Mr. Mitul Shah - Head of Research at Reliance Securities.
Indian equities started higher but closed in the red zone, tracking weakness in global markets as investors mull over the recent inflation data. Nifty declined 0.7%, Nifty Mid Cap was up 0.4% while Nifty Small Cap was largely flat. All sectoral indices ended in red except Nifty Auto (+0.7%) and Nifty Metal (+0.1%). Nifty Media was the major laggard which plunged 2.2%, followed by Nifty IT and Nifty Pharma which dipped 1.4% and 1.3% respectively. Data from the Centre for Monitoring Indian Economy (CMIE) showed that India's labour market shrunk by 2.1mn in Aug'22 due to a decline in salaried jobs while the labour force increased by 4mn, resulting in an increase of over 6mn in the number of unemployed. Hence, unemployment rate to rise to 8.3% in August which is the highest in the last 12 months. Meanwhile, the RBI is expected to continue its hawkish stance and likely to raise interest rates by 50bps in its upcoming policy meet.
U.S. equities inched higher after wobbling between small gains and losses, after a broad-based sell-off in the previous day, spurred by a stronger-than-expected inflation. The S&P 500 was up 0.3%, a day after the index plummeted 4.3% in its worst sell-off since June 2020. The Dow Jones was up 0.1%, while the tech-focused Nasdaq Composite gained 0.7%. The 10-year Treasury yield eased slightly to 3.411% from 3.422% on Tuesday. Moreover, data on Wednesday revealed that the producer-price index (PPI), which measures what suppliers are charging businesses and other customers, rose 8.7% YoY in Aug'22. On a monthly basis, this was 0.1% lower from Jul'22, in-line with market expectations. The Fed will make its next interest-rate policy decision next week and could hike rates by 75bps.
India's retail inflation CPI surged to 7% in Aug'22 due to higher food prices, as against 6.71% in Jul22. The index has remained above the RBI's comfort zone of 2-6%. Spill-overs from geopolitical shocks are causing considerable uncertainty to the inflation which is likely to remain at elevated level in the near-term due to higher energy and food prices. Meanwhile, U.S CPI also rose 8.3% YoY in Aug'22, down from 8.5% in Jul'22 but above market's expectation of 8%. India is trading premium valuations compared to emerging market on high growth expectations. We expect the outperformance to continue given the FII investments coupled with strong macros for the Indian economy 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. We expect strong economic rebound, normalised commodity prices and better visibility in the near term and inflationary pressures to cool down towards the end of FY23.