The domestic equity benchmarks - CNX Nifty and S&P BSE Sensex – gained 0.94% and 1.31%, respectively, in May tracking positive global and domestic cues. Positive global cues came in the form of strong economic data from the US and Europe which strengthened optimism over global economic recovery. Signs of more monetary policy easing from European Central Bank (ECB) and Bank of Japan (BoJ) aided further gains in the markets. Back home, the markets started the month on a positive note after the Reserve Bank of India (RBI) reduced the repo rate by 25 bps to 7.25% in its annual policy review held on May 3, the third such cut by the central bank in the current calendar year. Encouraging domestic data (including industrial growth rising to a five-month high of 2.5% in March compared to -2.8% in March last year) and the decline in Wholesale Price Index (WPI) inflation rate for April to 4.89% (lowest since November 2009 as compared to 5.96% in the previous month) supported the rise. Robust net buying by foreign institutional investors (FIIs) amid positive global news also boosted the indices. FIIs were net buyers to the tune of Rs 20,678 cr in May 2013 compared to net purchase of Rs 6,407 cr in April.
Gains were, however, capped as the rate cut hopes dimmed following RBI Governor D. Subbarao's hawkish comments on inflation and the current account deficit. Disappointing domestic economic data also dragged down the markets. Trade deficit widened to $17.8 bn in April 2013 from $10.3 bn in March 2013 and $14 bn in April 2012; while the imports grew by 11% y-o-y, exports declined by 1.7% over the same period. The Indian economy grew by 4.8% between January-March 2013 as mining GDP contracted by 3.1%, utilities and agriculture growth fell to 2.8% and 1.4% respectively; FY13 GDP growth fell to decadal low of 5%. The Industrial output (IIP) growth in FY13 was at a 20-year low of 1% down from 2.9% in FY12; manufacturing output (approximate 75% contribution to IIP) grew by 1.2% in the year. Sentiments were further dented due to the US Federal Reserve’s remarks which indicated that the US central bank may examine the possibility of scaling back its quantitative-easing programme in the coming months if the recovery in the US economy shows signs of sustainability.
S&P BSE sectoral indices ended mixed in May. The S&P CNX IT Index was the biggest sectoral gainer in the month, up over 6% on positive economic data from the US, rupee depreciation and value buying after a sell-off in the last month. S&P BSE Consumer durables rose 3.53% on stock specific buying. The S&P BSE FMCG Index followed, up 3.41%, helped by the positive sentiments in the market and views of rising demand for the sector from rural areas on reports of a normal monsoon this year. Among the laggards, the S&P BSE Realty Index fell the most, down 11.38%, due to profit booking, decline in index heavyweight and as expectations of further rate cuts by the RBI waned. The S&P BSE Capital Goods Index declined 3.20% due to dismal quarterly earnings from the index heavyweight L&T.
The markets in June are expected to be driven by normal onset of monsoons, FII inflows and macroeconomic data. Also, global cues will continue to impact the markets. Further, policy reforms by the Indian Government will act as a trigger. CRISIL Research expect CNX Nifty to end June around 5,800-6,000 (S&P BSE Sensex 19,150-19,800).