Moderate pick up in global economic activity helped the risk appetite of investors resulting in a strong rise in the portfolio inflows in to emerging market economies in the recent period. In conjunction with improved business sentiments amid firming up of industrial growth and exports, the domestic financial market activity also got a fillip.

The new government unveiled the Union Budget for 2014-15 on 10 July 2014. The budget estimates for fiscal deficit stands unchanged from the target laid down in the interim budget at 4.1% of GDP. The gross market borrowing for 2014-15 is estimated at Rs 6 lakh crore and net borrowing stands at Rs 4.61 lakh crore. The finance minister laid down the fiscal consolidation roadmap by targeting to bring down fiscal deficit to 3.6% in FY16 and 3% by 2016-17. As per the Economic Survey 2013-14 the GDP growth for FY15 has pegged at 5.4% to 5.9%. It was acknowledged that inflation has moderated, though it continues to remain above comfort level. The Economic Survey also highlighted the need for monetary policy framework for targeting CPI inflation.

The sectarian violence in Iraq resulted disruption of crude oil supply which adversely hit the overall market outlook and in turn the macro-economic situation in India. On the other hand, investors' sentiments remained extremely keen on the announcement of Union Budget 2014-15 scheduled on 10 July. Markets were optimistic about a strong rebound in economic growth however, higher than expected CAD, fiscal deficit and inflation might disrupt the government's economic plans in the long-run as the new government has inherited an economy that is struggling under the weight of inflation and debt.

Financial market movements were largely influenced by the RBI's second bi-monthly monetary policy announcement. The RBI reiterated that if inflation continued along the intended glide path, further policy tightening in the near-term was not anticipated. On the other hand, the RBI's policy also raised some hope of rate cuts if disinflation, adjusting for base effects, is faster than currently anticipated which will provide headroom for an easing of the policy stance.

With the forming of the new government at the centre, hopes for recovery in economic growth escalated creating buoyancy in the financial market activities during the fortnight ending 30 May. The newly elected political party already began its plan to cut the fiscal deficit. Amid this positive outlook, markets discounted rating downgrade that has been cut to junk from investment grade from the rating agencies. However, global repercussions on withdrawal of stimulus by central banks continued to bother the market dynamics posing additional obstacles to RBI in the formulation of monetary policy. Moreover, looming risk of a weak monsoon raised inflationary pressure on the domestic economy.

A pleasant surprise by the 2014 general elections results paved a way for firm and stable political mandate for the next five years ahead and opened up tremendous prospects for India. Markets turned more confident about the strong rebound in economic reforms. Financial market dynamics turned positive as the election outcome provided scope for smoother decision making process and focus on growth-development policies, though the economy might take some more time to recover.

Forecast of below normal monsoon in June-September 2014 hit the financial market sentiments adversely posing additional risk to economic growth. Hopes of revival in the economic activity and agricultural growth in 2014-15 turned gloomy as most of the agri-production is vitally dependent on July-August rainfall. Moreover, concern about higher food prices imposed fresh inflationary worries impacting chances of the RBI hiking policy rates in the current fiscal rather than the wider expectation of easy money policy.

On the macro front, wholesale price inflation (WPI) rate increased to 5.7% in March 2014, from 4.7% in the previous month. Industrial production contracted by 1.9% in February, following a decline in mining and quarrying and manufacturing activities, even as electricity generation posted modest rise on a y-o-y basis. Output from eight core industries too slowed down to 2.5%, pulled down by decline in output of crude oil, natural gas and fertilisers. Both exports and imports declined in March 2014 (year-on-year) and trade deficit narrowed to US$ 138.59 billion in fiscal year 2014. Above mentioned mixed developments in the economy coupled with optimistic sentiment arising from expectations of a favorable election outcome influenced the overall financial market activity during the fortnight.

Positive sentiment from expectations of a favorable election outcome, following a sharp improvement in the balance of payments situation coupled with increased capital flows into domestic market altogether have their positive influence on the overall financial market activity during the fortnight. While, RBI has adopted Urjit Patel committee report on strengthening the monetary policy framework recommendation and is progressively moving away from the LAF regime, which provided guaranteed access to funds at the overnight repo rate. In its first bi-monthly policy review, the RBI kept the repo rate unchanged at 8%. On the other hand, the RBI increased the liquidity provided under 7-day and 14-day term repos from 0.5% of net demand and time liabilities (NDTL) of the banking system to 0.75% and decreased the liquidity provided under overnight repos under the LAF from 0.5% of bank-wise NDTL to 0.25% with an immediate effect.

US Federal Reserve reduced its monthly bond-buyback program by $10 billion to $55 billion signaling an improving US economy. The US Federal Reserve also spelt out that interest rates would be raised six months after the end of the quantitative easing. The FOMC meeting outcome was perceived as relatively hawkish by the markets.