Mr. Mitul Shah - Head of Research at Reliance Securities.
Indian equities closed higher following positive global cues with Nifty rose 0.6%. The broader markets out-performed the main indices as Nifty Mid Cap and Small Cap rose 1% and 1.3% respectively. All sectoral indices ended in green with Nifty Reality gained the most at 2.2% followed by Nifty Media and Nifty IT which were up 2% and 1.4% respectively. The market is waiting for consumer inflation and factory output data for further cues, due later in the day. India's foreign exchange reserves have now dropped to their lowest since Oct'20, at $553bn in the week ended 2-Sep. This is a decline of ~$8bn from the previous week.
U.S. equities rose on Friday and posted weekly gain, offers relief to the market that had been weighed down by the fears of tightening monetary policy. For the week, the Dow Jones rose 2.7%, S&P 500 climbed 3.6% while Nasdaq gained 4.1%. All 11 sectors of the S&P 500 posted weekly gains for the first time since Feb'21. The yield on the 10-year U.S. Treasury increased to 3.321% from 3.291% on Thursday. Central banks including the U.S., U.K. and the euro-zone have made clear their intent to bring down inflation, even if tighter monetary policy winds up pushing economies into recessions. Meanwhile, consumer prices rose 2.5% YoY in August, a more subdued rise than July's 2.7% increase. Slower inflation should offer relief to policy makers as they come up with ways to stimulate the economy, which is facing challenges including an ailing property sector.
The US Federal Reserve reiterated the need to act strongly against inflation, leading markets to expect more interest rate hikes in the near future. India is trading premium valuations compared to emerging market on high growth expectations. Midcap Index outperformed with 24% return since Mid-June while Nifty delivered 16% return. We expect the outperformance to continue given FII investment coupled with strong macros for India compared with other markets. India's GDP data for Q1FY23 came in at 13.5%, and GDP growth is expected to sustain at 7% in FY23, which is the highest among emerging markets. The RBI is likely to opt for slower pace of hikes in forthcoming meeting. The country's retail inflation is likely to moderate after hitting a peak recently. We expect strong economic rebound, normalised commodity prices, inflation within targeted range and better visibility in the near term.