How the June Rally Fizzled out in Indian Equities

Indian market failed to build upon the June recovery and ended the month of July down -3.4%. The main factors contributing to the downfall are European Sovereign debt crisis, US debt ceiling deadlock and dampened appetite for risky assets. This coupled with a muted Q1FY12 results season held back Indian equities.

Domestic Factors – RBI the Bollywood Police – In Action but too Late – by raising policy rates by 50bps to 8% vs. expectations of a 25bps hike. The persistence of inflation at +9% levels over the past 18m, coupled with indications of continued pricing power, appears to be the key reason for the more than anticipated rate hike.

India’s Industrial Production for May came in lower again, 5.6% vs. cons 8.5%. Headline Inflation remained elevated at 9.4% for May.

Deficit is Back to Haunt – India’s 1QFY12 fiscal deficit came in at Rs1,627bn or 39% of budget estimates of Rs4,128bn v/s Rs402bn in the same period last year. Expenditures rose 7.8% to Rs2612bn v/s Rs2422bn in the same period last year. The inefficient Govt continues to provide Food subsidies which could see slippage of Rs100-200bn if the Food Security Bill is implemented.

What Next ?
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