India - Sailing through a storm

“The turn of the decade felt like a moment of departure,” said Aditya Birla Group chairperson Kumar Mangalam Birla at the annual general meeting of Aditya Birla Capital Ltd.

This summarizes the plight of India Inc and the continued pressure on global supply chains complemented by the Russia-Ukraine war and global stagflation keep uncertainties alive. Disruption now feels like ‘business as usual’.?

In today’s article we are going to touch on the aspects that keep Indian markets afloat.

Rural labor market

Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGS) saw a high demand of jobs during the pandemic phase. A rise in demand of MNREGS jobs indicates that there is an absence of other suitable employment opportunities and this becomes the last resort.

Demand has dipped after the peak of the pandemic, though it still remains above the pre-pandemic level.There has been a gradual shift in the pattern with laborers returning to urban areas and this reduced the job demand in the month of July. It was observed that the demand for jobs halved in July compared to the previous month.

Rupee depreciation

RBI understands the need to keep stability in USD INR rate and takes required measures. During the week, RBI sold USD 6.6 billion and over USD 43 billion have been used to contain rupee depreciation.?

This timely involvement of the central bank reinstates the belief in the India story.

Bank credit

The Indian banks are well capitalized and performing better than their peers in the public banking domain.

Bank credit to medium industries grew by 47.6 per cent in June 2022 and credit growth to micro and small industries accelerated to 29.6 per cent in June 2022 from 11.6 per cent in June 2021.

Retail participation

Equity funds (investments through direct equity or EPFO) are still receiving INR 23,169 Crores. One-third of the contribution is invested into growth and equity oriented schemes.

This is fairly high considering that retail has lost money for three consecutive months in the equity market.?

FIIs are back!

FIIs had sold close to INR 2 Lakh Crores and one-fifth of it is now invested back in the Indian market.?

Has the tide turned and are we going to see a better market in 2022?

DII participation is keeping the market stable. Let’s consider the month of May when FPI sold INR 39,993 Crores and DIIs brought an inflow of INR 30,758 Crores keeping the deficit in control.

It will be too premature to confirm whether the rally is going to last for long, markets have gone up by 8 percent in the last month and 12 percent since 1st of July. If FIIs don’t buy heavily but the selling is contained, it still provides cushion against capital erosion for retail participants.

While this gives a reason to rejoice, this could be shortlived if the inflation in the west and rising energy prices are not contained. Europe is expecting severe costs this summer and Germany's manufacturing woes would be something to fear.

Disclaimer - The views expressed in this article are of the author and do not represent the firm’s views.