### Summary
India's retail inflation in July rose to 7.44%, higher than market expectations, and is expected to remain elevated in Q3. The global currency market is experiencing significant turbulence, with the USD appreciating despite economic weaknesses. Heightened inflation and volatility in the currency market pose risks to the Indian market.
### Facts
- India's retail inflation in July was 7.44%, exceeding market expectations.
- Elevated inflation is expected to continue in Q3.
- The global currency market is experiencing turmoil, with the USD appreciating despite economic frailty.
- FII outflows have increased, but India's equity market is performing better than other emerging markets.
- The RBI has revised its inflation forecast upward and expects inflation to decrease to 5.7% in Q3.
- High interest rates and inflation are expected to impact corporate earnings growth and valuation.
- India's one-year forward P/E valuation has decreased from 20x to 18.5x.
- Bond yields have increased, leading to a divestment of equities and acquisition of bonds.
- The domestic market is supported by restrained FII divestment, robust purchasing by DIIs and retail participants, and outperformance compared to other emerging markets.
- Selling in global equities has increased due to concerns of deflation and defaults in China's realty and finance sectors.
- The author expects the selling from FIIs to continue in the short-term due to elevated global bond yields, US credit downgrade, and slowdown in emerging markets, but India will continue to outperform.
- In the last month, the MSCI World index was down 4.2% compared to MSCI India's 1.85% decrease.
Foreign portfolio investment inflows into the Indian markets slowed down in August due to concerns about rate hikes in the US, resulting in higher bond yields and a stronger dollar, but India remains an attractive market for investors compared to other emerging markets.
India's inclusion in JPMorgan's emerging market debt index is expected to lead to billions of dollars of inflows into the country's economy, helping it finance its deficits and raise its standing in international financial markets.
India's inclusion in the emerging market bond index is considered inevitable and comes at a good time for the country, as it will bring in stable dollar inflows and improve the health of the bond market.
The Reserve Bank of India plans to borrow Rs 6.55 trillion ($78.72 billion) through bonds from the market between October and March, including the introduction of a new 50-year tenor bond and the issuance of green bonds worth Rs 20,000 crore.
The Reserve Bank of India is expected to buy dollars and sell bonds in order to manage the liquidity and forex impact of India's inclusion in global bond indices, according to JPMorgan's head of emerging market economics.
Government bond yields are expected to continue their rise as fiscal concerns and anticipated higher interest rates weigh on the market, leading to losses in bonds and impacting equities and currencies.
India's inclusion in JPMorgan's emerging market bond index signals major changes in the global capital markets, boosting capital inflows by $20-25 billion and improving liquidity for Indian assets and the rupee, ultimately attracting more investment. India's rise in the global economy will have significant consequences, positioning it as a nonaligned player and surpassing China in certain measures, while ongoing disputes with Pakistan and China continue to shape its geopolitical landscape.
The fixed-income market is experiencing the "greatest bond bear market of all time" according to Bank of America Global Research, as the yield on 30-year US Treasuries hit a peak-to-trough loss of 50% and bond funds saw $2.5 billion in outflows, while shorter-dated paper and equity funds continue to see inflows.
The International Monetary Fund is closely monitoring global bond market developments, particularly the recent selloff of U.S. bonds, which could reflect a supply mismatch rather than concerns about interest rates or long-term risks.
Foreign fund outflows from Indian equities, driven by a rise in U.S. bond yields and Middle East geopolitical tensions, have impacted commodities and caused uncertainty, with the possibility of a rebound in the market dependent on various factors such as the evolution of GDP growth and inflation, according to HSBC Global Research.
