Market Review

July 2024
Macroeconomic Update
Global growth momentum slowed down led by moderation in economic activities in the US and China. US Nonfarm payroll (NFP) fell to near 3-year
lows in July 2024 with unemployment rate rising to 4.3% (from 4.1% in June 2024). Also, US's PMIs eased further, and interest sensitive housing sector
remained under pressure. On the other hand, China's manufacturing PMI also dipped in to contractionary territory while the pace of growth in
manufacturing and infrastructure investments trended lower. Moreover, its real estate sector remained weak and industrial production slowed
down. Economic activity in the Eurozone continues to remain lack luster. Inflation in the U.S. inched lower driven by a broad-based easing in goods,
housing and services, while it remained subdued in China.

The U.S. Federal Open Market Committee (FOMC) kept its monetary policy unchanged in July 2024 but commentary was relatively dovish. Post the
NFP data in August, US rate cut expectations have risen sharply and based on Fed Fund future rates, market is now factoring 125 bps rate cut by 31
December 2024 (as on 5th August 2024). Most other central banks are already in rate cutting mode with UK and China reducing rates during July
2024. However, Bank of Japan was the exception which raised rates by 15 bps to 0.25% during the month and reduced its quantum of security buying.
.
Indian economic activity improves sequentially: Indian economic activity witnessed healthy growth during the month. While PMIs continue to
remain well into the expansionary zone, retail auto sales of 2W & 4W, and GST collections also picked up during the month. Further, power demand,
digital spending and employment also improved / remained healthy. Tractor sales, however, continue to contract on YOY basis.

Indicators Units Jan-24 Feb-24 Mar-24 Apr-24 May-24 Jun-24 Jul-24

@
Retail registration - Auto
2W 15.4 13.6 5.8 33.6 2.7 5.0 17.3
PV 16.1 15.1 -3.7 19.0 2.3 -3.7 11.0
MHCV 2.3 0.2 -14.6 -5.3 -3.4 -4.3 10.0
LCV -3.9 -0.4 -7.5 -1.7 1.7 -8.1 1.9
Tractors 23.9 12.8 -1.8 2.5 -1.0 -27.5 -13.6
Gross GST Collection YoY, % 11.7 12.5 11.5 12.4 10.0 7.6 10.3
Average E-Way bill generated 16.4 14.8 13.9 14.5 17.0 16.3 NA
Power demand 6.1 4.7 9.1 10.5 15.3 8.9 8.5
Digital Spending & 35.5 40.6 33.5 32.6 31.6 32.1 29.9
Railway Freight Tonnage 6.4 10.1 9.5 1.4 3.7 10.1 NA
Railway Freight Earnings 4.1 9.0 - 1.3 3.8 11.1 NA
Manufacturing PMI^ Index 56.5 56.9 59.1 58.8 57.5 58.3 58.1
Services PMI^ Index 61.8 60.6 61.2 60.8 60.2 60.5 60.3
Unemployment* % 7.4 8.1 7.4 8.1 7.0 9.2 7.9
Source: www.gstn.org.in, www.icegate.gov.in, CMIE, PIB, RBI, www.vaahan.parivahan.gov.in, www.posoco.in
^Number >50 reflects expansions and number <50 reflects contraction compared to previous month. @ - figures are preliminary data and are subject to
revision. &- Sum of UPI+IMPS spending; * based on CMIE survey

India's economic activity is showing resilience despite global weakness. India's growth in FY25 is expected to remain steady, though lower than
FY24, supported by robust industrial and investment activities along with resilient services sector and urban consumption. Outlook on rural
recovery remains optimistic in view of good progress of monsoon during the month.

Trade deficit eases slightly, likely to remain range bound: Trade deficit declined month on month in June 2024 primarily driven by sharp fall in oil
imports (USD 15 billion vs ~USD 20 billion in May). This was marginally offset driven by higher net NONG imports. NONG exports declined on back of
lower engineering and rice exports which was partially set off by lower import of transport equipments.

Amount in USD billion May-24 Jun-24 Change

Trade Deficit / (Surplus) 23.8 21.0 -11.8%
Net Oil Imports 13.2 9.5 -27.7%
Net Gold Imports 2.6 2.8 8.4%
NONG^ net imports 8.0 8.6 7.7%

Source: CMIE, Ministry of Commerce; NM – Not meaningful. *Net Gold includes gold, silver and pearls precious & semiprecious stones adjusted for gems and jewellery exports.
^NONG refers to Non-Oil Non-Gold (as defined above) imports/exports
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Market Review - July 2024

Macroeconomic Update (contd...)

The trade deficit is likely to remain within a similar range in view of resilient domestic demand and easing in oil prices while exports might also
pickup on back of expectations of improvement in global trade. Further, services exports are growing at a healthy pace of 13% YoY in Q1FY25. Overall,
current account is likely to remain within manageable range in FY25.

Central government finances in a comfortable position: Fiscal deficit narrowed sharply on back of robust tax collections growth primarily driven by
rise in direct taxes and non tax receipts. Personal as well as corporate tax collections witnessed a healthy YoY growth, albeit on a weaker base.
Further, non-tax receipt rose on back of large increase in dividends from RBI. On the spending side, capex fell mainly because of delay in spending
due to elections, while revenue spending grew only at a marginal pace.

INR billion Q1FY24 Q1FY25 Change (YoY)

Gross tax revenue 6,719 8,308 23.7%

Total Direct Tax 3,302 4,621 39.9%
Total Indirect Tax 3,416 3,687 7.9%
Less: Share of States & others 2,383 2,812 18.0%
Net Tax collection 4,336 5,496 26.8%
Non-Tax Revenue 1,550 2,800 80.7%
Total Revenue Receipts 5,886 8,297 41.0%
Total Capital Receipts 107 45 -57.8%
Total Receipts 5,993 8,342 39.2%

Total Revenue Expenditures 7,722 7,889 2.2%

Total Capital Expenditures 2,785 1,811 -35.0%
Total Expenditures 10,507 9,699 -7.7%

Gross Fiscal Deficit -4,514 -1,357 -69.9%

Fiscal Deficit as % of GDP -1.6% -0.4%
Source: CMIE

While the fiscal deficit has been substantially low till Q1, it is likely to normalise in the coming months as government spending picks up.
Government announced the full budget for FY25 in July 2024 wherein it estimates the fiscal deficit to narrow to 4.9% (interim budget estimate: 5.1%)
of GDP. The revenue and spending assumptions for FY25 appears realistic and achievable.

Retail inflation inches up, likely to ease in coming quarters: India's June CPI YoY, % May-24 Jun-24 Change in %
rose to 5.1% YOY primarily driven by food inflation. Food and beverage inflation CPI 4.8 5.1 0.3
rose on the back of a sharp and broad-based increase in vegetable prices. Food & Beverages 7.9 8.4 0.5
Further, inflation of cereals and pulses continue to remain at an elevated level. Fuel and Light -3.7 -3.7 -
Core CPI remained at similar level as last month with subdued momentum. Housing 2.6 2.7 0.1
Transportation & communication 1.0 1.0 -
CPI is expected to decline over the coming quarters aided by favorable base
Core CPI@ 3.8 3.8 -
effects, benign input price pressure, arrival of new crops easing food inflation and
Source: CMIE; @-CPI excluding food, fuel, transportation & housing
sluggish core CPI momentum.

Commodity prices: Weak economic activity weighed on the commodity prices

with most major commodities declining month on month. Gold prices rose on
back of haven demand.

Market price (USD)* July-24^ FYTD25 (%)&

Brent Crude (per barrel) 80.7 (6.6) (7.7)

Gold (per ounce) 2,448 5.2 9.8
Steel (per tonne) 510 (2.9) 0.0
Zinc (per tonne) 2,635 (9.8) 10.2
Copper (per tonne) 9,015 (4.9) 3.3
Aluminium (per tonne) 2,228 (10.4) (2.9)
Lead (per tonne) 2,024 (6.3) 3.0

Source: Bloomberg; *Market prices as on July 31, 2024. ^M-o-M change. & - Change in YTD25

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Market Review - July 2024

Macroeconomic Update (contd...)

Summary and Conclusion:

Global economic activity momentum continued to moderate in July 2024 after a subdued Q2CY24. The outlook on growth remains uncertain
especially in view of ongoing weakness in the US labour market which has been the primary driver in sustaining global growth. Further, economic
activity in China remains weak and impact of growth supportive measure has been relatively low till now.

India's growth, however, remains steady supported by buoyant manufacturing and service sectors. Well progressing monsoon is supportive of
agriculture activity and rural incomes. Investments remain supported by real estate activity, government capex spending and improvement in
organised private corporate capex. Private corporate sector capital expenditure has potential to grow faster in view of low leverage, increasing
capacity utilization, consistent corporate profitability, and a robust banking sector balance sheet. India's external sector also remains robust on the
back of comfortable current account deficit and adequate forex reserves. Rise in geopolitical tension disrupting supply chains, sharp deceleration in
global economic activity, etc. are key near-term risks.

Looking ahead, the medium-term outlook for India's economy appears promising. This optimism is fuelled by policy continuity, benefits from
Production-Linked Incentive schemes, opportunities arising from shift in the global supply chain, enhanced infrastructure investments, the
potential of resurgence in private sector capex, and the enduring robustness of consumption.

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Market Review - July 2024

Equity Market Update

In July, Nifty and BSE Sensex indices ended ~3.5/4% respectively higher compared to the end of June 2024. The midcap and small index returns
surpassed the large-cap benchmarks. The market remains supported by continued FII and DII buying, steady economic growth, etc. Most sectors
gained during the month with IT, Oil & Gas, FMCG, Healthcare, Power, Auto and Capital goods being the key outperformers. Key events and factors
which influenced the market during the month include – rate hike by Bank of Japan, range bound US yields, escalation of tension between Israel and
Iran, etc. Notably, in early August 2024, weak employment data in the US and hawkish Bank of Japan, has resulted in heighted volatility in all major
equity markets.

Global market performance was mixed. Equity markets in the US and Europe ended in positive while Japan, Korea, China and Hong Kong equities
declined. Below are detailed tables outlining the performance of key domestic and global indices:

% Change in Indices Jul-24 FYTD25^ % Change Jul-24 FYTD25^

BSE India Auto 5.0 22.5 S&P 500 1.1 5.1
BSE India Bankex (1.3) 10.0
Nasdaq (0.8) 7.4
BSE India Capital Goods 4.6 24.1
BSE India FMCG 9.5 16.5 FTSE 2.5 5.2

BSE India Healthcare 9.2 15.6

DAX 1.5 0.1
BSE India Metal (0.8) 16.2
CAC 0.7 (8.2)
BSE India Power 6.1 26.0
BSE India Oil & Gas 10.5 17.8 Nikkei (1.2) (3.1)
BSE India IT 12.9 17.0
Hang Seng (2.1) 4.9

BSE SENSEX 3.4 11.0 KOSPI (1.0) 0.9

NIFTY 50 3.9 11.8
Shanghai (1.0) (3.4)
NIFTY Midcap 100 5.8 22.7

NIFTY Smallcap 4.5 25.3 MSCI Emerging Market Index (0.1) 4.0

Source: Bloomberg; ^Returns in FYTD25

FPIs bought equities worth USD 3.9 billion in July 2024 (June 2024: USD 3.2 billion) and have cumulatively bought equity worth USD 3.0 billion in
4MFY25 (4MFY24: USD 18.2 billion). DIIs, on the other hand, bought net equity worth USD 2.8 billion in July 2024 (June 2024: USD 3.2 billion) and have
cumulatively bought USD 18.2 billion in 4MFY25 (4MFY24: USD 0.1 billion).

Mutual funds flows were steady at ~INR 51,500 crore in June 2024 (May 2024: ~INR 45,200 crores) and cumulatively amounted to ~INR 128,000 crore
in Q1FY25 (Q1FY24: ~INR 20,000 crore).

Outlook

As on July 31, 2024, NIFTY 50 was trading at ~23x FY25E price to earnings multiple. Further, Market cap-to-GDP stood ~136% (based on CY24 GDP
estimates) and the gap between 10Y G-sec yield and 1Y-Forward NIFTY 50 earnings yield* remains at elevated level [*Earnings yield = 1/ (one year
forward P/E)]. Thus, current valuation indicators are at a premium to their historical averages. However, this is partially due to structurally attractive
nominal GDP growth, a healthy corporate earnings outlook and robust de-levered corporate and banking balance sheets.

Chart 1 Chart 2

Source: Kotak Institutional Equities; For 2024 and 2025, the market cap as on July 31, 2024 is taken and divided by GDP estimates for CY24 and CY25

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Market Review - July 2024

Equity Market Update (contd...)

Except for private banks, valuations for major sectors are higher than long-term averages as shown in the table below:

12 months forward Price to Earnings

31-Jul-24 LTA Discount / Premium^
IT Services 27.9 20.5 36.0
@
PSU Banks 1.5 1.1 35.7
Pharma 31.1 23.9 30.2
Metals 13.0 10.0 29.6
Oil and gas 15.8 12.2 29.4
Consumer staples 42.8 35.3 21.5

Consumer Discretionary 64.2 53.1 20.9

Auto 23.6 19.6 20.5
Private Banks@ 2.4 2.6 -6.9

Source: Kotak Institutional Equities. Stocks are part of Kotak Institutional Equities universe.
LTA – 10 Years average. Cells in green are sectors which are trading at premium. All figures are calculated based on 12 months
forward estimates.
^to Long term (LT) average, @-Price to Book value

The rally over the past year and half has been broad and small cap and mid cap indices have significantly outperformed. Despite corrections seen in
early August 2024, these trade at a noteworthy premium to their long-term average valuation and large caps. Given the aggregate valuation being
higher than historical average, the importance of stock selection increases even more.

Our medium to long term positive outlook on Indian equities remains unchanged driven by the structurally robust domestic growth outlook,
healthy corporate profitability, and supportive pro-growth policies. However, near-term risks include a significant global growth slowdown,
heightened geopolitical tensions, slowdown in government's reforms momentum, etc.

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Market Review - July 2024

Debt Market Update

Gsec yields saw a broad-based decline during the month and 10Y Gsec yield ended the month at 6.93%, down 8 bps from the previous month. The
yields at the short end fell more than the long end, resulting in steepening of the yield curve. During the month, RBI released draft circular which
proposed to increase the percentage of High Quality of Liquid asset (HQLA) to be kept by banking sector against deposits which are enabled for
internet and mobile banking. Further, it increased the haircut on key assets qualifying for HQLA (Gsec, T-bills and SDLs). Thus, in effect, RBI circular, if
implemented, will result in large increase in demand of SLR securities. This resulted in yields rallying during the month. Apart from aforesaid, key
factors and events which influenced the fixed income markets, include lower than expected fiscal deficit of central government, benign domestic
core CPI, consistent buying by FIIs, fall in US yields and oil prices, etc. The 10-year corporate bond spreads over Gsec widened compared to last
month. The table below gives a summary view of the movement of key rates and liquidity:

Jun-24 Jul-24 Change (in bps)

MIBOR Overnight Rate (%) 6.86 6.55 -0.31
3M Gsec yield (%) 6.80 6.67 -0.13
10Yr Benchmark G-Sec Yield^ (%) 7.01 6.93 -0.08
AAA 10Year Corporate Bond Yields#, & (%) 7.49 7.46 -0.03
AAA 10Y Corporate bond spread against 10Y benchmark@ (bps) 48 53 5

Average net liquidity absorbed/infused by RBI* (INR billion) -547 1,027 NA

NM – not meaningful. ^-bi-annual yield; #-annualised yield; & - Average yield of 8.62% NABARD bond maturing on 14-Mar-2034 provided by independent valuation agencies has
been taken. @ - Spreads calculated by subtracting non-annualised Gsec yields from annualised corporate bond yields.
*Average net daily liquidity infused / absorbed through Liquidity Adjustment Facility, exports refinance, marginal standing facility and term repos/reverse repos. Source:
Bloomberg, RBI

Average interbank liquidity turned positive in July 2024 driven by redemption of government securities, forex purchases by RBI and decline in
currency in circulation.

FPIs bought debt (including under voluntary retention route) worth USD 1.9 billion in July 2024 (June 2024: USD 1.7 billion). FPIs have bought net
debt worth USD 4.3 billion in 4MFY25 as against net buying of USD 2.1 billion during the same period last year.

Outlook

The Union budget presented during the month projects the fiscal deficit to consolidate to 4.9% of GDP (FY24: 5.6%) in FY25. Further, government
reiterated that the target of bringing down centre fiscal deficit to less than 4.5% of GDP by FY26 remains unchanged. This comforted the market
which was watchful of any deviation from fiscal consolidation path and thus, Gsec rallied during the month. This was further supported by release of
draft circular by RBI on Liquidity Coverage Ratio (LCR) which, if implemented, can increase the SLR demand by banks.

Fixed income remains favourably placed over the medium term considering:

Ÿ Global growth is increasingly showing signs of slowdown and most AE central banks have begun to reduce policy rates, RBI is also likely to cut
policy rates in H2FY25.
Ÿ Inclusion of India's sovereign securities in JP Morgan global bond indices bodes well for demand outlook for G-Sec in FY25. Further, likely increase
in demand of HQLA assets due to higher LCR requirements is also likely to add to strong demand for SLR securities.
Ÿ Higher-than-expected RBI dividend and expectations that it can remain at an elevated level in next year as well - should aid fiscal consolidation
and keep market borrowings within manageable levels.
Ÿ Core CPI momentum remains subdued on back of lower input price pressure.
Ÿ External sector remains comfortable in view of steady growth in services exports, fall in oil prices and adequate foreign exchange reserves.
Ÿ Revision of India's sovereign rating outlook to positive (Rating unchanged at BBB-) from stable by S&P enhances the possibility of rating upgrade
for India in next couple of years.

Key risks to the favourable outlook:

Ÿ Regular ffood price shocks keeping headline CPI at an elevated level.

Ÿ Robust credit growth and elevated SLR holdings can keep the incremental demand for G-Secs from banks subdued.
Ÿ Rise in commodity prices driven by escalation of geopolitical tensions .

Overall, in our view, yields are likely to trade with a downward bias and the long end of the yield curve is likely to outperform over the medium term.
Thus, as highlighted in past, investors with a relatively longer investment horizon, can continue to increase allocation to longer duration funds in line
with individual risk appetite. Further, while yield curve has steepened during the month, it is still relatively flat and in view of elevated short-term
rates along with expectations of rate cuts in H2FY25, one may also consider investment in short or medium duration categories of debt funds.

Source for various data points: Bloomberg, NSDL, CMIE, RBI, Kotak Institutional Research, World Bank, Daily valuation provided by ICRA/CRISIL.
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Market Review - July 2024
Glossary

AE Advanced Economies
BoE Bank of England
BoJ Bank of Japan
BoP Balance of Payment
bps Basis points
CAGR Compound Annual Growth Rate
CMIE Centre for Monitoring Indian Economy
CPI Consumer Price Index
CRR Cash Reserve Ratio
CV Commercial Vehicle
DIIs Domestic Institutional Investors
EA Euro Area
ECB European Central Bank
FOMC Federal Open Market Committee
FPI Foreign Portfolio Investment
GDP Gross Domestic Product
GST Goods and Services Tax
GVA Gross Value Added
IMD India Meteorological Department
INR Indian Rupee
IMF International Monetary Fund
IMPS Immediate Payment System
JGB Japanese Government Bonds
LCV Light Commercial Vehicle
Mbpd Million Barrels Per Day
MHCV Medium and Heavy Commercial Vehicle
MIBOR Mumbai Interbank Offered Rate
M-o-M Month on Month
MPC Monetary Policy Committee
MSP Minimum Support Prices
NABARD National Bank for Agriculture and Rural Development
NBFC Non-Banking Financial Company
NONG Non-Oil Non-Gold
NSO National Statistical Organization
OMO Open Market Operation
PIB Press Information Bureau
PLI Production Linked Incentive
PMI Purchasing Managers’ Index
PPI Producer Price Index
PSU Public Sector Undertaking
PV Passenger Vehicle
RBI Reserve bank of India
RE Revised Estimates
RRR Reserve Ratio Requirement (for banks in China)
SLR Statutory Liquidity Ratio
UPI United Payments Interface
US United States of America
USD United States Dollar
UST US Treasuries
YoY Year on Year

DISCLAIMER
This document contains our views as on August 08, 2024. The views expressed herein are based on internal data, publicly available information and other sources believed to
be reliable. Any calculations made are approximations, meant as guidelines only, which you must confirm before relying on them. The information contained in this document
is for general purposes only and not an investment advice. The document is given in summary form and does not purport to be complete. The document does not have
regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. The information/ data herein
alone is not sufficient and should not be used for the development or implementation of an investment strategy. The statements contained herein are based on our current
views and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in
such statements. Past performance may or may not be sustained in future and is not a guarantee for any future returns. Stocks/Sectors referred above are illustrative and not
recommended by HDFC Mutual Fund (the Fund) / HDFC AMC. The Fund may or may not have any present or future positions in these sectors. HDFC AMC / the Fund is not
guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). Neither HDFC AMC and the Fund nor any person connected
with them, accepts any liability arising from the use of this document. The recipient(s) before acting on any information herein should make his/her/their own investigation
and seek appropriate professional advice.

For complete details on budget, please refer to the budget documents available on https://www.indiabudget.gov.in/

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.

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