July 2024

Global and Market Context

Global financial markets during July 2024 were influenced by evolving expectations around monetary policy across major economies and signs of moderating economic activity in the United States. The U.S. Federal Reserve maintained policy rates during the month, but signalled that conditions were gradually aligning for a potential rate-cut cycle in the coming months. Market participants increasingly priced in the possibility of the first rate cut in September.

Other major central banks also adjusted policy positions. The Bank of England reduced interest rates by 25 basis points, while the European Central Bank maintained its policy stance. Meanwhile, the Bank of Japan increased policy rates to approximately 0.25%, aiming to stabilize the yen, which had weakened against the U.S. dollar and other major currencies.

These global developments occurred alongside rising geopolitical tensions and increased attention to currency market movements, both of which continued to influence investor sentiment across global markets. Despite these global uncertainties, India's macroeconomic environment remained supportive, supported by strong domestic liquidity conditions and stable policy signals.

Market Overview

Indian equity markets extended the post-election rally during July 2024, with benchmark indices reaching new all-time highs. The Nifty 50 index gained approximately 3.9% during the month, while broader market segments continued to outperform. The mid-cap and small-cap indices rose approximately 4.9% and 4.5% respectively, reflecting strong investor participation across segments.

Investor attention during the month was focused on the presentation of the Union Budget by the newly formed coalition government. The budget emphasized fiscal prudence and continuity in economic policy, which was generally viewed positively by market participants.

However, the government also introduced changes to taxation on financial assets, including an increase in long-term capital gains (LTCG) tax to 12.5% and short-term capital gains (STCG) tax to 20%, effective immediately. Additionally, the Securities Transaction Tax (STT) on derivatives trading was increased, with implementation scheduled for October. Despite these policy adjustments, the broader market environment remained constructive.

Macroeconomic Developments

Domestic macroeconomic conditions remained stable during the month. Fiscal policy continued to emphasize prudence and continuity, reinforcing investor confidence in India's long-term growth outlook.

Globally, attention increasingly shifted toward the potential start of the U.S. interest rate easing cycle. Markets began pricing in a high probability of a rate cut in September, with some expectations leaning toward a larger 50 basis point reduction. Currency markets also remained an important area of focus as divergence between central bank policies, particularly between the Bank of Japan and other major central banks, created volatility in global currency movements.

Sector and Economic Indicators

Corporate earnings season began during July, with results broadly in line with expectations across sectors. There were relatively few major surprises, reflecting the ongoing trend of steady earnings growth accompanied by relatively modest revenue growth.

At the same time, equity market valuations across several sectors reached elevated levels. The market capitalization-to-GDP ratio approached approximately 150%, comparable to levels seen during the previous peak in 2007. Valuation metrics across multiple sectors also traded at premiums to long-term averages, reflecting strong investor optimism and sustained liquidity in equity markets.

These valuation dynamics increased the importance of disciplined stock selection and a focus on companies with strong operating fundamentals.

Foreign Investment Trends

Foreign institutional investors continued to show positive participation in Indian equities during July, recording net inflows for the second consecutive month. However, the scale of foreign inflows was relatively modest compared to domestic institutional investors, who remained significant buyers of equities during the period, purchasing approximately ₹23,000 crore during the month.

Strong domestic flows from institutional and retail investors continued to provide structural support to the Indian equity market.

Currency and Market Internals

Currency markets remained an important driver of global financial conditions. Movements in the Japanese yen attracted particular attention following the Bank of Japan's policy adjustments, which were aimed at stabilizing the currency.

Global investors also continued to monitor currency dynamics across emerging markets as central banks followed diverging monetary policy paths. Despite these global developments, Indian financial markets demonstrated resilience supported by strong domestic liquidity and investor participation.

Sector Allocation and Stock Selection

Portfolio positioning continues to emphasize companies with strong balance sheets, superior operating metrics, and sustainable earnings growth. Given the elevated valuation environment across the broader market, increasing focus on quality-oriented companies becomes particularly important.

Companies trading near their historical valuation ranges while demonstrating strong return ratios and earnings visibility are better positioned to deliver attractive long-term risk-adjusted returns. This approach helps mitigate potential downside risks during periods of market correction while still participating in long-term growth opportunities.

Outlook

Looking ahead, global macroeconomic developments are expected to remain an important influence on market sentiment. Investors will closely monitor developments in global monetary policy, particularly the anticipated start of the U.S. Federal Reserve's rate-cut cycle.

Geopolitical tensions, particularly in the Middle East, could also contribute to periods of volatility across global asset classes. Domestically, India's strong macroeconomic fundamentals, stable policy environment, and continued domestic capital flows provide important support to the equity market.

However, given elevated valuations, investors should remain cautious about potential market shocks. Maintaining disciplined portfolio construction and focusing on high-quality companies with strong fundamentals remains essential in navigating this environment.

Major Indices – July 2024