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Dear Investors,

Warm Greetings!

Indian stock markets rallied by 6.5% during the month of May, touching near February 2021 highs. The Nifty 50 Index closed at 15,583 levels during the month of May, registering gain of 6.5%, ahead of most developed markets such as US and UK. Emerging markets such as Brazil, Russia , China also rallied by 5-6% during the month. Amongst sectors Auto, Banking, O&G, capital goods outperformed while healthcare and IT marginally underperformed the broader markets.

Continuous decline in covid cases, pickup in vaccination and easing of restrictions in some of the states lead to the rally. Daily infection has decreased from peak of around 450,000 to around 84,000 currently which is a big relief.

India reported FY21 growth of -7.3% compared with Advanced Estimate (AE) of -8%. Positive surprise was led by government spending, investments and exports. Gross Value Added was also revised upward to -6.2%, vs AE: -6.5% on the back of manufacturing and construction. Counter cyclical fiscal policy was visible with government spending rising by 2.9% in FY21. However, consumption and investment were muted in FY21. GDP growth in Q4FY21 surprised positively at 1.6% compared with 0.5% seen in Q3FY21. The positive surprise was due to Centre’s spending which rose by 30.7%.

India’s Consumer Price Index (CPI) inflation for Apr 2021 came in at 4.3%.  Retail inflation has been falling consistently since Nov 2020. In Feb-Mar 2020, unfavourable base effect pushed up inflation above 5%. However, beginning Apr 2021, base effect has normalised pulling down inflation to 3–month low. In Mar 2021, CPI stood at 5.5%. Food inflation has been falling steadily since Nov 2020 (barring Feb – Mar 2021). The trend continued in Apr 2021 when food & beverages inflation fell to 3-month low of 2.7%, contributing just 28% to headline inflation. On the other hand, fuel and services inflation remained elevated due to unabated rise in pump prices of fuel and more expensive services during the second phase of lockdown.

Industrial production growth came in at series-high of 22.4% in Mar 2021, mainly due to favourable base effect. In Mar 2020, IIP had contracted 18.7%. From the sectoral perspective, manufacturing growth surged 25.8% year on year (YoY) after contracting 22.8% twelve months ago.

In terms of flows, foreign portfolio investors (FPI) turned positive with net buying of USD37mn, while Domestic Institutional investors (DIIs) bought USD283mn in the month of May. On year to date basis FPIs have invested USD5874mn, while DIIs are net sellers to the tune of USD1405mn.

Post the recent rally Nifty index is up 11.5% during the year till date (YTD). It has outperformed emerging market peers, but has underperformed US, UK markets on YTD basis.  The rally so far was led by liquidity, expectations of strong earnings growth in FY22/23E and hope for economic revival post the 2nd wave. While near term looks hazy, stock valuations may eventually reflect its long term prospects. We remain cautiously optimistic on equities. 

Sanjay Chawla

Chief Investment Officer

Source:, RBI, Kotak Securities, Edelweiss Financial

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