the central banks’ target of 2%. Inflation based on the Consumer Price Index (CPI) in the US accelerated to 3.2% YoY in February 2024 as compared to 3.1% YoY in January 2024. However, CPI remained higher than the market expectations of 3.1% YoY in February 2024. The core CPI in the US eased to 3.8% YoY in February 2024 as compared to 3.9% YoY in January 2024. In the latest policy meeting, the Federal Reserve (Fed) once again decided to maintain the target range for the federal funds rate at 5.25-5.50%. The latest projections suggest Fed officials expect rates to be lowered to a range of 4.50-4.75% by the end of CY24. However, Fed raised their forecast for rates at the end of CY25 to a range of 3.75-4.0%. The US’s trade deficit widened to USD 67.4 bn in January 2024 from a revised USD 63.5 bn in December 2023. As per the Institute for Supply Management (ISM), the manufacturing PMI in the US fell to 47.8 in February 2024 from 49.1 in January 2024. In the Eurozone, consumer price inflation slowed to 2.6% YoY in February 2024 from 2.8% YoY in January 2024. The European Central Bank (ECB) left the main refinancing rate, or refi, unchanged at 4.50%. For CY24, ECB has revised down inflation at 2.3% YoY (vs. 2.7% YoY earlier) and GDP growth at 0.6% YoY (vs. 0.8% YoY earlier). The downward revision for CY24 suggest that the ECB could begin rate cuts in June. According to the National Statistics, the UK’s CPI-based inflation remained eased to 3.4% YoY in February 2024 as compared to 4.0% YoY in January 2024, and lower than the market expectations of 3.5% YoY. As per National Bureau of Statistics of China, consumer prices posted an increase of 0.7% YoY in February 2024 after a 0.8% YoY decrease in January 2024. The Bank of Japan (BoJ) raised its interest rates for the first time in nearly two decades and became the world's last central bank to end negative rates amid signs that inflation is strengthening. The BoJ Policy Board in a 7-2 vote to raise the overnight interest rate around 0-0.1% from (-)0.1%.

Domestically, India’s the Consumer Price Index (CPI) based inflation eased to 5.09% YoY in February 2024, marginally lower than the previous month’s growth rate of 5.10% YoY but higher than the market expectations of 5.0% YoY primarily on account of elevated vegetable and cereal prices. Wholesale Price Index (WPI) based inflation eased to 0.2% YoY in February 2024 from 0.27% YoY in January 2024. Bloomberg announced the inclusion of India's Fully Accessible Route (FAR) bonds in the Bloomberg Emerging Market (EM) Local Currency Government Index and related indices. This decision will be phased in over a ten-month period, commencing from January 31, 2025. India’s gross G-sec borrowing plan in H1 FY25 has come in lower than expected at Rs 7.5 trillion, which is 53% of full year borrowing (vs. H1 FY24 actual issuance was 58% of full year). While ultra-long bond gross supply stands lower at Rs 2.8 trillion in H1 FY25 (30-y to 50-y) vs. Rs 3 trillion in H1 FY24 (30-y and 40-y), the supply of 10-y was similar to last year, at Rs 1.8 trillion vs. Rs 1.82 trillion in H1 FY24. The Centre has also introduced a new dated security of 15-y tenor. Additionally, in a departure from the usual pattern of issuing green bonds in the latter half of the year, the government has planned to issue green bonds worth Rs 120 bn in H1 FY25. India's Current Account Deficit (CAD) declined to USD 10.5 bn or 1.2% of the GDP in Q3 FY24 from USD 11.4 bn in Q2 FY24 and USD 16.8 bn in Q3 FY23. India’s merchandise trade deficit widened to USD 18.71 bn in February 2024 from USD 17.49 bn in January 2024 as imports outstripped exports in value terms against the backdrop of the Red Sea conflict. The merchandise exports stood at USD 41.40 bn in February 2024 as compared to USD 36.92 bn in January 2024 and the imports stood at USD 60.11 bn in February 2024 compared to USD 54.41 bn in January 2024. India's net direct tax collection till March 17 of FY24 grew at 19.88% YoY to Rs 18.90 trillion, which accounted for over 97% of the RE at Rs 19.45 trillion. Gross direct tax collection stood at Rs 22.27 trillion, an 18.74 % YoY growth. India's Goods and Services Tax (GST) collection has grown by 12.5% YoY to over Rs 1.68 trillion in February 2024. The cumulative gross GST collection from April 2023 to February 2024 demonstrates a robust 11.7% YoY growth, totalling Rs. 18.40 trillion.

The RBI has ensured that system liquidity remains tight and the call money rates remain above or around the repo rates. The RBI has remained nimble in liquidity management and has used tools like VRRR or VRR to manage liquidity. Market participants expect the RBI to ease liquidity into the system before moving forward with the rate cuts. The lower planned borrowing by the government in H1 FY25 remains positive for the bond market as the demand-supply dynamic in FY25 is likely to be favourable for G-secs, with demand supported by India’s inclusion into the JP Morgan EM bond index and strong investor demand. The market movement is also expected to track the trend of tax revenue collection, the US market, and liquidity measures of the RBI. While the US Fed decided to keep the policy rate unchanged, their forecast suggests three rates this year, which aligns with the market expectations. Domestically, strong demand for yields at crucial points in the longer end suggests limited scope for further dips in the absence of substantial rate cuts. Hence, yields are expected to move in a range with a declining bias, and fund managers who can play with volatility are likely to generate substantial alpha. The yields at the longer end have been weighed down due to lower-than-expected fiscal deficit estimates for FY25 and advance buying by the FPIs and other market participants ahead of the inclusion of Indian G-secs into the JPMorgan Bond Index. However, the yields at the short end of the curve continue to be determined by the availability of liquidity, which at the current juncture remains under pressure, ensuring a flat yield curve.

Fixed Income Mutual Fund investment strategy: - Recently, we have seen higher demand for SDLs, which can have implications on the SDL spreads in the near term. Any rise in the SDL spreads can provide an opportunity to buy into long-dated SDL Index Funds. Corporate Bond Funds continue to look like a safe bet at the current juncture for investors looking to invest in shorter-tenure funds. Hence, investors can look at Corporate Bond Funds and Short duration funds for a horizon of 15 months and above. Investors who are comfortable with volatility and have a longer horizon of 24 months and above can take exposure to Dynamic Bond Funds, Gilt Funds, and longer-tenor SDL Index Funds to play the improved fiscal deficit dynamics. For a horizon of 3 months and above, investors can consider Arbitrage Funds. Whereas for a horizon of up to 3 months, investors can consider Overnight Funds and Liquid Funds. Investors can also look at Multi-asset allocation funds for a horizon of 36 months and above. Investors should invest in line with their risk profile and product suitability.

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