Macro-economic indicators

  • Retail inflation (which includes the price of food, fuel, electricity, etc.) for April 2022 came in higher at 7.8% as against the previous month’s 7.0%
  • The total loan book of all the banks in India increased by 11.9%, higher than the their deposit growth of 9.7%
  • Manufacturing PMI for May 2022 fell to 54.6 as against the previous month’s 54.7
  • The rupee traded in the 76.26 – 77.73 range, before closing the month weaker at 77.64
MACRO DATA May 31, 2022 1-Month 1-Year
USD/INR 77.64 76.43 72.62
Brent Oil ($/bl) 122.84 109.34 69.32
Retail Inflation (CPI) 7.79% (Apr) 6.95% 4.23%
MARKET RATES May 31, 2022 1-Month % Change 1-Year % Change
Borrowing rate for GoI for 10 years 7.42% 0.28% 1.39%
Borrowing rate for good quality (AAA) private company for 10 years 7.70% 0.35% 0.93%
Bond market index 3918.14 -1.34% 0.64%

Market Review

Crude Oil prices continued to remain elevated as western countries’ sanctions on Russian output were tightened. Inflation in US remained elevated at 8.3%. With sustenance of inflation pressures, FOMC raised the federal funds rate further by 0.50% in the last meeting in May post the 0.25% increase in March. Bank of England raised their interest rates further by 0.25% to 1%. ECB monetary policy with revised growth and inflation estimates is awaited in June.

To tackle the inflationary concerns, RBI opted for an intermittent meeting in the first week of May and raised policy repo rate by 0.40% to 4.40% and hiked Cash Reserve Ratio by 0.50%. Minutes of the meeting indicated a further raise in repo rate in the June meeting. Government also stepped in to curb inflation with excise duty cut on petrol and diesel which immediately brought down in the retail fuel prices. These steps are expected to cool down inflation in the coming months. Government’s fiscal account for FY23 is currently under pressure due to excise duty cut and additional food & fuel subsidy.


  • We remain ‘Cautious’ on bond markets from a medium term perspective. The sudden shift of MPC’s focus from growth to inflation will continue to put upward pressure on bond yields as more rate hikes are priced in. Emerging markets are likely to face pressure with regard to inflation and a depreciating currency as foreign capital rushes to safe haven assets. Expectations of accelerated rate hikes in the US is putting pressure on EM bond yields as well. Supply is likely to outweigh the demand and compel RBI to take some steps to keep the rising bond yields in check. But soaring commodity prices, coupled with monetary policy normalization, a huge bond supply and an adverse global bond yields environment are expected to lead to further hardening of bond yields, though any measures taken by RBI to provide support to the bond markets may slow down the pace of yield movement.

Exhibit A: GoI borrowing rate for 10 year

Security Yield

EQUITY INDICES May 31, 2022 1-Month % Change 1-Year % Change 3-Year % Change 5-Year % Change
Nifty 16,585 -3.0% 6.4% 11.6% 11.5%
BSE 100 16,888 -3.9% 6.7% 11.9% 11.2%
Returns more than 1 year have been annualised.


Nifty was down 3.03% for the month of May 2022:

Market were volatile, affected by the conflict between Russia and Ukraine. The US Fed also got into rate hike mode, dampening foreign inflows. FIIs’ selling continued unabated. DIIs (both MFs and others) buying propped the market up.

FIIs continued to be sellers to the tune of US $ 4.8 billion in May after selling US $ 3.8 billion in April. Domestic institutional investors continued to be buyers (net buying US $ 6.5 billion). Capital Goods/Auto outperformed while Metals & Minerals/Cement underperformed.


Our outlook remains Neutral in the short-term and Positive in the medium-term. We note that growth in economic activity is holding up, while being susceptible to inflationary pressures. We note that the war situation and a hawkish policy stance from the US Fed and other major central banks have dampened sentiments towards risk assets. This could lead to continued volatility in the market.

We shall continue to monitor the pace of economic growth in India. Commodity prices have seen inflation. Higher inflation is pushing up nominal economic output values. However, it impacts demand negatively, leading to decline in profit ability. We are already seeing evidence of this in a few sectors. We note that the Nifty Valuations are at FY23E PER of ~19X.

In the medium-term, we expect certain important drivers of growth to help. These are: Consolidation in businesses and rise of local manufacturing/import substitution. The rise of technology-enabled (digital) businesses is a key area that is seeing rising activity levels, and driving employment generation. We also expect capital expenditure (particularly private capex) to improve, driven by deleveraged balance sheets of corporate India.

Earnings expectations are robust for FY23 and FY24 (with the forecasters building in a ~15% CAGR in Nifty EPS over these two years). Policy normalization by the US Fed has led to foreign funds’ outflows, and continues to be a risk.

Equity Insights: Opportunities in a correcting market

In our recent notes, we have been highlighting about higher market volatility. This year, so far we have seen high volatility driven by Fed policy change and a major geo-political conflict. Given the macro-economic outlook remains less than sanguine, one can expect volatility to continue to be high through the course of the year.

With a conflict involving a commodity exporter, it is quite likely that there shall be continued ramifications. Higher commodity prices eats away from savings and consumption. Hence this can have an impact on growth too. As the world adjusts to the new normal, the stock market could react. Hence, we are likely to see continued volatility in the near term.

As the market correction gathers steam, we note that such correction provide opportunity to the long term investor to buy assets at relatively cheaper prices. During times of economic slowdown, the intrinsic long term value of a business decreases moderately. However, the correction in stock prices can be disproportionately much higher. This creates favorable investment opportunities in a correcting market.





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