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As we navigate through September, the global equity landscape has been marred by multiple headwinds - marking the second consecutive month of negative momentum globally. Key events driving markets during the month include:

* Central banks have maintained their stance on a ‘higher for longer’ interest rate narrative, while keeping rates unchanged. This has led to a cautious sentiment among investors;

* The 10-year US Treasury yields have skyrocketed to a 16-year high, adding another layer of uncertainty. The volatile macroeconomic environment has cast doubts over central bank policies and future risks;

* Supply constraints have pushed oil prices higher, adding inflationary pressure to the global economy

Against this backdrop, the MSCI World and MSCI Europe have declined 4.5% and 4.0% respectively in USD terms in September. Interestingly, emerging markets have shown relative resilience, with the MSCI EM down just 2.8%. India and Philippines stand out as the only major economies posting positive returns last month. In local currency, NIFTY 50 has gained 2.0% during the month. The Midcap segment continues to outperform, registering a 3.6% increase. Sector wise, PSU banks, Utilities, and Energy have led the gains, while FMCG and IT have lagged. (Source: Bloomberg)

Important event during the month has been inclusion of Indian Government bond in JP Morgan Emerging Market Bond Index. Inclusion is slated to commence on June 28th, 2024, in a staggered manner. From the date of commencement, 1 percent weight will be added to the index every month for the next 10 months to take the overall weightage to 10% by March’25. This comes post the exclusion of Russia from the index and will take the overall exposure in Asian subcontinent in the index close to 50%.

With this inclusion, investors will be able to diversify their portfolios and allocate money to a high yielding market in the world’s first-largest economy by GDP. On the yield front, among those Asian economies which are part of JP Morgan Emerging market bond Index, India has one of the highest yields currently and will also have a higher relative weight

For the country, this is an opportunity to tap into a larger pool of liquidity to meet the growing finance need. India is expected to witness inflow of over USD 20 bn in the Indian bond markets. This would bring diversity in the Indian debt ownership and deepen Indian bond market. Overseas ownership is less than 2% of the total outstanding debt in India. Indian bond market has been larger than many of the other bond markets and its inclusion in global indices has been long due.

This inflow will help finance the country’s current account deficit. Currently India’s credit rating is BBB-/Baa3, last in the investment grade band. Inclusion in the index is expected to also bring down the country’s risk premium attached to it in the global financial markets. This should also lead to lower cost of funding and thereby cost of capital and consequently a positive effect on the overall equity valuations. The decision by JP Morgan can also lead to domino effect for Indian markets as other competing global EM bond benchmarks might end up taking a similar decision. With this inflow of funds in next financial year, it is expected to see a positive effect on the Indian forex reserve along with stability in the currency market.

Along with positive news on Bond inclusion, rainfall also saw some improvement during the month. Cumulative rainfall (till Sept 22) was now 6% below long period average. On a cumulative basis, rainfall was normal in north-west and central India, while relatively weaker in east and north-east, and southern India. Interestingly, though rainfall has a major impact on total agricultural output of the country, the overall impact has been reducing as there has been a structural shift in contribution of crops to agriculture Gross Value Added (GVA), a drop from 63% to 52% in last 10 years. Furthermore, there has been a change in the constituents within the crops as there has been a significant increase in horticulture which has overtaken cereals. Also, gradually India is also increasing irrigation leading to gradual reduction in dependence on rainfall.

When it comes to sowing status, it is in line with last year, which is on a positive note looking at the inflationary pressure on the current food and vegetables basket. By the end of third week of September, in this season, total kharif, rice and coarse cereal sowing was 0.3%, 2.7% and 1.3% higher respectively. On the other hand, pulse and oilseeds were at 4.6% and 1.6% lower respectively, compared to last year.

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