Indian equity markets extended the rally seen during July into August with both Nifty 50 & Sensex returning more than 2.5% for the month. The rally kicked off initially after the RBI announced measures for onetime restructuring of stressed loans, which was taken positively by market participants. The Government’s relief initiatives also weighed in after it announced a review of GST for two wheelers. The sectors that outperformed in August included Banks, Metals and Power while the major underperformers were IT, FMCG and Oil & Gas. FIIs were significant net buyers in August to the tune of USD 6 bn while DIIs were net sellers of USD 1.5 bn.
June IIP growth fell by 16.6% as against a fall of 33.9% in May. With the phasing down of the lockdown, economic activity continued to improve on a sequential basis and production levels have now reached 83% of levels last year, led by manufacturing and electricity. The data as per the use-based classification continued to reflect the challenges in both the consumer durables and investment-related indicators, even though weakness abated significantly compared to the previous month as the production of capital goods and consumer durables contracted 36.9% (65.2% in May) and 35.5% (69.4% in May), respectively.
CPI inflation jumped to ~6.9% YoY in July, up 70bps from 6.2% in June. Fresh spike in vegetables and sustained rise in commodities pushed the headline number higher. Within food, while cereal, milk and pulses softened, vegetables and meat/fish clocked a steep rise, perhaps reflecting the impact of supply disruptions. Core CPI rose by 50bps to 5.9% in Jul’20 from 5.4% in Jun’20 . WPI inflation for July remained in the deflation zone for the fourth consecutive month even as the pace of decline moderated to -0.6%YoY. This was due to smaller contraction in fuel and core inflation while food inflation increased.
Bond yields rose for the first time in seven months after retail inflation remained above the upper tolerance level of 6% set by the Reserve Bank of India (RBI). This lowered the possibility of further easing of monetary policy in the coming months reflected in the status quo stance of the MPC on overnight rates. Market sentiments also remained subdued as the supply of sovereign debt in the market remained significantly high compared to that of the supportive steps taken by the RBI to counter the same. The benchmark G Sec yield hardened 24 bps to 6.08% from 5.84% in July. August also witnessed the issuance of a new benchmark 10 year, 5.77% GS 2030, which ended the month at 6.12%
The GDP figure for 1QFY21 was declared on 31st August and it was worse than consensus expectations at -23.9%. This, combined with the new trading margin requirements announced by SEBI and escalating geopolitical tensions on the Sino-Indian border, kept markets volatile in the first week of September. Considering the high valuations the market was trading at, more volatility cannot be ruled out for the remainder of the month.
Chief Investment Officer
Pramerica Life Insurance.