Global macro and market:
Global economy continues to make a remarkable recovery and most high frequency indicators are suggesting solid growth. Global PMIs rose to the highest level in 15 years, global trade is rebounding and consumption is picking up smartly in US as well as Europe. With DM economies opening up, their services is also picking up smartly and catching up with manufacturing.
However, DM-EM divergence is emerging with DMs doing much better due to continuation of the strong stimulus and faster pace of vaccination. It is to be noted that significant impact the unprecedented monetary fiscal stimulus unleashed in the wake of pandemic, which will flow in 2021 and probably 2022 as well. EMs have either exhausted or have begun dialling back their stimulus, plus new wave of infection and low vaccination is putting pressure on their growth numbers.
Inflationary pressures are rising in global economy both headline and core. Besides the strong rise in commodity prices, pandemic is creating supply bottlenecks. So while demand has shot back sharply, supply response is taking time and that is creating shortages. Through the second half of last year, supply shortages in industry is pushing core goods prices above their pre-pandemic pace. The acceleration in growth is intensifying these pressures.
Global equity markets continue to scale new peaks led by DMs but EM markets were more sideways. DXY continue to be under pressure but has failed to break below 89-90 level. Yields were sideways in May despite high inflation as jobs data surprised negatively and Fed aggressively guided market to look through the recent rise in inflation which it regards as transient. Global commodity prices continue to rise. Worryingly for India both crude and food prices are up. Crude is trading above 70 and global food prices are up 40% y-y and highest since 2011.
India macro:
Both the second Covid wave and its economy impact has likely peaked in May. States have already begun to ease restrictions. Activity indicators in May were 20-25% down from the beginning of the second wave and at similar level as June 20. While mobility indicators dropped to 1QFY21 levels, high frequency data suggest that economic impact was much less than the National Lockdown in first wave. We expect a shallower slowdown than the first wave and a shallower recovery. Trough will be much higher than last time. Consumption will be mainly hit this time, exports/GFCF will do much better. Strong global recovery is generally good news for Indian economy and equity markets. Exports are already doing well. Vaccination remains the key to sustainable control pf pandemic. The key risk to watch out for India, besides net mutation of virus, is the rising inflationary pressures globally, which may also spill over in India.
Difference between first and second wave:
First wave had full and strict lockdowns resulting in very sharp collapse in all activities including manufacturing and construction. Moreover economy was not prepared for lockdowns and it took time to adapt to the new normal. Global backdrop was also not favourable with growth collapsing all around. But, on the positive side global commodity prices were low and India appeared to be outperforming most economies in containing the pandemic. The second wave has no national lockdowns, national transport lines are open, economy has adjusted to lockdowns, and manufacturing, construction and export/imports have been left largely untouched and global backdrop is very strong. But the humanitarian crisis of Covid is much higher, and commodity prices higher/ CAD higher. The pent up demand post reopening will be somewhat lower than last time given the widespread human/medical cost and the impact on confidence. Moreover lot of pent up demand was result of shift to the new normal which is likely satiated. Consumer sentiment indicators are already at their lowest levels.
At the other side of pandemic, economic prospects for India remain quite bright. Slew of economic measures like PLI schemes and corporate tax cuts, and serious reforms undertaken in agriculture, bankruptcy and labour laws in last few years have set the economy on the path of strong medium term growth. Recent trend in GST collections suggests that the finally the promise of an eflcient indirect tax regime with minimal leakage is being realized. Accommodative monetary policy, aggressive fiscal push to growth, and strong global growth are other factors because of which we remain bullish on India’s prospects, despite the near term drag due to pandemic.
RBI policy:
RBI MPC unanimously decided to keep the policy rates unchanged while announcing further liquidity measures, including higher quantum of G-SAP 2 for second quarter. The tone of policy remained dovish and largely in line with what markets has been expecting from them. RBI reiterated its commitment to continue with its efforts to support bond markets and government borrowing via continued liquidity support and accommodative policy stance till COVID-19 drag persists.
Overall RBI seems to be on pause till there is sustained growth revival with accommodative liquidity stance. They will continue to prevent rise in yields till the pandemic subsides and until that time inflation mandate will stay in background, unless there is uncomfortable spike in inflation and/or there are indications of it getting generalised. It is safe to assume that while the second wave has deferred the normalisation path, the same should resume once pandemic drag subsides and we will continue to be watchful of that. We continue to recommend roll down strategy to our investors depending on their time horizon.
Source: Bloomberg, CEIC, RBI
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
Thank You
Message will change according to your requirement.