### 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.
The Indian government bond market is set to receive significant foreign fund inflows and experience a lower yield curve after JPMorgan announces the inclusion of India's sovereign bonds in its emerging markets index, potentially resulting in inflows of $40-50 billion in the medium term and lower borrowing costs for the economy.
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.
Indian banks are becoming increasingly attractive to global investors due to higher credit growth, improved margins, and stable asset quality, with a significant rise in the total market value of foreign institutional investors' holdings in Indian banks. The country's economic growth prospects, solid performance of lenders, and the growth and profitability enabled by digitalization are driving this investor interest.
India's central bank is selling U.S. dollars to prevent the rupee from reaching a record low.
MarketAxess Holdings has launched Open Trading for local currency bonds in emerging markets, enabling onshore dealers to connect with international buyside clients and deepen liquidity pools.
The world's biggest bond markets are experiencing a selloff as higher interest rates become the new norm, which has implications on government borrowing costs, global financial markets, and emerging economies.
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.
Bank of America is forecasting that $400 billion of state and local bonds will be sold next year, which is slightly higher than this year's sales.
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.
India has been accused of aggressively selling US dollars to prevent its local currency, the Rupee, from depreciating, a move that has left foreign exchange traders puzzled. This intervention by India, along with similar actions by China and Japan, reflects a trend among BRICS countries to challenge the dominance of the US dollar in international currency markets.
The Bank of Japan has conducted an unscheduled bond-purchase operation in an effort to slow the increase in sovereign yields, as Japanese government bonds face renewed pressure amid a selloff in US Treasuries.
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