Domestic equity markets once again came under significant selling pressure, with both the benchmark indices, the Sensex and the Nifty 50, recording losses of ~2% each for the month. Markets initially rallied on the hopes of a more expansionary monetary policy review by the RBI's MPC. The review did not change the key interest rates but simply cut the CRR from 4.5% to 4%. However, the trend reversed as the Federal Reserve’s hawkish tone on interest rate cycle in 2025 dampened market sentiments. The depreciation of the INR further compounded matters for the markets. In terms of sectoral performance, healthcare, realty and consumer durables performed the best while the noticeable laggards were power, metals and capital goods. FIIs reversed the previous month's selling streak, becoming net buyers to the tune of USD1.8 bn.

The HSBC India Composite PMI stood at 59.2 in December 2024, less than the flash estimate of 60.7 but higher than November's reading of 58.6. It marked the 41st consecutive month of increase in private sector activity and the strongest growth since August, with service providers recording a quicker increase in business activity as factory production growth softened. New orders rose at a stronger rate, with the fastest rise in new business at service firms more than offsetting a fractional slowdown at goods producers. Meanwhile, employment expanded at a slower pace, though it remained among the strongest on record. Job creation was stronger in the service sector compared to the manufacturing industry.

Retail CPI moderated to 5.2% YoY in December 2024 (Nov-2024: 5.5% YoY). The 0.6% MoM decline was led by vegetable prices (winter seasonality).Within food basket, vegetables, fruits, pulses, meat and fish, sugar prices declined/moderated sequentially. The food inflation likely to moderate further in Q4FY25 on the back of bounty kharif harvest. Core inflation marginally moderated at 3.6% on yearly basis (-0.02% MoM) with low sequential increase in housing prices (seasonal) supporting the print. Gold and silver prices reported almost flat sequential growth, in line with weak global prices. WPI in Dec’24 rose to 2.37% YoY (vs 1.89% YoY the previous month) with an uptick in non-food articles (2.5% vs -1%) and a slow but steady rise in manufactured products (2.1% YoY).

Bond yields declined initially on expectations of monetary easing by the RBI following the weaker-than-expected domestic economic growth data of Q2 FY25. However, yields rose after the RBI maintained the repo rate at 6.50% in Dec 2024 monetary policy meeting. Losses were extended after the U.S. Federal Reserve reduced the interest rate by 25 bps in its Dec 2024 policy meeting and flagged a slower pace of policy easing in 2025, pointing to stable labour market and sticky inflation. Yield on the 10-year benchmark paper (6.79% GS 2034) rose by 1 bps to close at 6.76%, compared with the previous month’s close of 6.75%. Corporate bond spreads largely witnessed expansion across maturities.

The first half of January has seen renewed selling pressure in the markets, with hardly any sign of relief evident. Unease surrounding the tariff policy by the incoming President, the outbreak of a new influenza virus and expected softer corporate earnings growth for 3Q have led to a fresh round of selling with a lot of the small and mid-caps bearing the brunt. The upcoming Union Budget of India will be a key monitorable going forward.

Regards,

Investment team