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May 2012

The Indian equity markets represented by S&P CNX Nifty posted negative 0.9% returns in the month of April, in-line with the performance of most global indices.  FIIs were net sellers during the month with a net outflow of Rs 1.6 bn due to concerns over the GAAR provisions. Widening trade deficit and FII outflows resulted in depreciation of the rupee against the US$. Rupee depreciated by another 3.7% to Rs 52.7 in April after depreciating by almost the same level in the previous month. S&P downgraded outlook on India to negative. 

India's retail inflation shot up to 9.5% in March from 8.8% in the previous month due to higher food and fuel prices. In a bid to boost economic growth, the RBI in its annual monetary policy for 2012-13 slashed the repo rate by 50 bps to 8%. Similarly, the reverse repo rate is now at 7% from the previous 7.5%. The sharp rate cut came as a surprise given RBI’s stance in the past and WPI inflation (6.89%) remaining above its comfort level of 5%. Industrial output for February month expanded 4.1% y-o-y, the highest since November 2011.

The Technology index posted the highest decline this month of 6.6%. Results for the top four IT companies were mixed, with TCS and HCL Tech giving a positive surprise while Infosys and Wipro declined due to weaker growth guidance. The Capital goods index posted a decline of 6.2% in April led by BHEL who witnessed order cancellation from its large clients. Risk aversion and positive results led to the FMCG index being highest gainer this month posting 6.2% returns. Auto index was the second highest gainer with 5% return driven by lowering of interest rates on auto loans by some of the large banks.

Corporate earnings for Q4FY12 and guidance for FY13 will be the key drivers of markets in May. The FII inflow is expected to remain lacklustre as lack of clarity on GAAR will weigh on FII’s minds. The increasing trade deficit is expected to result in rupee remaining weak. The impact of the interest rate cut on both, growth and inflation remains a key monitorable and will decide the future course of policy action by the RBI. India is expected to receive normal monsoon rains for the third year in a row which is a key positive.