The Nifty Index rose 4.1% in April while Mid-cap (up 5.9%) and small-cap (up 7.3%) indices outperformed large-cap indices as some domestic macro concerns abated. With no interest rate hikes in April-23 by RBI and an earlier than expected pivot led to benchmark 10-year yields rallying and interest rate sensitive sectors doing well. Weak quarterly results of IT stocks did pull down the markets, but overall sentiment improved subsequently as result outcomes of some other index heavyweights were better. Sector-wise, Real estate (+15%), Auto (+7.4%), PSU (+7.2%), and Cap goods (+6.9%) gained the most, whereas Tech (-3.4%), and consumer durables (+2%) were the indices which underperformed. Other key developments in the month: (1) OPEC+(The Organization of the Petroleum Exporting Countries Plus) announced surprise cuts in oil production, (2) the weather agency Skymet expects the upcoming monsoon to be 'below normal’, whereas IMD expects a normal monsoon. FPI buying continued in April also, with them purchasing US$ 1,4bn worth of Indian equities in the secondary market, while DIIs also bought equities to the tune of US$ 300mn.

High-frequency data for April held up on a YoY basis. GST collection for April (reflecting activity in March) came in at an all-time high of INR 1.87tn (vs. INR 1.6tn in March), growing at a slightly slower rate of 11.6% YoY (vs. 12.7% in March). PMI manufacturing rose to a 4-month high of 57.2 in April from 56.4 in March. Services PMI accelerated to 62 in April, the highest since Jun-10, from 57.8 in March, with the upturn driven by a pick-up in new business growth and favorable market conditions. Air passenger traffic gained pace in sequential terms and remained steady in YoY terms. The CMIE unemployment rate rose a tad to 7.9% in April from 7.8% in March, even as consumer sentiment rose to its highest since Mar-20. Credit growth remains resilient, albeit off peaks. Whilst growth in rail freight accelerated, power demand declined at a slower pace in YoY terms.

As we have highlighted in our previous communication that central banks around the world are now inclined to take a pause in their interest rate hike cycle for now to allow for the impact of past hikes to percolate down the economic system. This comes as a welcome relief for equity markets and alongside the recent moderation in bond yields, provides a floor to equity market valuations. From an India market perspective, we began CY23 with concerns on two counts – India’s extended relative valuations versus the rest of the world and signals of slowing growth, particularly in the consumption segment of the economy. While our concern on valuation appears to have been addressed, we reckon India can still undergo a re-adjustment phase over the next few quarters as growth moderates from its high base of the previous year and as recent interest rate hikes work their way down the system.

While risk to earnings downgrades for FY24 still remains as growth continues to moderate for a couple of more quarters, entry opportunities for investors will likely start to surface during the rest of this year. On current reckoning, we expect the next earnings upgrade cycle in India to commence in mid-2024 as the impact of the global slowdown wanes and India’s structural growth drivers assert themselves more meaningfully. Under the present developing macro-backdrop, India remains one of the best ‘buy on dips’ market for investors focused on medium-term returns.

Global rates remained relatively stable during the month as the market continued to factor in moderated expectations of further rate hikes by US FOMC amidst US regional banks concerns and also as incoming data on employment, consumer spending & inflation showed softening of economy. Dollar Index witnessed a weakening trend. On the back of benign global backdrop, Emerging market nations saw a brief rally in interest rates. Indian rates in particular rallied more with 10 yr G-Sec rallying by ~20 bps as MPC delivered a surprise pause against the market wide expectations of a 25-bps rate hike.

Domestic headline CPI inflation provided the much-needed relief and moderated to 5.7% in March from 6.4% in previous month, led by benign base effect and softening of food inflation. More critically, Core inflation also softened to 5.95% in March from 6.23% in February, largely due to seasonal decline in housing index.

FPIs remained net buyers in Indian equity for 2nd consecutive month with ~INR 157 bn inflow while the debt segment saw marginal net outflow of ~INR 11 bn. Fx reserves surged further during the month by USD 10 bn to ~USD 589 bn. INR strengthened to 81.83 (on April 28, 2023) against USD from 82.33 in April beginning partly led by moderating USD and also as India’s external factors improved.

MPC in April policy surprised the market with an un-expected pause on policy rates likely factoring in moderated expectations of global monetary policy rate actions on financial stability concerns and softening of domestic inflation trajectory.

Outlook

US FOMC(Federal Open Market Committee) delivered a 25 bps rate hike, however has now tweaked the forward guidance to indicate that the Central bank is likely to maintain the status quo on rates with future actions to be data-dependent factoring in lagged effect of monetary tightening as well as developments in the regional banking sector.

RBI has already taken a pause in its April monetary policy taking comfort from India’s external strength. While RBI has maintained “withdrawal of accommodation” policy stance keeping room open for further rate hikes, we believe the bar is very high for any more rate hikes as the inflation is expected to moderate in FY24. Having said that, policy rates are expected to remain “Higher for Longer” as inflation remains far away from medium term target of 4%. Rate trajectory going forward will rather be influenced more by fiscal supply side factors in FY24 which remains a challenge amidst record high borrowing program.

As Central banks reach to an end of rate hike cycle, investors can look at various points of rate curve as elevated yields are expected to deliver positive returns over inflation. Additionally, as we enter rate cut cycle at some point in time, it will further enhance returns through mark to market benefit. More specifically, we find risk-reward to be more favorable for upto 5-year space given the flattened yield curve. Credit environment remains healthy, however current narrow spreads of AA / AA+ over AAA bonds do not provide favorable risk adjusted reward opportunities.