The Nifty ended October with a decline of 6.2%, its largest monthly decline since March 2020. Midcap and small-cap indices fell 6.7% and 3% respectively. Oil & gas (-14%) was the worst-performing sector, followed by auto (-12%) and consumer durables (-10%), while Healthcare (-0.7%), Bankex (-2.3%) and Information Technology (IT) (-4.6%) did relatively better. Though most global markets were down for the month of October, the Indian Nifty’s decline was the sharpest. Key reasons for the same being: (1) weak 2Q results and EPS downgrades, (2) moderation in credit growth due to RBI’s measures to curb unsecured lending and some asset quality deterioration in MFI segment, (3) sharp rally in the Chinese market at the beginning of the month and the resultant reallocations leading to continued FPI outflows and (4) uncertainty surrounding the upcoming US presidential election weighing on investor sentiment. Other key developments: (1) the SEBI introduced plans to curtail retail participation in speculative index derivatives, (2) BJP won Haryana assembly elections, (3) the government increased minimum support price for rabi crops, (4) the RBI banned four NBFCs from sanctioning and disbursing loans, (5) the IMF retained India's GDP forecast at 7% for FY2025. During the month FPIs sold US$11 bn of Indian equities in the secondary market, whereas DIIs bought stocks worth US12.8 bn.

On the ongoing earnings season front, 2QFY25 results declared so far, suggest a broad-based slowdown in the Indian economy. 34 Nifty-50 companies have reported results so far and net income increased 1.9% YoY compared to our expectations of a 4.5% YoY increase. Approximately 60% of the NSE500 companies have reported their financial results to date. Among these companies, the Adjusted Profit After Tax (PAT) has experienced a YoY decline of 3.7%.

Meanwhile, trend across high frequency indicators remained mixed in October. Manufacturing PMI improved to 57.5 vs. 56.5 last month indicating an improvement in operating conditions while Services PMI also rose to 58.5 vs. 57.7 in the last month. Growth momentum has however slowed in Q2 in some other hi-frequency monthly indicators indicating weakness in demand (PV sales, GST, Air traffic, petrol sales have all showed declining trend in urban consumption). On the other hand, rural indicators like 2W sales remain steady and corporate commentary from 3 large FMCG companies Nestle, HUL and Tata Consumer have alluded to slackness in urban demand even as rural seems to be recovering.

As we write, the US elections have drawn to a close and the Republican party has been voted back to power. While any shift to economic, trade and geo-political policies of the new government. will unfold over the course of 2025 and may have their repercussions on the market, the event calendar considerably lightens from hereon. From an India perspective, the Union Budget in early 2025 will be the next ponderable and up until then, investor interest will mainly revolve in gleaning data from ground level economic indicators, urban demand trends in the busy festive/wedding season and signals to indicate the direction of rural recovery. Earnings growth will be the cynosure of the market, while sector and stock selection will likely play a vital role in portfolio returns heading into 2025.

On the domestic macro, we continue to pin hopes on a possible cyclical improvement in the consumption cycle helped by better rural demand in turn helped by receding inflation. Alongside, the emerging strength seen in private sector capex and a likely downward bias to interest rates in 2025 should keep up the momentum in the investment sector.

While India continues to command premium valuations to much of the emerging and developed markets, the recent market correction has somewhat narrowed this gap. Pockets of the broader market have seen relatively sharper drawdowns and have now begun to provide important entry points in a few cases. We hold to the view that India markets would largely undergo an earnings-led cyclical correction if any. Keeping the overall macro-profile and top-down narrative in focus, we see low probability of a valuation compression driven deeper correction in the market. Risk management however will be crucial noting overall strong returns of the market in the last couple of years. Intermittent corrections, especially those caused by global factors that provide attractive valuation-based entry points, should be used to accelerate investments and enhance overall return outcomes.

US treasury yields hardened by more than 50 bps and 10 yr yield crossed 4.30% as the market factored in higher chances of Republican win in US Presidential elections & as the economy remained healthy thereby resetting the rate cut expectations. US Dollar strengthened against major currencies. Domestic yields also came under pressure and hardened by 10-15 bps with 10 yr G-Sec crossing 6.85% mark. Amidst volatile market, corporate bond yields remained relatively stable. Banking liquidity remained in surplus keeping the overnight rates below policy rate.

Outlook

US’s presidential election has seen a clean sweep by the Republican Party which has raised concerns on policy continuity as the Republican party has been more focussed on higher import tariffs, bigger fiscal spends, corporate tax cuts and anti-immigration. Some of these policies may have a potential of raising uncertainty in global financial market and more so for the Emerging Market (EM) countries. However, any meaningful impact, if at all is expected with a lag as it will take time to formulate & implement the policies. Post election results, three key central banks - USA, England and Sweden have delivered rate cuts in line with market expectations.

While we keep a close watch on this evolving space, we believe that US’s policies may not have any meaningful adverse impact on Indian fixed income market and any spillovers will be largely absorbed by currently strong domestic fundamental factors. In-fact, India’s resilience to global volatility has already been the key highlight of CY24 so far wherein Indian yields have reacted more to domestic factors than to the global concerns. India’s healthy Fx reserve, manageable current account deficit and just about 4% foreign ownership in domestic G-Sec has kept Indian market insulated. Domestic G-Sec is in sweet spot with fast paced fiscal consolidation and healthy demand through the G-Sec inclusion in major global debt indices. Post the US election results, US treasury yields have hardened by 15-20 bps and more than 80 bps since mid Sep 2024 while domestic G-Sec yields have remained largely flattish post US election results and have hardened by a limited ~11 bps since mid Sep 2024, reflecting a strong resilience.

On domestic monetary policy, RBI has maintained caution so far even after changing the stance from “Withdrawal of Accommodation” to “Neutral” as healthy economic growth gives room to stay vigilant on inflation. Now as the domestic growth has started to witness a slowdown largely led by subdued urban consumption & limited private capex, and as domestic inflation is expected to recede closer to 4% in FY26, we continue to maintain our expectation that MPC will deliver first 25 bps rate cut in Feb 2025.

Banking liquidity has remained in surplus since July, which is already reflected in lower TREPs & T-bill yields. Money market yields have remained elevated on record high supply. However, we expect the yields to moderate on lesser supply as Credit growth has slowed down with RBI’s measures on few lending segments and after more than 2 years, deposit growth has outpaced the credit growth.

Overall, risk-reward remains favorable for fixed income market. Domestic yields have hardened by 10-15 bps due to global concerns and we believe current elevated yields provide an entry opportunity for investors across the yield curve. Short end of the yield curve is expected to get the benefit of surplus banking liquidity and reduced T-bill as well as money market supply, while the long end of the yield curve is expected to reap the benefit of robust demand from investors like insurance companies, NPS, EPFO etc. Any uptick in yields due to still evolving global factors should be seen as an opportunity to build further exposure as the rate cut cycle commensurate over next few months.