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This week, market started with a gap-up and maintained the gain with volatility. Two key factors for the bounce were reduction in FIIs selling due to good earnings in the US and maintenance of domestic inflows. The short-term recovery of domestic market is comforted by 20% drop in broad market price & valuation. The US stocks were also boosted by softening of CPI to 8.3% in April from 8.5% in Feb. While easing of lock down in Shanghai lifted global sentiments, which impacted imports from China leading to rise in inflation.

GDP was a significant domestic data released this week. Market got a bit volatile while awaiting the release of Q4 GDP data. GDP was expected to register a slower growth rate of 4.0-4.2%. The actual of 4.1% was in-line, as the consumer spending and investments were hurt by soaring inflation. RBI has expected decent GDP growth of 7.2% in FY23, if they maintain the forecast in the upcoming policy, it will be an upbeat for the market. The updated market consensus of economist is average at 7.3%, so highly possible. Other high frequency data released in the week were GST collection and PMI for April, which showed good start to FY23. Auto sales data, posted by major manufacturers, witnessed growth in passenger and commercial vehicle segments due to pick up in the construction sector & lower base, however, two-wheeler and tractor segments continued to remain beleaguered.

High oil price is the key headwind for India and estimates continue to be elevated. This impacts all the sectors, weaken the fiscal position and currency (INR). Oil & gas sectors are the most directly impacted firms due to increase in import cost, fall in volumes & margin. It spoils the performance of all the sectors which uses fuel or derivatives as a raw material and high transportation like Chemicals, Paint, Logistics, Auto, FMCG and Consumption. EU has banned most of Russian oil imports, currently mainly through sea route. CPI has increased to 7.8% in April. Some soothers are that we are bound to gain windfall from discounted imports, Saudi is expected to increase oil outputs and generally good monsoon.

FIIs selling compounds in India during the period of high crude prices. FIIs turn cautious on emerging markets when the global interest rate cycle intensifications and economy slowdown. Both these factors became harsher in 2022 as global inflation peaked to records highs due to war & supply issues. In the last policy, Fed became very alert and increased rates by 50bps and is expected to maintain the hawkish view in 2022-23. They are expected to increase effective rate from current 1% to 3% by mid-2023. Along with that, the liquidity support measures are to be reversed to bring inflation under the long-term forecast.

The recent rally of the broad market is 7% from the low to high of last 2weeks. The decision of both central banks, RBI & FED, to be announced in the next 2week will be the prime factor to define the further direction, in the near-term. The market has been factoring such a hawkish monetary policy and slowing economy in the last 6-7months. Equity market has corrected heavily and yields like US10 year treasury has doubled during the same time to 3%. We can expect moderation in FIIs selling during the year, which will help to revamp the market.

The author is Head of Research at Geojit Financial Services. Views are personal.