A Bird’s eye view of the macro

economic landscape

Hitesh Suvarna
Macro Chartbook hitesh.suvarna@jmfl.com
Tel: (91 22) 66303351
December 2023
Macro Summary

Small and Mid caps underperformed Nifty in last month of 2023 and we expect this underperformance
to continue in the near term. Yields on the benchmark US treasury have softened below 4% mark, as
asset allocators scrambled to lock in rates before the expected rate cuts. However we believe that
risk-on sentiments are still prevalent but with a cautious stance. FII flows in the first 18 days of
December have almost doubled from levels seen in November, and is expected to surpass the USD
36bn in FY24. Positive commentary by Fed on inflation and growth dynamics and an indication of soft
landing bodes well for the markets. Markets are now anticipating Fed’s first rate cut in March 2024, we
believe that early part of H2FY25 would be the right time for easing policy rates which will be followed
by RBI but at a shallower pace. The normalisation of trade deficit to USD 20.5bn in November although
looks good on paper but it is on the back of falling imports, which indicates weakness in domestic
demand environment. The improvement in real wages in rural activities bodes well for the rural
economy while non-agri activities needs a closer watch. Going forward, we continue to expect higher
allocation towards quality large caps while redemption pressure is likely in SMIDs with stretched
valuation.
.
2
Macro Highlights
 Nifty outperformed SMID in last one month and this outperformance is expected to continue from hereon. Even the Mutual Fund inflows
indicate that redemption pressures in large cap schemes have reverted to positive territory albeit at a miniscule scale. Nifty gained 6.9%
outperforming the EM (1.3%) and DM (4.9%) basket by a wide margin in last one month (as on 20th Dec). Clearly risk-on sentiments are
still prevalent but with a cautious stance.
 On a sectoral level, Utilities (19.3%), Energy (13.4%), Cap goods (9.4%), Infra (8.8%), Banks (8.6%) gained the most even IT (7.3%)
outperformed Nifty in last one month while sectors like Industrials (-3.6%) and Pharma (+1%) dragged the index.
 The FOMC in its last meeting of 2023 delivered its policy decision in December, although a status quo was widely anticipated but Powell’s
positive commentary of soft landing and Fed’s economic projections positively surprised the markets. He also indicated that, in order to avoid
the risk of over tightening, Fed will likely move before inflation reaches the 2% target. Markets are anticipating first rate cut in March
2024.
 Before Fed’s meet, the RBI governor had already raised an alarm on the risk of over tightening by major central banks. The MPC also made
favourable changes to inflation and growth projections, most notable being 120bps reduction in inflation expectation in Q2FY25, taking it to the
4% target. We believe, start of H2FY25 would be a right time for easing in policy rates by the US which would be followed by the RBI
but at a comparatively shallower pace (ceteris paribus).
 Our assessment of the relation between US Dollar index and commodity index / Brent crude indicates that the Dollar index is likely to ease
below 102 levels, which would add strength to the INR. However RBI’s FX intervention would continue to ensure least volatility.
 FII flows continue to be strong for two months in a row, with first 18 days of December clocking flows of USD 7.2bn which has almost
doubled from the USD 3.9bn in the entire month of November. While on an annual basis, FIIs flows have reverted to positive territory after
two straight years of negative flows. At USD 25.8bn in first nine months (Apr-Dec) of FY24, FII flows are expected to surpass the levels
recorded in FY21 (USD 36.1bn).
 Real wages in agricultural activities are growing at a healthy pace (2.1% in Oct’23) while real wages in non – agricultural activities have been
barely positive since the start of this fiscal. Lowest absorption in MGNREGA is also indicating that the rural economy is absorbing labour
with an inflation beating remuneration while non-agricultural activities are still lagging.

3
Fed Pivot: Fed aims for soft landing; looking forward to “rate cuts”
Favourable tweaks to Inflation and growth projections by Fed Markets expect first rate cut in Mar’24

 2023's last FOMC meet gave markets reasons to cheer. Although a status quo on policy rates was widely anticipated but Powell's
positive commentary and Fed's projections surprised the markets favourably.
 Fed's median policy rate expectation now moves down by 20bps to 5.4% in 2023 and by a massive 50bps to 4.6% in 2024. This data
point alone led markets to pre-empt rate cuts, bonds rallied across the curve.
 Shorter end of the yield curve (2yr) saw steepest cuts (-29bps, 4.38%) while the benchmark yields are down ~28bps to 3.88%,
equities gained +2.7% since the FOMC meet.
 Growth and inflation projection for 2023 were tweaked favorably by 50bps, while 2024 forecast were changed by 10bps. While Fed
did not see further deterioration in the labour market nor does Powell expect a recession in the upcoming year.
 On specific question on the timing of rate cuts, Fed chair indicated that the fed will move before inflation reaches the 2% target and
avoid the risk of over tightening.

4
MPC: paints a positive picture of domestic economy; Monetary policy to remain actively disinflationary

RBI paints a positive picture of the domestic economy ….. with uptick in growth and a substantial reduction in inflation
MPC Projections (%) Q3FY24 Q4FY24 FY24 Q1FY25 Q2FY25 Q3FY25 Change in RBI's Projection (vs Oct'23, ppt)
1.0

MPC (Dec’23) 0.5 0.5

0.5
CPI inflation 5.6 5.2 5.4 5.2 4.0 4.7 0.3
0.1
GDP growth 6.5 6.0 7.0 6.7 6.5 6.4 0.0
0.0 0.0 0.0 0.0

-1.2
MPC (Oct’23) -0.1
-0.5
CPI inflation 5.6 5.2 5.4 5.2 5.2
CPI inflation
GDP growth 6.0 5.7 6.5 6.6 6.6 -1.0
GDP growth
Change from Oct’23
-1.5
CPI inflation 0.0 0.0 0.0 0.0 -1.2 Q3FY24 Q4FY24 FY24 Q1FY25 Q2FY25

GDP growth 0.5 0.3 0.5 0.1 -0.1

 RBI closed the year with a widely anticipated status quo, India’s robust growth and inflation dynamics are clearly
reflecting in the significant tweaks in RBIs projections.
 The MPC in its last meeting of 2023, unanimously decided to maintain status quo on rates (Repo 6.5%) while the
policy stance remained unchanged at "withdrawal of accommodation" with 5:1 vote.
 Governors main focus was on the progress in CPI inflation till now and its expected trajectory in the near term
while the MPC would look through one-off spikes in food inflation.
 Taking cognisance of the better than expected growth in Q3FY24, RBI's growth projections were raised by a
significant 50bps to 7% for FY24, which is conservative according to the governor.
 On the systemic liquidity, RBI believes that the monetary policy transmission is still working its way through the
economy and hence RBI's policy action would be actively disinflationary.

5
US Dollar Index expected to soften below 102; INR to trade at 82-84/USD
USD moves in tandem with Crude price, but with a lag ….. similar is the case with the commodity basket

115 Commodity Index (advanced by 8 months)

125 Brent Crude (USD/bl, advanced by 8 months)
650 Dollar Index (RHS)
Dollar Index (RHS) 112
625
110 110 110
600
108
95 575
550 106
105
80 525 104
500 102
65 100 475 100
450 98
50
425 96
95
35 400 94
375 92
20 90 350 90
Sep-19

Sep-20

Sep-21

Sep-22

Sep-23

Jul-19

Jul-20

Jul-21

Jul-22

Jul-23

Jul-24
Jan-20

Jan-21

Jan-22

Jan-23

Jan-24
Mar-19

Mar-20

Mar-21

Mar-22

Mar-23

Mar-24

Oct-19

Oct-20

Oct-21

Oct-22

Oct-23
Jun-19

Dec-19

Jun-20

Dec-20

Jun-21

Dec-21

Jun-22

Dec-22

Jun-23

Dec-23

Jun-24

Apr-24
Apr-19

Apr-20

Apr-21

Apr-22

Apr-23
 We continue to track the relation of US Dollar index with Brent crude and Commodity Index. In the previous
months macro chart-book we had highlighted that the US dollar index moved in tandem with the Brent crude and
Commodity index, but with a lag of eight months.
 Even with recent softening bias, the US Dollar continues to remain elevated at 102.4. However considering the
movement in commodity index and Brent crude, we expect Dollar index to soften below 102 in the near term.
 Asset allocators identified an opportunity in the recent softening in UST 10 year yields and US Dollar index,
tactically moving towards risk assets like equities.
 In addition to benefitting risk assets, weakening USD would strengthen INR and other EM currencies, But whether
there is a strengthening bias or weakening bias, RBI’s Forex intervention would ensure least volatility.
 With slight appreciation in the near term, we expect INR to trade in the range of 82-84/USD in 2023.

6
FII Flows: FII flows almost double in December; Likely to surpass FY21 levels
Positive FII Flows for two months in a row … this is after two negative years
7.0 FII Flows (USD bn) 50000 FII Flows (USD Mn)
5.0 40000

3.0 30000 25,818

1.0 20000

-1.0 10000
-3.0
Debt 0
-5.0 Equity -10000
-7.0
-20000
Jul-22

Apr-23

Jul-23
Jun-23

Nov-23
May-23
Nov-22
Aug-22

Dec-22

Mar-23
Oct-22

Aug-23

1 - 18th Dec
Sep-22

Jan-23
Feb-23

Sep-23
Oct-23

Mar-17

Mar-22
Mar-14

Mar-15

Mar-16

Mar-18

Mar-19

Mar-20

Mar-21

Mar-23

Apr-Dec'24
 FII flows have been strong at USD 7.2bn in first 18 days of December, almost doubling from the USD
3.9bn in November.
 Debt flows have remained stable at USD 1.7bn, while equities did the heavy lifting at USD 5.4bn.
 On an annual basis, FII flows turned positive to the tune of USD 25.8bn.
 This is on the back of two straight years of negative flows in FY22 and FY23.
 Considering the strength in the flows in FYTD24 (Apr-Dec), it is highly likely that the FII flows cross
levels of USD 36.1bn last seen in FY21.

7
MF Flows: SIP flows to reach INR 1.9tn in FY24; Flows in Large cap schemes still miniscule

SIP Flows likely to cross INR 1.9tn in FY24 Flows in Large-Cap schemes improved but still miniscule
SIP Flows (INR Bn) Mutual Fund Flows (INR Mn)
1,865
1,900
Large Cap Fund Mid Cap Fund
1,700 1,560 65000
Small Cap Fund ELSS
1,500
50000
1,246
1,300
35000
1,100 1,001 961
927
900 20000
672
700 5000
500 439
-10000
300
100 -25000

Jul-23

Sep-23
Jun-23
May-23

Nov-23
Aug-23

Oct-23
-100
FY20

FY21
FY17

FY18

FY19

FY22

FY23

FY24E

 Monthly SIP Flows continue to gain pace, collection in November crossed INR 170bn mark for the first
time with total 74.4mn SIP accounts outstanding.
 We observed that SIP collections have growth at a rate of 17% CAGR during FY17-23, while in last one
year collections have grown by 19.6%.
 At this pace, we expect the annual SIP collection to reach INR 1.9tn in FY24.
 On a scheme level, we observed that the redemption pressure in large cap schemes have receded and
has reverted to positive territory, however it is still miniscule compared to collections in Small and
Mid-cap category.

8
Nifty: Outperformance over SMID; Large caps to be in favour
Nifty outperforms EM and DM basket by a wide margin … performance led by Utilities and Energy, while Industrials lag
Returns in last one month Perf ormanc e (% )
CRB Index -3.6 LT P 1 w eek 1 mont h 1 Y ear
Crude (INR/bbl) -2.5 Nifty 21,150 1.1 6.9 16.2

INR/EUR -0.1 BSE Capital Goods 53,192 (0.9) 9.4 56.0

BSE Cons Durables 48,311 (0.6) 4.1 22.5
INR/USD 0.2
NSE Bank 47,445 0.7 8.6 11.3
MSCI EM 1.3
NSE Industrial 2,713 0.4 (3.6) 13.1
BSE Small Cap 2.8
NSE Nifty Auto 17,524 (2.2) 3.9 38.0
Gold (US$) 3.1 NSE Nifty Energy 32,152 1.1 13.4 23.1
MSCI DM 4.9 NSE Nifty F MCG 54,598 0.7 4.1 20.6
BSE Mid Cap 5.1 NSE Nifty India Consumption 9,160 (0.6) 4.7 18.2
Nifty 6.9 NSE Nifty IT 34,741 5.1 7.3 21.4

Sensex 6.9 NSE Nifty Pharma 16,121 (0.1) 1.0 24.8

BSE Utilities 4,540 (2.5) 19.3 21.7
MSCI India (INR) 9.1
NSE Infra Index 7,005 (0.1) 8.8 31.5
-4.0 -2.0 0.0 2.0 4.0 6.0 8.0 10.0

 Nifty (6.9%) outperformed the EM (1.3%) and DM (4.9%) basket by a wide margin in last one month.
Entire commodity basket weakened by 3.6% while Brent crude was also down by 2.5%.
 Small and Mid cap category finally underperformed Nifty after a long time. As we had highlighted in
last months Macro chart book, now large caps would find allocation over small and mid cap category.
 we have also seen in the Mutual fund flows, flows towards large cap schemes have improved in last
two months albeit at a marginal pace.
 Weakening USD (-1.1%) strengthened the INR marginally by 0.2%.

9
Rural: Real growth in Agri wages; Employment under MGNREGA lowest in four years
Real Agri wages continue to remain healthy; Non-Agri barely positive Work provided under MGNREGA lowest in last four years
Rural Wage growth (YoY%)
6.0 Person days (mn) Employment provided
Real Agri
700 FY24
4.0 Real Non-Agri FY23
600 FY22
2.0
FY21
500
0.0
400
-2.0
300
-4.0
200
-6.0 100
-8.0 0

Jul-23
Apr-23
Apr-20
Jul-20

Apr-21
Jul-21

Apr-22
Jul-22

Jan-23
Jan-20

Jan-21

Jan-22

Oct-22

Oct-23
Oct-19

Oct-20

Oct-21

Apr

Sept

Nov

Dec
Aug

Jan

Feb

Mar
May

Jun

Oct
Jul
 Real wages in the rural areas grew at a healthy pace 2.1% in Oct’23, while Non-Agri wages are barely
positive (0.2%)

 Employment provided under the MGNREGA scheme has moderated to the lowest levels in last four
years to 181mn person days.

 This indicates that the agri activities are absorbing labour, with an inflation beating remuneration
while non-Agricultural activities are still lagging.

10
CPI Inflation: Food price-led spike; Favourable print expected in December
Food inflation pushes headline above the 5% mark … although at a shallow pace, but moderation in core continues
Contribution to headline inflation (ppt)
8.0
Core CPI Inflation (MoM%)
7.0 1.6 8.0
1.4 Core CPI Inflation (YoY%, RHS)
6.0 7.5
1.2 7.0
5.0
1.0
4.0 6.5
0.8
3.0 6.0
0.6
2.0 5.5
0.4
1.0 5.0
0.2
0.0 4.5
0.0
Mar-22

Mar-23
Jan-22

Jan-23

Jul-23
Jul-22
Nov-21

May-22

Nov-22

May-23

Nov-23
Sep-22

Sep-23
-0.2 4.0

May-22
Jul-22
Sep-22

May-23
Jul-23
Sep-23
Nov-21

Mar-22

Nov-22

Mar-23
Jan-22

Jan-23

Nov-23
Food and Beverages Pan, Tobacco and Intoxicants
Clothing and Footwear Housing
Fuel and Light Miscellaneous

 CPI inflation surprised on the lower side, as RBI had raised expectation of a food price led spike in
headline inflation above the 6% mark. Actual CPI print came in lower at 5.55% vs expectations of
5.78%
 Admittedly food inflation remained elevated at 8.7% vs 6.6% prior, but within food category, pricing
pressures were most notable in Pulses (20.2%, 1.6% MoM), Vegetables (17.7%, 5% MoM), Spices
(21.5%, 0.5% MoM) and cereals (10.3%, 0.93% MoM).
 Tomato (-18%), Onion (-14.5%) and Potato (-4.4%) prices have declined in the first 19 days of
December, hinting at the possibility of favourable print in December as well.
 Our assessment of the manufacturing PMI revealed that inflationary pressures have been subdued
across the EM economies.

11
Merchandise Trade: Moderation in overall trade; Deficit normalises
Trade Deficit normalises to USD 20bn Falling crude price aids Oil Deficit
Trade (USD Bn) Oil Balance
80 -32 22 (USD bn) 150
20
70 -27 18
16
60
-22 14 100
12
50
-17 10
8 50
40
-12 6
30
4
-7 2
20 0 0

Nov-17

Nov-18

Nov-19

Nov-20

Nov-21

Nov-22

Nov-23
May-20
May-18

May-19

May-21

May-22

May-23
-2
10
Feb-21

Feb-22

Feb-23
Aug-21

Aug-22

Aug-23
May-21

May-22

May-23
Nov-20

Nov-21

Nov-22

Nov-23
Trade Balance (RHS) Expo rts Imports
Crude Oil (USD/bl, RHS) Petroleum Imports
Petroleum Exports

 India’s overall trade activity moderated in November; Exports were down 2.8% YoY while imports declined by
4.3% on YoY basis.
 At USD 20.6bn, merchandise trade deficit reverts to a comfortable level in November after widening sharply in the
previous month (USD 30bn)
 Within exports, pick-up in exports of petroleum products was sharp at 25% MoM while other major categories like
Engineering goods (-3% MoM), Gems & Jewellery (-6% MoM), Electronic goods (-5% MoM) and drugs and Pharma
(-13% MoM) declined.
 Within imports, the decline was steep in Gold (-52% MoM), Electronic goods (-17% MoM), Petroleum products (-
15% MoM) and Machinery (-7% MoM) while imports of Coal grew marginally at 2% MoM
 We retain our CAD expectation at 1.4% of GDP for 2024, expecting annual trade deficit at USD 240bn. But upside
risk still persists as global economy slows.

12
Trade: NoNG trade indicate stable external demand; Services surplus at record high
Domestic consumption weakens Highest services surplus as imports fall
Imports (YoY%) Services Exports (YoY%)
15 40
Total Imports
10 35
Non-oil, Non-Gold
30
5
25
0 20

-4
-5 15
10
-10

10.8
5

30
20
29
29
13
7
7
3
8
8

7
-15
0

Sep-23 -3
-20 -5

Nov-22

Nov-23
Jul-23
Jan-23

Apr-23
May-23
Jun-23
Dec-22

Feb-23
Mar-23

Aug-23

Oct-23
Feb-23

Sep-23
Aug-23
Jul-23
Jan-23

Oct-23
Mar-23
Dec-22

May-23
Jun-23
Nov-22

Nov-23
Apr-23

 It is observed that on FYTD basis (Apr-Nov), Non-Oil Non-Gold (NoNG) exports have marginally grown
by 1% YoY to USD 209bn, indicating that external demand is still holding up.
 But NoNG imports weakened by -7% YoY to USD 299bn which is an indication of weak consumption in
the domestic economy
 Services surplus reached USD 15.3 bn in November, which is the highest in 2023. A closer look reveals
that it is the decline in services imports, which is aiding services surplus.
 India’s service exports were up 6.5% while service imports declined by a massive 12.9% in November.
 Even on FYTD basis, imports were down 3.1% YoY while exports grew 6% YoY

13
Mfg. PMI: Performance gains pace, inflation eases; Marginal improvement in China
Sequential improvement in PMI; except in Vietnam Falling demand and subdued inflation across EM
MoM change in Mfg PMI (ppt) Country Demand Input Inflation
1.0
India Resilient Demand Negligible
0.5 China Modest Demand Subdued
1.1 1.1 0.5 0.2 0.1 Indonesia Improved Subdued
0.0
-0.1 -0.3 -2.3 Malaysia Subdued Demand Muted
-0.5
Taiwan Subdued Demand Uptick

-1.0 Vietnam Improvement in Demand Sharp Uptick

Malaysia

Malaysia

Vietnam
Thailand
India

Indonesia

China

Taiwan
Thailand Weak Demand Muted
Philippines Strong Demand Muted

 India’s manufacturing industry (56 in Nov'23 vs 55.5 in Oct'23) maintained its robust performance in
November, with output regaining growth momentum.

 Our assessment of 8 Emerging Market economies, indicates that demand conditions remained subdued
moreover inflation moderated in November. Vietnam being an exception where demand continued to
improve, reflecting in healthy pricing pressure.

 While the manufacturing sector in the DM economies continues to contract, firms in US reported a turn in
inventory cycle. However decline in employment for two straight months is likely to reflect in upcoming
consumer spending and unemployment data.

 Improvement in China's manufacturing sector was not significant, pricing pressures picked up at a modest
pace. Firms blamed slowing global demand for moderation in new orders.

14
IIP: Performance exceeds expectations; Should reflect in Q3 GDP as well
Manufacturing leads the show in Industrial performance .. As indicated by the robust performance in core industries
Contribution to IIP Growth (%) 15
13 100 Core Industries (YoY%)
11 80 10
9
60
7
5
5 40
3
20
1 0
0
(1)

Feb-23

Sep-23
Aug-23
Jul-23
Jan-23
Oct-22

Oct-23
Mar-23
Dec-22

May-23
Jun-23
Nov-22

Apr-23
(3) -20 -5
(5)
Coal Crude oil
Nov-22

Jan-23

Jun-23
Dec-22

Jul-23

Aug-23

Sep-23

Oct-23
Oct-22

Mar-23

Apr-23

May-23
Feb-23

Nat ural gas Refinery products

Fertilizers Steel
Cement Electricity
Mining Manufacturing Electricity IIP
Core industries (RHS)

 Better than expected performance in IIP (11.7% vs 10.5% est.) in Oct’23 was already anticipated in the
performance of Core industries (12.1%). Moreover this should reflect in the GDP print of third quarter
of current fiscal as well.

 Although manufacturing contributed the most in Oct’23, however the contribution of mining was also
meaningful.

 Within manufacturing, only 17% of the categories declined vs 39% in Sep’23. Most notable
improvement was reported in machinery equipment, motor vehicles, basic metals while textiles
category showed signs of improvement.

 The decline in wearing apparel, computers and chemicals subsided in Oct’23.

15
US CPI: Falling crude prices and housing inflation aided headline inflation
Disinflationary trend in US CPI continues ….. led by fall in energy and housing inflation
US CPI Inflation (%) 10.0 US CPI Inflation (%) 40.0
14 50
CPI
Housing Inflation
12 40
Food Energy Inflation (RHS) 30.0
10 Energy (RHS)
30 5.0
20 20.0
8
10
6 0.0 10.0
0
4 0.0
-10
2 -5.0
-20
-10.0
0 -30

-2 -40 -10.0 -20.0

Nov-17

Nov-18

Nov-19

Nov-21

Nov-22

Nov-23
Nov-20
Jul-19

Jul-20

Jul-21

Jul-23
Jul-18

Jul-22
Mar-18

Mar-19

Mar-20

Mar-21

Mar-22

Mar-23
May-17

May-18

May-19

May-20

May-21

May-22

May-23
Nov-16

Nov-17

Nov-18

Nov-19

Nov-20

Nov-21

Nov-22

Nov-23

 CPI inflation moderated further to 3.14% in Nov'23 from 3.24%, meeting market expectations of 3.1%

 Moderation in core inflation was marginal at 4% from 4.1% in the previous month, while gaining
momentum by 0.2% MoM, but did not miss expectations.

 Momentum in largest component in the CPI basket (Shelter) representing housing inflation halved to
0.3% MoM (6.7%) aiding the headline.

 Sharp decline in gasoline index (-5% MoM) helped cool down overall energy inflation by -2.5% MoM.

16
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