The month gone by – A snapshot
The rally in global equity markets continued in December, as initiation of Covid-19 vaccination program provided comfort to investors that the pandemic will gradually be brought under control. US and Japan have passed additional fiscal stimulus packages, while European central bank has expanded its monetary stimulus. UK and EU have agreed to a post-Brexit trade agreement, thereby removing a nagging uncertainty for markets. These positive developments have outweighed some near-term concerns, including extension of lockdown measures in some parts of Europe and identification of a new faster spreading mutant of the Covid-19 virus.
MSCI India index outperformed global markets with a 10% increase in December, compared to 7% increase in MSCI Emerging Market index and 4% in MSCI Developed Market index. INR appreciated by 1% during the month. Crude oil prices rose by 9% to US$ 52/barrel given expectations of a revival in global demand.
Domestic economic recovery continues
Macro-economic data points indicate a continuation of economic recovery. Industrial production in October rose to 4% on an annual basis on the back of pent-up demand and festive season. Though few data points indicate some slowdown in specific segments, key high frequency indicators such as record high GST tax collections and increase in electricity consumption continue to show an upward trend in overall economic activity.
Taking cognizance of the faster than expected economic recovery, RBI has revised upwards India’s FY 2021 GDP growth projections. The government is expected to announce additional steps to support economic growth in the upcoming budget.
RBI reiterates accommodative stance to prioritize growth
CPI inflation has eased in November due to moderation in food inflation. However, inflation continues to remain above RBI’s target level. The central bank expects inflation to ease gradually as supply side bottlenecks get resolved. RBI kept policy interest rates unchanged in the December policy and reiterated that it will maintain an accommodative policy stance well into FY 2022. Foreign institutional investors (FIIs) bought US$ 635mn of Indian debt in December.
Outlook: RBI continues to take measures to keep financial conditions benign. As a result, interest rates have continued to remain stable. Given central bank’s forward guidance, we expect interest rates to remain soft.
Foreign inflows continue unabated propelling equity markets to record highs
Benign liquidity conditions, synchronised economic recovery and expectations of a sharp bounce back in corporate profitability bodes well for equity markets. Forward guidance from policy makers indicate continuation of softer interest rates. This coupled with earlier-than-expected macro-economic recovery and continued improvement in high frequency indicators are supporting the market rally.
Indian equity markets moved up by 8% during the month with Fast Moving Consumer Goods, Metals and Capital Goods sectors outperforming. FII inflows in equity markets was US$ 7.2bn in December, taking total FII inflows in 2020 to US$ 23bn.
Outlook: Post the sharp rally, markets may consolidate before the start of Q3 FY2021 earnings season. Management commentaries with regards to demand environment and sustenance of profitability is likely to provide further roadmap. The Union Budget, slated to be announced next month, will be an important event to watch out for. Notwithstanding near-term volatility, the medium to long-term outlook for equities remain strong.