Navigating the Tightrope: Building Stability in an Uncertain and Evolving Market

Most emerging markets faced significant FII outflows, driven by uncertainties surrounding the US elections, geopolitical tensions in the Middle East, China's stimulus measures, and rising US yields. For India, these outflows were further amplified by ongoing earnings reports that failed to justify the high valuations. The correction was particular in sectors that had experienced sharp rallies over the past year, especially among companies that missed market expectations on earnings.

Despite the intense FII outflows, totalling approximately USD 12 billion in a short span, the Indian rupee demonstrated remarkable resilience compared to similar past events. This resilience highlights India's strong macroeconomic fundamentals, including relative strong GDP growth, controlled inflation, well-managed twin deficits, and record-high foreign reserves. Here’s a closer look at the data underpinning these fundamentals.

Indian Macroeconomy

Inflation

In September 2024, headline Consumer Price Index (CPI) inflation spiked to 5.5% year-on-year (YoY), up from 3.7% in August. This surge was primarily driven by soaring food prices, particularly fruits and vegetables, which reached a 56-month high. The Reserve Bank of India (RBI) has adopted a cautious stance, prioritizing inflation control over aggressive monetary easing. The elevated inflation print has tempered expectations of rate cuts, with interest rates likely to remain steady through December 2024.

Growth Drivers

India's Q2 GDP growth in 2024 slowed to a multi-quarter low of 5.4%, yet the country continues to outpace major economies, supported by strong domestic demand and favorable demographics. In FY2023, India contributed 19.5% to global GDP growth, up from 15.6% in FY2022—a trend projected to remain robust in the coming years. Key highlights include:

• Services Sector: Sustained demand in housing and personal care services.

• Automobile Industry: A rebound to pre-pandemic sales levels, driven by urban demand recovery, positioning it as a key contributor to industrial growth in 2024.

Risks Ahead

While India’s economic fundamentals remain strong, challenges include:

• Elevated food and core inflation, which may erode purchasing power and dampen investment.

• Slowdowns in global trade and rising geopolitical risks, which could impact exports and increase energy import costs.

Indian Equity Markets

Sectoral Performance

October 2024 was marked by broad-based sectoral declines, with notable corrections in Automobiles, Oil & Gas, Consumer, Utilities, and Real Estate. The banking sector struggled with slower credit growth and narrowing margins, while subdued consumer demand affected sectors like FMCG, Automotive, and Cement, resulting in weaker corporate earnings.

Flows and Valuations

• Domestic Institutional Investors (DIIs): October saw record inflows of USD 12.8 billion, reflecting strong domestic investment appetite.

• Foreign Institutional Investors (FIIs): Contrarily, FIIs pulled out USD 10.9 billion, a stark reversal from USD 21.4 billion inflows in 2023, driven by valuation concerns (Nifty 50 P/E at 23x, above its historical average).

Corporate Earnings

2QFY25 corporate earnings were mixed, with commodity sectors dragging overall performance. Excluding Metals and Oil & Gas, earnings growth met expectations at 9–11%.

Outlook

Despite short-term volatility due to geopolitical risks and central bank policies, the long-term outlook remains optimistic, supported by corporate deleveraging and healthy earnings growth projections.

• Investment Strategy:

  • Maintain equity exposure for those adequately invested.

  • Gradually increase allocation to large-cap and multi-cap strategies over 3 months.

  • Mid and small-cap strategies can be added selectively over 6–12 months, with accelerated deployment during significant market corrections.

Indian Debt Markets

RBI’s Policy Stance

The RBI maintained policy rates in October, shifting its stance from “Withdrawal of Accommodation” to “Neutral,” signalling a shallow easing cycle in the near to medium term. October inflation hit a 12-month high at 6.2%, driven by food inflation at 10.9%. Q2FY25 GDP growth estimates were revised down by 20 bps to 6.8% due to subdued activity and weather-related disruptions, but full-year forecasts remain steady at 7.2% GDP growth and 4.5% inflation.

Bond Market Dynamics

Indian bond markets experienced heightened volatility, reflecting global macro signals, central bank actions, and geopolitical tensions. Over the last 10 months:

• Long-term G-Sec yields eased by 40–50 bps despite interim fluctuations.

• The medium-to-long-term trajectory indicates a softening trend.

Investment Recommendation

Play duration through a mix of active and passive strategies, with an emphasis on long-term maturity (15–30 year) G-Sec strategies to balance yield opportunities with volatility risks.