Domestic equity markets started month on a strong note amid reinstated expectations that the U.S. Federal Reserve would start interest rate cuts in Sep 2024 following the dovish commentary from the U.S. Federal Reserve Chairperson. Some of the taxation measures announced (increase in LTCG and STCG) curbed the initial enthusiasm to a certain extent in the Union Budget. In terms of sectors, last month's laggards Infrastructure, IT and Oil & Gas proved to be the key outperformers this month while sectors that dragged the most were Banks, Metals and Realty. FIIs continued to buy strongly in July, exceeding even June's significant buying with a net buy figure of ^~USD 3.8bn.

The HSBC Flash India Composite PMI was revised downward to 60.7 in July 2024 from a flash figure of 61.4. The latest figure followed June's 60.9, pointing to the 36th successive month of expansion in private sector activity. As has been the case since February, the manufacturing industry led the upturn. New orders rose sharply and at a pace that was considerably above its long-run average. Manufacturers logged a stronger rise in new orders, despite a slowdown in its rate of expansion. Job creation remained solid across the two segments.

Headline Consumer Price Index (CPI) fell to 3.54% in July, marking its lowest level since August 2019. This decline is below market expectations of 3.64% and is largely due to a favourable base effect. The food and beverages inflation dropped to a 13-month low of 5.06% in July, down from 8.36% in June. While the high base effect contributed to this decline, the outlook for food prices will depend on upcoming monsoon conditions. Core CPI (excluding food and fuel items) which had consistently seen record lows has risen from 3.14% in June to 3.35% in July. The transport and communication segment, in particular, saw inflation jump from 0.97% in June to 2.48% in July, reflecting recent telecom tariff hikes and higher fuel costs in some states. WPI softened due to a high base to 2.04% from 3.36%. The softening was led by food (3.4% vs 10.9%) while fuel and power (1.7% vs 1.0%) and manufactured products (2.6% vs 1.4%) inched up.

Bond yields slipped during the month in tandem with a drop in U.S. Treasury yields on expectations of rate cut in Sep 2024 by the U.S. Federal Reserve. Gains were extended following an ease in global crude oil prices. Sentiments remained upbeat as the Union Budget 2024 did not present any negative triggers, with an announcement of lower-than-expected gross borrowing for the current fiscal year. The benchmark 10 year old G Sec yield softened 8 bps from 7.01% in June to 6.92% in July. Corporate bond spreads expanded across maturities because of liquidity deficit.

The first half of August has been a bit volatile with markets initially reacting negatively to concerns of a recession in the US (spurred by data on employment) and then significant escalation in the Middle East geopolitics with Iran threatening to go to a full out war following the assassination of the top Hamas leader in Tehran. The monetary policy committee maintained status quo as far as rates were concerned but the commentary came across as hawkish, contributing to the jitteriness in the markets. As the first quarter earnings season closed out, it also became evident that corporate earnings growth could well be lower than earlier expected.

Regards,

Investment team