Domestic equity markets experienced some jitteriness in the run up to the results of the General Election in India as both the benchmark indices closed the month with minor declines. Apart from the General Elections, the status quo by the Federal reserve on interest rates also led to a dampening of investor sentiments globally. The sentiments were soothed to an extent by the April CPI numbers, which had eased to an 11 month low of 4.83%. In terms of sectors, Capital Goods, Power and Infrastructure were the key outperformers while sectors that dragged the most were IT, Healthcare and Oil & Gas. FIIs sold heavily in May, with a net sell figure of ^~USD 3 bn.

The HSBC India Composite PMI fell to 60.5 in May 2024, revised down from the initial estimate of 61.7 and April's reading of 61.5. The latest figure marked the slowest expansion in the Indian private sector since December 2023, although growth remained notably strong. Goods producers outperformed service providers, but the rate of expansion slowed for both. On the price front, input cost inflation rose to a nine-month high, pushing output charge inflation higher as well, with inflation accelerating for both manufacturers and service firms. Lastly, business sentiment improved among both manufacturing firms and service providers, with companies collectively being the most optimistic since September 2023.

CPI inflation softened to 12-month low of 4.75% in May, compared to 4.83% in the previous month. Food prices, however, remained stubborn at 7.9%. Vegetables (up 27.0% YoY) and Pulses (17.0%) together contributed 40% to headline inflation in May. Fuel inflation was -3.8% vs-4.24%. Most other heads of inflation remain in good control with housing at 2.7%, and Misc inflation flat MoM at 3.5%.Core inflation eased further MoM to 3.10% from 3.23% (a multi-year low) and provides respite to the RBI. WPI inflation reported higher at 2.61% in May versus 1.26% in April . Food price inflation registered higher at 9.8% while fuel and manufacturing registered slight growth of 1.35% and 0.78% respectively.

Bond yields fell in tandem with the U.S. Treasury yields after the U.S. Federal Reserve maintained interest rates as expected but sounded less hawkish than anticipated in its monetary policy concluded on May 1, 2024. Gains were extended after the RBI approved a record surplus transfer of Rs. 2.11 lakh crore to the government for the fiscal year ended on Mar 31, 2024. The benchmark 10-year-old G Sec yield softened 21 bps from 7.2% in April to 6.99% in May. Corporate bond spreads expanded across maturities because of a liquidity deficit in the period preceding the elections.

The first half of June witnessed considerable amount of volatility related to the outcome of the General Elections- markets rallied strongly based on the exit polls result only to plummet the next day when it became clear that the ruling party BJP would not be getting an absolute majority of its own. However, as the impact of the election results died down, markets started to rally once again after it was evident that the BJP led NDA coalition would form the new government with majority. Investors were of the view that the continuity of policy making would not be hindered in any significant manner and this led the markets to scale fresh life time highs. The RBI MPC kept rates unchanged in the policy review in June along expected lines while revising its GDP growth outlook for FY25 from 7% to 7.2%.

Regards,

Investment team