January was another challenging month for domestic equities as the benchmark indices, the Sensex and the Nifty 50 lost 2% and 3% respectively. In spite of a promising start to the month, markets soon gave away on account of concerns on the longevity of global inflation, nervousness ahead of India's Union Budget and then finally, the damaging report alluding to corporate misgovernance and inflated valuation on one India's largest industrial conglomerate. Certain sectors like Autos, IT and Metals outperformed while on the other side sectors like Power, Oil & Gas and Banks dragged the most. FIIs were primarily responsible for the sell off towards the end of the month, ending up net sellers to the tune of USD 3.5bn.

The S&P Global India Composite PMI was down to 57.5 in January 2023 from December's near 11-year high of 59.4. Still, the latest reading remained above its long-run average of 54.1 while marking the 18th straight month of growth in private sector activity. Manufacturing production increased at a stronger rate than services activity, but growth moderated in both cases. New orders expanded, as has been the case in last one and half years, with the rate of growth staying strong at goods producers and service providers, despite slowing from December.

December CPI inflation print came in at 5.72% as against 5.9% for November, surprising marginally on the downside led mainly by a sequential fall in food prices. There was a sharp fall in prices of vegetable -12.7% MoM versus -8.3% MoM in November, and fruits -1.7% MoM vs-1.9% MoM in November. On the other hand, cereal prices along with prices of milk and spices continued to push up food inflation. Fuel and light inflation rose by 11% (November: 10.6%). core inflation (CPI excluding food, fuel, pan, and tobacco) remained sticky at 6.3% while increasing sequentially by 0.3%. WPI for December came in at 4.9% as against 5.8% in the previous month on account of declines in food and mineral inflation.

The fixed income market remained largely flat in January as bond yields continued to move in a tight range. Although initially hardening on the higher than expected borrowing schedule of State governments, yields cooled off following a decline in US treasury yields as well as a benign monetary policy by the Bank of Japan. The benchmark 10 year Gsec yield hardened marginally by 3 bps to 7.36% from 7.33% in December. Corporate bond spreads expanded slightly across medium term securities.

Markets have remained volatile again in the first week of February, largely due to the effect of the significant sell off seen in that one industrial conglomerate group of companies. The Union Budget was promising in terms of increased focus on institutional capex and infrastructure spending with renewed thrust on the new direct tax regime. The latest RBI MPC policy review was along expected lines as the repo rate was hiked by 25 bps while the stance on withdrawal of accommodation was maintained.

Regards,

Investment team