June/July 2022

 Investors have had to battle one crisis after another for the last 8-10 months, like high inflation, higher interest rates, a never-ending pandemic, the Russian-Ukrainian war, supply-side constraints, heavy FII-selling and a falling rupee against the dollar. But things are finally looking up.

July's rally helped reinstate the gains that investors eagerly awaited after seeing a steady portfolio bleed over the months. But then again, this is how the market operates -- it frustrates you and suddenly changes trajectory. There were talks in July that the Nifty would touch 14,000, but now no one talks about the Nifty touching the 14,000 level.

But the moot question is if this rally is sustainable. Here's why we believe the rally would be sustainable

FIIs are returning and are here to stay this time. FIIs sold heavily in the last nine months but turned positive in July, and that trend continued even in the first week of August. Why are FIIs returning? Because of India's strong economic growth. 

IMF has revised India's GDP growth, but India will still be the fastest-growing large economy in the world. And if the economy grows, India Inc.'s earnings would also increase. And with a rise in India Inc earnings, FIIs would look to chase the growth story. 

Given favourable conditions, FIIs will have every reason to return to the Indian equity market as they look to invest in countries that can help them generate alpha on the portfolio.

Despite FIIs selling heavily in the first six months of 2022, we believe FII investments would be positive for 2022. In other words, we believe FIIs would invest more than what they sold in the second half of 2022.

2. Southwest Monsoon has progressed well with 8 per cent above the normal range until July 31. That should further help boost the rural economy and cut food inflation. The rural slowdown was one concern that a good monsoon can tackle.

3. While the world has been struggling with inflation, India's inflation numbers are declining. For instance, inflation numbers in May were lower than April's, while June data revealed inflation lower than in May. With crude prices diminishing, various other commodity prices are also declining and supply-side concerns easing, which will release pressure on inflation.

India Inc. results

Over 60% of India Inc. has reported June quarter numbers showing a 32% jump in YoY sales and 26% growth in net profits. Many analysts do not seem impressed with these numbers. However, I beg to differ.

We need to view these growth figures in the context of the market conditions they have been operating in. For instance, despite the rupee's depreciation, the government's decision to impose a 15% export duty on finished steel products, crude oil volatility etc., and other factors, India Inc.'s numbers deserve accolades.