India’s HSBC Manufacturing Purchasing Managers’ Index (PMI) eased to 54.3 in May, down from 54.7 in the previous month.
A PMI reading above 50 indicates expansion in manufacturing activity, while a reading below 50 indicates contraction.
Market Momentum And Hedging
The dip in India’s manufacturing PMI to 54.3, while still in expansion territory, signals a slight loss of momentum for the economy. For us, this suggests that the upward trend in the market might be getting tired. With the Nifty 50 index currently hovering near its recent high of 25,000, we should consider buying out-of-the-money put options for the June expiry to hedge our long positions against a potential short-term correction.
This softening data complicates the Reserve Bank of India’s next move, especially as April’s CPI inflation was a bit sticky at 5.1%. A slowing economy might call for looser policy, but persistent inflation prevents it. This uncertainty could lead to higher volatility in the coming weeks, making strategies like long straddles on the Bank Nifty index attractive ahead of the next policy meeting.
Globally, the US Federal Reserve continues to signal a “higher for longer” interest rate stance, which keeps the US dollar strong. Combined with this slightly weaker domestic data, we see renewed upward pressure on the USD/INR currency pair. We believe going long on USD/INR futures, targeting a move above the 84.50 level, is a sensible trade.
Portfolio Positioning And Rotation
We remember how a similar pattern of slowing PMI figures back in late 2024 preceded a market consolidation period that caught many by surprise. That experience taught us that even minor decelerations in growth can impact sentiment when valuations are high. Therefore, trimming some exposure in high-beta manufacturing stocks and rotating into more defensive sectors could be a prudent move for the next few weeks.
