Outlook for the Month of July 2024


Economy Review

The key events in the month were –


  • Domestic Factors –

    a)  CAD – India reported current account surplus of $5.7bn (0.6% of GDP) in Q4FY24, as against deficit of $1.4bn (0.2% of GDP) in Q4FY23. This was led by a reduction in the goods trade deficit, steady services trade surplus and strong inward remittances.


    b)  GST Collection – India’s GST collection in June’24 rose 8% yoy to Rs 1.74 tn.


    c)  Manufacturing PMI – India’s Manufacturing PMI in June’24 came in at 58.3 from 57.5 last month.


    d)  Trade Deficit – India’s trade deficit for May’24 widens to a 7-month high of $10.9bn. The widening trade deficit was led by a rise in oil imports and service imports.


    e)  Monsoon – The first month of monsoon started on a tepid note, though the cumulative rainfall deficit gradually narrowed to 11% towards June end. Except for South India, other regions saw a deficit with the highest deficit in North-west region.

  • Global Factors –

    a) FED – The Federal Reserve in the June’24 meet kept key policy rates unchanged and scaled back its forecast to one rate cut from three rate cuts in CY2024.


    b) Eurozone PMI – Eurozone Manufacturing PMI remained below the 50 mark in June’24, indicating contraction. However, Services PMI remained in expansion territory at 52.6 in June’24 vs. 53.2 in May’24.


    c) Crude Oil – Brent crude oil prices rose to $87/bbl during the month after industry data showed a bigger-than-expected drawdown in U.S. crude stockpiles, boosting hopes of solid fuel demand.

Domestic Macro Economic Data

Inflation – India’s CPI further eased to 4.75% in May’24 vs. 4.83% in April’24 due to higher food inflation. India’s WPI rose to 2.61% in May’24 as against 1.26% in April’24 driven by rising prices across the board and not just limited to food.

 

Outlook for Equities


June concluded with Nifty recording a gain of 7%. The Nifty witnessed the sharpest single-day decline on June 4 as the BJP fell short of majority on its own; however, the index rebounded in subsequent sessions as the formation of BJP-led NDA government reassured investors of policy continuity and political stability. Mid-cap and small-cap indices were up 8% and 10% duirng the month, respectively. The Federal Reserve in the June’24 meet kept key policy rates unchanged and scaled back its forecast to one rate cut from three rate cuts in CY2024. Brent crude oil prices rose to $87/bbl during the month after industry data showed a bigger-than-expected drawdown in U.S. crude stockpiles, boosting hopes of solid fuel demand.


On the domestic front, India reported current account surplus of $5.7bn (0.6% of GDP) in Q4FY24, as against deficit of $1.4bn (0.2% of GDP) in Q4FY23 led by a reduction in the goods trade deficit, steady services trade surplus and strong inward remittances. India’s Manufacturing PMI in June’24 came in at 58.3 from 57.5 last month. The RBI’s MPC decided to maintain the repo rate at 6.5% as the RBI remains committed for aligning inflation to 4% on a durable basis. FIIs bought equities worth $2.9bn in the month of June’24 while DIIs remained buyers to the tune of $2.6bn.


Indian Equity Market is currently in euphoric mode with strong momentum and is trading at all-time high. While the domestic flows have remained very strong throughout the last FY, some market volatility is expected as India will present its first Union Budget post elections. Post the recent rally, Nifty is trading at ~22x FY25 P/E, +1.5SD above the long-term average. We expect Nifty earnings to grow at ~12-13% in FY25. Investors can continue to invest in equities from a long-term perspective.


Outlook for Debt


June marked the beginning of monsoon which has so far fallen short of long-term average. Till June 28, cumulative rainfall was 14.5% below long-term average. On a cumulative basis, rainfall was above normal in southern India while deficient in rest of India. Basin-wise reservoir levels have been deficient in June. Overall basins and reservoirs levels were 14% below long-term average for week-ending June 27. Much awaited JP Morgan GBI-EM index inclusion for Indian Government bonds happened in June 2024, however FPI flows towards end of month were not very large in quantum.


RBI MPC in early June kept key repo rate unchanged, the vote was 4-2, with 2 members voting for change of repo rates as well as stance. MPC remained guarded in the guidance with continued reiteration of 4% CPI target on a durable basis. MPC pointed out risks from food inflation which has slowed the disinflationary process and firming up of non-energy commodity prices even as fuel inflation has declined. Governor re-emphasized that local factors are dominant while deciding monetary policy and global or Fed policy do not influence their decision making. RBI MPC meeting minutes continued to signal caution on the inflation trajectory. Most members considered a wait-and-watch approach appropriate, given the headroom from resilient growth prospects. Dr Varma and Dr Goyal highlighted that the current restrictive monetary policy would induce unacceptably high growth sacrifice.


INR came under immense pressure during the month to hit record lows of 83.67 amidst aggressive domestic importer dollar demand, heavy corporate FPI outflow, higher crude oil prices, DXY strength on uncertain Fed actions, and jitteriness on the CNY weakness. INR closed the month at 83.3825. Banking system liquidity turned positive towards end of month even as Government cash balances surged as high as Rs. 5tn during the month. Minimum support price (MSP) for kharif crops for the marketing season 2024-25 was increased by around 6% compared to increase of around 7% last year. Tariff hikes by telecom service providers would also add inflationary pressure going forward. Gross borrowing for SDL is indicated at Rs2.6tn in 2QFY25, states borrowed 57% of indicated amount in the 1Q. Also in 1HFY25 the net competitive supply of T Bills will be (-) Rs1.5tn. This will incrementally add to baking system liquidity.


CAD/GDP narrowed to 0.7% in FY2024 from 2% in FY2023. The current account was US$5.7 bn in surplus in 4QFY24 (0.6% of GDP), with a narrowing of goods trade deficit, supported by strong services surplus and remittances. Goods trade deficit in May widened to US$23.8 bn led by a sharp increase in oil trade deficit. Services trade surplus in May, at US$12.9 bn, moderated from April. May CPI inflation was at 4.75%; Core inflation continued to fall and was at 3%. WPI inflation in May increased to 2.6%. IIP growth in April was at 5%, all categories registered positive growth, except for consumer non-durables. Infrastructure output growth in May 2024 came in at 6.3%.


The Federal Reserve kept its policy rate unchanged and scaled back its forecast to one rate cut from three rate cuts in CY2024. Recent data prints on inflation and labour market have been somewhat softer but FED has not been too amenable to rate cuts in their communication. Bank of Japan kept policy rates unchanged at 0-0.1% while signalling an intent for a rate hike in July. ECB however cut key rates by 25bps. Brent crude remained well bid rising by ~6% during the month to $86.41/bbl.



In the near-term market will watch for Budget in July especially for any populist measures as well as any changes in market borrowing. FPI inflows during the month, CPI inflation and FOMC meeting towards end of July will also be tracked. Movement of USD INR, Chinese yuan, Japanese yen and dollar will also be closely observed. 10-year G-Sec closed at 7.01% on June 28, 2024, rising by 3 bps during the month. In the near term 10-year G-Sec is likely to be in a range of 6.90%- 7.20%. Spread of G-Sec with corporate bond is 45 bps and likely to be between 40-60 bps.