CIO Speak

Indian equity markets witnessed a strong rebound rally in June with both benchmark indices registering gains of ~7.5% each after the Government announced the first phase of 'un-lockdown' of the economy from 1st of June where production of goods and services were allowed to resume in a phased manner. On top of that, the amount of quantitative easing initiated by several central banks around the world resulted in a significant amount of liquidity pumped in globally, which also had a very positive effect on stock markets. The liquidity infusion was able to negate the tremors caused by heightened geo political conflicts on the Sino- Indian border as well as poor macro numbers. The rally was led by Financials, Auto and Realty sectors while defensive sectors like FMCG and Healthcare underperformed. FIIs were net buyers to the tune of USD 2.9bn while DIIs were net buyers to the tune of USD 317 mn.


IIP in April contracted by a record -56%, much weaker than the -17% contraction in March as the lockdown was at its most stringent during this month. Most industry units reported zero production for the month. Data quality issues also impacted IIP with the CSO indicating that these quick estimates will undergo revision. Item-wise detail shows that manufacturing production contracted by -64.3% YoY in April. Within manufacturing, contraction can be seen in all 23 industries with the lowest decline seen in food manufacturing (-21.4% YoY) and pharma (-29.8% YoY) that fell under permitted activities. There was close to a 100% contraction in automobile sector, production of transport equipment and vehicles. Use-based classification shows lesser contraction in consumer non-durables (-36%) and sharper contraction in consumer durables (-95%) and capital goods (-92%).


Headline CPI inflation wasn’t released for the second month as the lockdown continued to hamper data collection, resulting in several sub-components, especially on the core side missing. Among the sub-components released, food and beverages inflation moderated to 7.4% YoY in May from 8.6% in April, reflecting some normalization of supply chain. Item wise detail reveals the decline was led by vegetable prices which were lower by 10.7%MoM, followed by sugar (lower by 3.1%MoM). Prices of pulses saw a more moderate rise of 0.5% in May. Cereals and fruits saw a decline in prices. May Headline WPI inflation fell to -3.2% YoY, led by sharp contraction in fuel prices and also softer food inflation. Core inflation dipped deeper into the negative zone, at -1.3% YoY, underscoring weak input price pressures.


Bond yields continued to soften on hopes that the RBI would soon announce measures to absorb a major chunk of the supply of sovereign debt. Expectation of further relaxation in monetary policy by the Monetary Policy Committee in the coming months also contributed to the upside. The bond market received another boost in the form of one more Operation Twist announced by the RBI to the tune of Rs 10,000 cr. The old benchmark 10 year G Sec yield softened 2 bps to 5.99% from 6.01% in May (the yield on the new benchmark 10 year old hardened 10 bps due to lack of liquidity in the security). Corporate bond spreads too reflected the positivity as they contracted across maturities.


The first week of July has seen the continuation of investment optimism as markets once again have staged rallies across the globe, bolstered by monetary policy and stimulus actions. With India commencing the Unlock 2 phase from Jul 1, investors are seeing a lot of opportunities in the consumer discretionary companies. Investors are also keenly awaiting more stimulus measures from the policy makers in coming time, as the exit strategy from the lockdown is formulated while keeping an eye out for the June quarter earnings cycle.



Amit Patra

Chief Investment Officer

Pramerica Life Insurance.