Markets poised for positive momentum in August as domestic and global inflation eases

• Markets are poised to see extended gains in August as well after inflation data in India and the US presented positive signs.
• India's annual retail inflation dipped below 7% in July for the first time in four months.
• Sensex sustained its 59,000 mark hitting four-month high because of easing global cues and reversal of FII slows after a nine month slump.

Indian markets have picked up momentum and are currently witnessing a positive rush of capital infusion from foreign institutional investors or FIIs on hopes of benign interest rate hikes. This confidence comes in retail inflation eased in India, and the US inflation data too was better than expected.

On Friday, India's annual retail inflation eased to 6.7% in July from 7.01% in the previous month. Moreover, it has dipped below 7% for the first time in four months, however it remained above the central bank's tolerance band of 2%-6%.

“Given favourable conditions, FIIs will have every reason to return to the Indian equity market as they look to invest in countries that can help them generate alpha on the portfolio. Despite FIIs selling heavily in the first six months of 2022, we believe FII investments would be positive for 2022. In other words, we believe FIIs would invest more than what they sold in the second half of 2022,” said Sunil Damania, chief investment officer at MarketsMojo.

According to Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, says that CPI headline has moderated inline with their but the core inflation remains elevated and sticky.

“We expect repo rate at 6% by end of 2022 followed by a pause and a shift to neutral policy stance,” said Bhardwaj.

Sensex sustained its 59,000 mark hitting four month high on August 11 because of easing global cues and reversal of FII slows after a nine-month slump.

US retail inflation slowed to 8.5% in July, below the estimate of 8.7% and lower than 9.1% in June. This too raised hopes that the Federal Reserve may be less aggressive in hiking interest rates.

After 8-10 months of constant FII sell off, the trend has finally reversed and is expected to sustain its momentum. In July and August, markets witnessed positive inflows because of slight ease in global inflationary concerns. As a result, Sensex and Nifty50 surged 11% in the last one month, more than Asian and US peers.

‘Bouts of volatility can’t be ruled out’
Analysts believe that the markets will keep up the positive momentum through all of August. “The short term trend of Nifty continues to be positive and one may expect further upside in the short term,” said Nagaraj Shetti, technical research analyst at HDFC Securities.

Global markets are headed for a fourth straight week of gains on Friday, August 12, as investors re-analysed views on how far US interest rates and inflation can climb, while crude oil recouped some of the losses.

“The benefit of the recent moderation in commodity costs is likely to start accruing in 2HFY23E, which would boost corporate profitability. Thus the positive momentum in the market is likely to sustain going ahead, though bouts of volatility can’t be ruled out given mixed global cues and increasing geopolitical tensions,” said Siddhartha Khemka, head - retail research at Motilal Oswal Financial Services.

Adding to it, over 68% of companies have either met or exceeded earnings expectations in the first quarter, says a Motilal Oswal report.

“Amid heightened concerns over a weakening macro environment, management of most of the companies are not seeing any impact on the pipeline. A majority of the companies delivered good deal wins and highlighted a strong pipeline,” said a report by Motilal Oswal.

Among FMCG companies, HUL reported good growth in volumes even as the industry reported a decline, showing the company’s ability to navigate in a challenging macro environment. Currently, lack of rural recovery is the pain point for the sector.

Southwest monsoon has progressed well with 8% above normal range until 31st July. It could help boost the rural economy and cut food inflation further and improve their spending capacity.

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