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Indian Markets continue give away gains – The Indian markets extended their losing streak for the consecutive months as the geopolitical conflict in Europe continues to impact the global economic growth. The continuous stress in the supply chains and high volatility in the commodity prices, which are at the elevated levels, have resulted in centrals banks aggressively tightening monetary policy and liquidity conditions to tackle inflation. With rising interest rates in the US and Europe, the FIIs continue to pursue safer investments and as a result impacting the emerging market economies. The FIIs were sellers to the tune of `40,000 Cr in the month of May’22 and the current trend is likely to carry on as the US Fed continues to hike interest rates.

Near term inflation movement to dictate the course of markets – Over the course of the next few months, the market direction is likely to be dictated by the global inflation. The US CPI, which will be released on 10th June, will be closely watched as the better-than-expected non-farm payrolls has already added to expectation of aggressive tightening by the Fed. Although there are indications that core inflation is close to peeking out with May CPI expectation of 5.9% from 6.2% in April, there is still some cost inflation that is yet to make its way through the system. Oil inflation continues to be a challenge as Saudi Arabia has raised the selling prices sharply of Arab Light crude for Asia as the decision by OPEC+ to boost output in July and August by 648,000 barrels per day is unlikely to offset shortfall from banning of Russian oil being imported into the EU.

High frequency indicators strong, India Inc posts strong profits – Meanwhile, most high frequency indicators are so far indicating robust economic recovery. The manufacturing PMI for May’22 came in at to 54.6 from 54.7 in April, which was the 11th straight month of expansion in the manufacturing sector. Meanwhile the services PMI was at the highest level since April 2011, coming in at 58.9 as against 57.9 in April 2022. May GST collections for the third consecutive month crossed `1.40 lakh crore with collections growing to `1.41 lakh crore. The CV segment outlook also remains positive given that the fleet operator profitability is at a higher level vs. the recent past. Similarly, 2Ws registrations, which were ~ 30% lower than 2018 and 2019 levels, have seen good MoM recovery in April and May partially aided by the mini wedding season. Meanwhile, the listed companies have delivered strong earnings for Q4FY22, which is supporting the market in current conditions.

Volatility levels to remain high in near term – Aggressive rate hikes by global central banks on the back of continued inflationary pressures are the near-term risk while earlier than expected peaking of Inflation would drive the market. While we expect continued improvement in the underlying economic conditions, high inflation and aggressive tightening by central banks will lead to some slowdown down the line, resulting in earnings cut. Therefore, while we remain positive on the longer-term growth potential on the Indian economy, we are cautious in the near term given multiple headwinds to the economy.

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