October was by far the toughest month for domestic equities as both the benchmark indices, the Sensex and the Nifty 50, dropped ~6% each. The sharp correction was initiated by the Chinese economic stimulus announcement towards the end of September and later on, was compounded with the escalation of the geopolitical crisis in the Middle East as Iran pounded Israel with a barrage of missiles. What compounded matters were rising inflation and the relatively poor corporate earnings for 2QFY25, which have now started showing signs of a slowdown after the significant uptick seen post Covid. Although every sector came in for selling, the impact was softer in Healthcare, IT and Banks. On the other, Oil & Gas, Autos and Consumer Durables bore the brunt of the selling. FIIs sold off heavily to the tune of USD 11bn for the month.

The HSBC India Composite PMI stood at 59.1 in October 2024, surpassing the flash estimate of 58.6 and improving from September's 10-month low of 58.3. It was the 39th month of expansion in private sector activity, with new orders expanding at faster rates in both the manufacturing and service sectors, boosting growth of sales and employment at the composite level. Goods producers logged stronger rates of increase in new business and output than service providers, but the latter led when it came to job creation.

Headline CPI inflation in Oct-24 rose to 6.2% after a spike in Sept’24 at 5.49% with vegetables spiking once again but also supported by edible oils – taking inflation above the comfort threshold since Aug’23. Food inflation (heavy-weight) increased by 225bps MoM vs. 104bps in the last month with a surge in price of vegetables (8%) and oils & fats (6%). Housing/clothing/pan & tobacco prices were also up by 0.9%/0.4%/0.2% MoM. Fuel and light decline continues in deflation zone -1.6% YoY, but the deflationary trends are fading especially on the urban side. Core inflation was also higher at 3.8%, in line with pickup in gold and silver prices in the month. October WPI followed suit, rising to 2.36% from 1.84% in the previous month as food prices rose further to 13.5% from 11.5% with vegetable inflation at 63.0% from 48.7%. Rise in inflation can have an adverse effect on expected the interest rate cuts.

Bond yields rose tracking a rise in U.S. Treasury yields and global crude oil prices over an escalating conflict in the Middle East following Iran's missile strikes on Israel. Yields steepened further after U.S. retail sales rose sequentially in Sep 2024, dampening expectations of an aggressive interest rate cut by the U.S. However, losses were limited following the RBI’s decision to shift its stance from withdrawal of accommodation to neutral. The benchmark 10 year old G Sec yield hardened 10 bps from 6.75% in September to 6.85% in October. Corporate bond spreads declined across maturities, largely due to lower CD borrowing.

The first half of November has seen the continuation of the heavy selling witnessed last month, with the Nifty 50 capitulating by another ~3% already. There has been a slowdown in urban consumer demand and it has been evident in the corporate earnings seen so far. The power demand upcycle also seems to have plateaued while energy companies have witnessed pressure on their earnings. The outcome of the US Presidential elections had a very short term impact on markets globally. It could potentially result in increased capital inflows to the US on account of the higher UST yields.

Regards,

Investment team