● Geo Politics: Russia-Ukraine conflict continues to distrupt the global supply chain. This has led to increase in International crude oil and other commodity prices. Management commentaries in past earning season sounded cautious on margin decline due to higher raw material prices.

● Inflation and interest rate: In our view, the performance of the Indian market over the next few months will depend on the trajectory of domestic and global inflation. Any sign of inflation peaking will result in a cap on domestic and global bond yields and a floor to valuations. The market will get more comfort on the extent of rate increases by central banks and the RBI. However, continued high inflation will keep markets on tenterhooks given uncertainty around the eventual level of inflation and related extent of rate increases by central banks.

● Food inflation: We note that weaker-than-expected monsoons may drive up food prices over the next few months. The Indian Meteorological Department IMD) predicts a normal monsoon for CY2022 but we note that weather patterns have become quite erratic. For example, higher-than-normal temperatures in the months of March and April affected the yield of India’s wheat output in the recent rabi (winter) season and also production of vegetables.

● Quarterly earnings: Earnings of Nifty-50 Index grew healthy in Q4FY22 with banks, diversified financials, IT services and oil & gas companies reporting strong growth. However, management commentaries of majority of the companies sounded cautious. Many companies have reported margin decline and we believe full impact of RM inflation will be seen in 1HFY23.

● Power shortage: India is facing its worst electricity shortage. Coal prices on the other hand have risen significantly leading to higher energy cost for manufacturing companies. The government asked the electricity companies to import coal before monsoon season sets in. If they do not import coal for 10% blending in their fuel demand by the end of this month, benchmark would be increased to 15%.

● GST collection: GST collections continues to be robust at Rs~1.41 lakh crore in the month of May, higher by 44% as against corresponding period in the last year. This comes after the highest collection of Rs1.68lakh crore that was reported in the month of April 2022. Robust collection will further boost government fiscal position and will provide cushion to the impact that can be seen from recent excise cut in order to fight inflation.

● Covid Cases/Vaccinations: Covid cases are under control with average covid cases below 3k in the month of May. Covid related restrictions have been relaxed to great extent with economic activies returning to normal pace. India continues to vaccinate at good pace with more than 2/3rd of Indian population partially vaccinated and more than half of the total population fully vaccinated. DCGI has granted emergency use covid 19 vaccines for children under the age of 12.