Initially opening on a very promising note and scaling new lifetime highs, Indian equities suffered a blip from higher crude oil prices and stretched valuations, which limited the gains of the benchmark indices to 1.5-2% for the month. Markets started off on a sanguine note, feeding on the positive cues like additional Chinese economic stimulus, better US employment data and the fact that RBI decided to roll back the incremental cash reserve ratio it had imposed recently. However, stretched valuations and higher commodity prices took some sheen off and led to another round of profit taking. Telecom, Infrastructure and Metals ere the best performing sectors in September while on the other hand, sectors that underperformed included FMCGs, IT and Banks. FIIs turned net sellers to the tune of ^~USD 1.7 bn.

The S&P Global India Composite PMI inched up to 61.0 in September 2023 from 60.9 in the prior month, indicating one of the highest readings in 13 years. The latest figure also marked the 26th straight month of expansion in private sector activity, supported by buoyant demand in both manufacturing and service economies. New orders rose the most since 2010, with services firms noting a quicker increase in sales, while manufacturers saw a slowdown. On prices, input cost inflation eased at goods producers and services firms, leading to the second-slowest increase in aggregate costs for three years.

CPI inflation in cooled off to 6.8% versus 7.4% in July and as against an estimate of 7.1% in the market. The YoY cooling is on the back of lower vegetable prices (26.2% vs 36.3%). The culprit of July’s food inflation spike, tomato eased by -21% as compared to the towering spike of 271% in July and combined 281% in June/July. While vegetable prices, especially of tomatoes have cooled since then, other food items like cereals (11.9%) pulses (13.3%), spices (21.6%), milk (8.3%) remain elevated. Core CPI eased to 4.9% YoY vs 5% in the last month with sequential pace slightly higher at 40bps vs. 36bps rise in the last month. Headline WPI for July continued to decline by -1.4% vs -4.1% in June, but with a MoM spike of 1.9% led by food articles, specifically vegetables (+81% MoM and 62% YoY).

In the fixed income market, government bond yields hardened marginally for the month on the back of global cues. Although yields initially hardened on account of elevated US treasury yields and higher crude oil prices, benign inflation data of August and the initial optimism of bond index inclusion softened the impact. The benchmark 10 year Gsec yield hardened 8 bps to 7.21% from 7.13%. Corporate bond spreads remained range bound for most securities throughout the month.

Domestic equities in October so far have largely remained flat with some initial volatility showing signs of subsiding. The RBI MPC in its policy review, kept the key rates unchanged with the stance being moderately hawkish, while signalling its intent to actively manage liquidity through auction-based OMO sales. Impact of the significant geopolitical event in the Middle East would be keenly observed, especially its impact on commodity inflation. Participants would also look at the upcoming 2Q earnings season for further cues

Regards,

Investment team