India’s markets have held their ground this quarter, diverging from global price action and faring better than most regional peers. Benchmark equity indices have proved to be resilient, heading towards record highs and are amongst the handful in the region with net gains year-to-date (ytd). In dollar terms, Nifty/ Sensex is down 4.0% ytd, less than double-digit fall in Philippines, China, Thailand, and Malaysia, whilst also outpacing the MSCI EM this quarter. Host of drivers are behind this outperformance, including the rising presence of retail investors (no. of demat accounts surpassed 100mn in Aug vs 40mn in Mar20), net foreign inflows since July (~$8.1bn), strong corporate earnings, deleveraged books, relative attractiveness vs sobering growth outlook in other major countries and structural tailwinds, amongst others. While spill-over of global economic slowdown and upcoming Fed action are risks, expensive valuations have not shaken the optimism.
Separately, INR bonds have benefited from a pullback in crude oil prices and anticipation of bond index inclusion (read India: Optimism over bond index inclusion resurfaces). 10Y (generic) bond yield is down ~40bp vs Jun’s high. Apart from banks’ stepping up bond purchases, demand has risen from insurance companies, provident funds, and foreign investors (front run index hopes). Supply fears have receded as the borrowing plan for 2HFY23 (Sep to Mar23) is likely to stay on track with ~INR5.9trn (or be marginally cut), in light of strong revenue collections. By contrast, short-end (2Y) and money market rates have risen, with surplus liquidity falling below INR 600bn owing to lower government spending and tax related outflows, vs INR3.6trn in late-Jun. The short end might stay buoyant as expectations rise that the RBI might consider a third consecutive 50bp hike next week. Strong intervention presence has meanwhile kept the USDINR in a narrow 79-80 range. While the authorities continue to show a hand on both sides of the range, drawdown of the forwards book (-$43.8bn since Mar), apart from the reserves stock (-$90bn from record high), is likely to see the central back stay opportunistic in its intervention presence. This implies that the currency might adjust along with the regional peers if the shift is triggered by a wave of broad dollar strength or a bout of risk-off move. Encouragingly, the rupee has consistently been in the middle-to-upper quotient of the Asian FX pack on year-to-date performance, outdoing many regional peers. Shifts in global risk sentiments, upcoming FOMC rate decision and rising US real yields are under watch.
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