Market Views

Please click here for Monthly Equity & Debt Outlook Presentation – Dec 2020 

Key Events:

• Nifty (+11.4%) rallied sharply in November, as a global risk-on triggered by a Biden victory, positive vaccine developments and dollar weakness (DXY fell by ~2.3% in Nov) led to strong inflows into EM markets
• FIIs pumped in ~$9.4bn into India equities (highest ever monthly net inflows) partly driven by MSCI rebalance, as >$2bn of passive inflows were expected due to increase in Foreign Ownership Limits in various stocks
• DIIs on the other hand, continued to remain net sellers including Domestic MFs as equity funds witnessed fourth consecutive month of net outflow in October as redemptions grew 20% vs September
• Deceleration in real GDP growth moderated to -7.5% y/y in 2Q (vs -23.9% in 1Q). Rebound was led by manufacturing (+0.6% y/y vs -39.3% in 1Q) while subdued govt. spending dragged growth
• CPI spiked to 7.6% in October, highest print since May’14 while core CPI also rose slightly to 5.8%. While inflationary pressures were broad based, food items led the sharp jump, partly due to unseasonal rains
• Govt’s latest measures focused on urban consumption, infrastructure and Covid-affected sectors. Moreover, loan guarantee scheme was extended to 26 stressed sectors and healthcare
• RBI released a pro-growth monetary policy decision. Kept Repo and Reverse Repo rate unchanged

Please click here for Monthly Equity & Debt Outlook Presentation – September 2020.

Key Events:

·         1Q FY21 Real GDP growth contracted by 23.9% YoY, weaker than the street estimates. Led by a strict lockdown and labor migration, construction was the worst hit, followed by trade, hotels, transport and communication. 

·         MPC took a pause in the rate easing cycle while refraining from giving any specific forecasts on growth & inflation given heightened uncertainty.

·         July’s CPI print of 6.9% (v/s 6.2% in June) drastically reduced chances of a rate cut for the rest of this fiscal year. RBI’s recent policy statement had predicted inflation to stay elevated till Sep and see moderation in 2HFY21.

·         India’s trade balance turned to a deficit of ~$4.8bn in July are a rare surplus of ~$0.8bn in June, as gold and other imports started to pick-up. Exports in July were down ~10% in July at $23.6bn while imports at $28.4bn.

·         India’s fiscal deficit stood at Rs8.2trn at the end of July, at ~103% of the budgeted target for the current fiscal year. Sharp fall in tax receipts coupled with resilient government expenditure led to the high deficit in the period.

·         After an erratic July, August witnessed excess rainfall of 26%, highest print since 1901. Rainfall is already at a record in states of Maharashtra, Madhya Pradesh, Gujarat, and Odisha.

·         Indian Equities moved slightly higher (Nifty +2.8%) in August.

Please click here for Monthly Equity & Debt Outlook Presentation – August 2020

Key Events: 

·         Nifty (+7.5%) made new highs (breaching 200DMA & 11k for the first time since March fall) in July but more than half of its gains were contributed by just two stocks.

·         After a sharp recovery (>+50%) from April lows, activity levels peaked in early-July and were still >15% below pre-Covid levels.

·         The MPC, unanimously, kept the repo rate unchanged at 4% but retained the ‘accommodative’ stance.

·         Headline CPI moderated to 6.1% for June after peaking at 7.2% in April. Core Inflation at 5.1% was still elevated in June suggesting that despite the subdued demand, the supply disruption led CPI to spike

·         After almost 18 years, India reported a trade surplus of $0.8bn in June driven by broad-based export rebound and still weak import demand. Oil imports were suppressed by low oil, but non-oil trade improved sharply

·         Centre’s fiscal deficit during 1Q of this fiscal stood at ~83% of Budget Estimate. Reports suggested that actual fiscal deficit for FY21 could be as high as 7.6%, almost 2x budget

Please click here for Monthly Equity & Debt Outlook Presentation – July 2020

·       Nifty (up +7.5%) finally decoupled from the US markets (S&P up only +1.8%) and outperformed during June.

·       Despite the headwinds, Indian markets continued to rise due to high foreign inflows (+$2.5bn, highest monthly inflows in 2020) and marginal domestic institutional buying (+$0.3bn). In sectorial trends, all sectors were up v/s May with Realty and Banks at the top.

·       After the border clash with China led to 20 Indian casualties, the Indian forces deployed along the 3500-km border were given “full freedom” to counter any aggressive Chinese behavior . Later both countries, however, agreed on a “step-wise mutual disengagement” from areas of friction in Ladakh averting further escalation. 

·       IMF projected a deeper 4.5% contraction (vs -1.9% in April) for India in FY21 citing a longer lockdown period and slower than anticipated recovery. FY22 growth forecasted at +6% vs +7.4% earlier.

·       Moody’s downgraded India’s rating to Baa3, last level of investment grade rating, while keeping outlook as negative. whereas Fitch reaffirmed BBB- rating but changed the outlook to negative. S&P retained BBB- rating with a stable outlook. 

·       The gross GST revenue collected in the month of June, 2020 is Rs 90,917 crore.

·       The India Manufacturing Purchasing Managers Index (PMI) edged up to 47.2 in June, compared with 30.8 in May.

·       May merchandise trade deficit narrowed to a decade low $3.2bn on weak crude and faster recovery in exports vs imports.

·       RBI’s FX reserves hit a record $500bn on portfolio inflows and lower trade deficit.

• India Inc over the last 3 years has seen multiple shocks – from demonetisation to key reforms like GST, RERA etc. to credit freeze in aftermath of wholesale NBFC unable to get access to credit to current lockdown amidst the global supply and demand shock unleashed by Coronavirus. In the long journey of corporate India, these events almost seems like a big RESET button. A call to significantly change business practices, realign key business priorities in a changing landscape and massive consolidation across sectors.

• ·       Covid19 – while initial impact was localised to Chinese economy and therefore the supply shock given large export from China, the spread of virus globally now risks creating a demand shock as well. While global coordination of policy makers and containment of virus and improvement in drugs to counter will reduce the longer term impacts of this shock, near-term demand and supply chains remain frozen amidst a significant drop in economic activity. We are slowly emerging from lockdown to phases of ‘unlocking’ the economy.

• ·       While Indian government & RBI have announced few measures, we expect more measures to be announced given the unprecedented nature of events led by Covid 19. Amidst this uncertainty, Indian equities have seen large up and down moves in recent months.

• ·       While near term uncertainty induces volatility in asset prices, in the long run, wealth creation in equities is a function as how businesses can profitably grow over their cost of capital sustainably. Given the long-range of reforms introduced as well as likely relief measures by government & RBI, we believe longer-term prospects of Indian equities is quite encouraging and we would advise investors to benefit from such induced volatility.

• ·       Time in the market is more important than timing the market - recently, markets volatility has moved up and investors can benefit from this volatility by focusing on disciplined investing and asset allocation.

·                India FY 21 Q4 GDP numbers came in at 3.1%, dragging the full year growth at 4.2%. While the Q4 GDP was slightly higher than expectations, all previous GDP figures for FY 20 were revised downward between 4-7 basis points.

·                The government also came up with its increased borrowing plan for FY 21 in the month of May revised to Rs. 12 lakh crore from 7.8 lakh crore, taking the weekly borrowing to Rs. 30000 crore. However as the economy is in Risk off mode with low credit off take, the increased demand for government bonds has kept the yields anchored.

·                Shortly after the increased the Finance minister announced the “Aatmanirbhar” economic relief package of Rs 20 lakh crore.

·                We saw unprecedented swing in the OIL markets, the oil trading in the range of 20 to 37 dollars a barrel. Overall lower OIL and commodity prices in generally beneficial for the country. The slowdown in demand has helped to lower the trade deficit that could eventually lead to a rare surplus in current account.

·                On 22nd May the RBI Governor cut the policy rate by 40 basis points, taking the repo rate to 4%. This is the second unscheduled rate cut given by the Reserve Bank.

• India Inc over the last 3 years has seen multiple shocks – from demonetisation to key reforms like GST, RERA etc to credit freeze in aftermath of wholesale NBFC unable to get access to credit to current lockdown amidst the global supply and demand shock unleashed by Coronavirus. In the long journey of corporate India, these events almost seems like a big RESET button. A call to significantly change business practices, realign key business priorities in a changing landscape and massive consolidation across sectors.

• ·       Covid19 – while initial impact was localised to Chinese economy and therefore the supply shock given large export from China, the spread of virus globally now risks creating a demand shock as well. While global coordination of policy makers and containment of virus and improvement in drugs to counter will reduce the longer term impacts of this shock, near-term demand and supply chains remain frozen amidst a significant drop in economic activity.

• ·       While Indian government & RBI have announced few measures, we expect more measures to be announced given the unprecedented nature of events led by Covid 19. Amidst this uncertainty, Indian equities have seen large up and down moves in recent months.

• ·       While near term uncertainty induces volatility in asset prices, in the long run, wealth creation in equities is a function as how businesses can profitably grow over their cost of capital sustainably. Given the long-range of reforms introduced as well as likely relief measures by government & RBI, we believe longer-term prospects of Indian equities is quite encouraging and we would advise investors to benefit from such induced volatility.

• ·       Time in the market is more important than timing the market - recently, markets volatility has moved up and investors can benefit from this volatility by focusing on disciplined investing and asset allocation.

•       One of the biggest fallouts of the Covid crisis was seen in April with oil prices (WTI Crude) going into negative territory as inventory buildup, due to lack of demand, created a storage problem in the oil markets.

•       The lock down in India has been extended for the second time in India till the 17th of May, however several concessions were provided based on the classification of the entire country into Green, Orange and Red zones, depending on the number of cases in each region.

•       In the mutual fund space, Franklin Templeton wound up 6 of their debt schemes with over 30000 Crs of AUM as of 31st Mar 2020, citing inability to meet redemptions due to market liquidity conditions as a result of the Covid-19 crisis.

•       Earlier during the month RBI has announced several measures including a cut of reverse repo rate by 25 bps to 3.75 percent, LTRO 2 of 50000 cr that could be lent to NBFC’s and MFI’s

•       The current Gsec yield curve is quite steep. However we do expect further RBI action to introduce some amount of flattening.

·         The geo-political Risk which was triggered due to Coronavirus in Wuhan has become the 6 sigma event as feared. The slowdown fears are quickly becoming a reality.

·         The falling commodity prices and bond rally globally will help keep Indian rates lower.  This is positive for trade deficit however due to equity selloff INR will remain under pressure, which is manageable as RBI has enough reserves to fight the same.

·         If India continues to remain relatively unaffected from the COVID-19, it could spell positive for the country in attracting capital, tourism and jobs.

·         We believe we have seen peak of inflation in February  2020 with head line CPI at 7.59% . However based on current prices we expect the same to ease off to 7% and gradually trend towards the comfort zone. This will be positive from interest rates point of view given the overall environment inflation is what will be chased globally

·         The RBI announced LTRO worth 1lac cr which was much potent tool than a rate cut and we believe this LTRO will pull down and anchor the short term rates much closer to overnight rates as 1 Lac cr of fresh money will lead to at least 2-3 lac cr worth of demand for assets leading to spread compression.

·         In a nut shell, key driver for returns will be corporate spread-compression or flattening of the yield curve. It will start with AAA/PSU followed by NBFC/HFC like Bajaj/HDFC; and then, it may percolate to lower grade NBFC and other corporate bonds. 

·         The Budget presented a policy continuum, with focus on fiscal prudence and some steps in capital markets, especially to help India Inc access global financial markets.

·         The last 18 months have seen risks emerge from wholesale funded NBFC, over-leveraged promoters having difficulty to roll-over debt etc. Over the few months, lot of these companies have managed to raise capital which is an encouraging development. With RBI introducing newer measures to help in transmission of interest rates, this fall in borrowing costs to India Inc will be viewed positively by markets.

·         Coronavirus – while initial impact was localised to Chinese economy and therefore the supply shock given large export from China, the spread of virus globally now risks creating a demand shock as well. While global coordination of policy makers and containment of virus and improvement in drugs to counter will reduce the longer term impacts of this shock, near-term will be dominated how the virus stats develops, especially in developed world.

·         While near term uncertainty induces volatility in asset prices, in the long run, wealth creation in equities is a function as how businesses can profitably grow over their cost of capital sustainably. Given the long-range of reforms introduced, we believe longer-term prospects of Indian equities is quite encouraging and we would advise investors to benefit from such induced volatility.

·         Time in the market is more important than timing the market - recently, markets volatility has moved up and investors can benefit from this volatility by focusing on disciplined investing and asset allocation.

Debt Outlook:

• We believe we have seen peak of inflation in January 2020 with head line CPI at 7.35% . However based on current prices we expect the same to ease of to 7% and gradually trend towards the comfort zone. This will be positive from interest rates point of view
• The government admitted to a fiscal slippage and pegged the Fiscal Deficit at 3.8% for FY20. But it stuck to the glide path the next year has been pegged the Fiscal deficit at 3.5%. To its credit, the government did not increase the market borrowing for the current year and next year borrowing program was also as per market expectations. We will have to see how soon India will be a part of Global Bond Index for further direction.
• The geo-political Risk has moved from US-Iran to china WRT to Wuhan – Coronavirus. As of now the risk of a global slowdown is increasing i.e positive for interest rates. • Global risk-off led to bond yields falling sharply in US Treasuries;. The yields of other developed economies also continue to remain low. This may, sooner than later, lead to chase for Indian sovereign assets which are still offering high real rates.
• As we said earlier, India is probably preparing for inclusion in Global EM bond indices. The union budget has paved the way for the same and hopefully this may see the light of the day by end of the year. This will be a huge positive for long bonds.
• Liquidity is in huge surplus mode but market is yet to price this new phase. Positive liquidity is a more important tool than repo rate cut.
• We maintain that due to ‘operation twist’ the rate cut cycle has been elongated by at least 6m. We expect at least 25-50 bps cut in the policy rates in CY20. Market may still be in denial mode which gives a window of opportunity for the long term investors.
• In a nut shell, key driver for returns will be corporate spread-compression or flattening of the yield curve. It will start with AAA/PSU followed by NBFC/HFC like Bajaj/HDFC; and then, it may percolate to lower grade NBFC and other corporate bonds.
• We believe that the investment opportunity in short duration bond funds, banking and PSU funds, credit funds and dynamically managed duration funds is still present and becoming more attractive. Investors may look to invest in the funds depending on the scale of risk appetite and the investment horizon.

Key Events:

• Steps will be taken to remove criminal liability for offences under the Income Tax Act, which are civil in nature, the Finance Minister said in her Budget speech.
• While delivering the second budget speech of Narendra Modi Government 2.0, Finance Minister Nirmala Sitharaman allocated Rs 1.7 lakh crores for transport, infrastructure including Railways and Rs 99,300 crore outlay for education sector in 2020-21 and Rs 3,000 crore for skill development.
• Budget 2020 has proposed a new tax regime slashing income tax rates and rejigging income tax slabs to reduce total tax payable by individuals. As per the new regime, 70 tax exemptions will be removed
• Passenger vehicle (PV) exports from India increased by 5.89 % in the first nine months of the current fiscal.
• The International Monetary Fund (IMF) noted that Indias domestic demand has slowed more sharply than expected amid stress in the nonbank financial sector and a decline in credit growth. Indias growth is estimated at 4.8% in 2019, projected to improve to 5.8% in 2020 and 6.5% in 2021 (1.2 and 0.9 % point lower than in the October update), supported by monetary and fiscal stimulus as well as subdued oil prices.
• Net employment generation in the formal sector stood at 11.62 lakh in November 2019, shows provisional data released by the Employees~ Provident Fund Organisation (EPFO) on Wednesday. As per the latest data, 4.03 lakh jobs were created in the same month last year, while 6.48 lakh EPF subscribers were added in October 2019.
• Wholesale prices based inflation surged to 2.59 % in December, as against 0.58 % in November due to increase in prices of food articles like onion and potato. The annual inflation, based on monthly wholesale price index (WPI), was at 3.46 % during the same month a year ago (December 2018).
• India’s exports declined 1.8% in December to $27.36 billion, on the back of currency volatility and fluctuation in commodities prices coupled with the sluggish global economy. Exports had declined 0.34% in November. Echoing the general economic sluggishness and weak domestic demand, imports witnessed a sharper decline of 8.83% at $38.61 billion in December

Key Market Events:

• The Gross Domestic Product continued its downward spiral for the seventh consecutive quarter, falling to 4.5 per cent in the second quarter (July-September) of the year 2019-20
• CPI inflation jumps to 4.62% in October 2019. Core CPI inflation dips to 3.44% in October 2019
• Wholesale prices in India rose by 0.16 percent year-on-year in October of 2019, slowing from a 0.33 percent gain in the previous month and compared with market expectations of a flat reading.
• The fiscal deficit for the period April-October was recorded at 102.4% crossing the full year target underlining the fiscal concerns for the government
• India’s trade deficit narrowed to $11.01 billion in October from $18.0 billion a year ago, the trade ministry said on Friday, helped by lower oil imports.
• Industrial growth shrunk for the second straight month in September, contracting by 4.3%, the most in nearly 8 years. The slide was mainly due to poor performance in the manufacturing sector, according to official data released on Monday.
• India’s Manufacturing PMI rose to 51.2 in November from 50.6 in October, indicating little improvement in health of the sector.
• The Union Cabinet approved the sale of the government's stake in BPCL, SCI, and Concor, as well as decided to cut shareholding in select public sector firms below 51%.

Debt Outlook:

• The head line spiked as expected however the core data plunged to 3.44 which is a clear indication of a demand slowdown. As per the RBI outlook this is likely to stay in the range for coming year which is very positive for the rates cycle.
• Brent crude oil fell back to ~US$60-62 per barrel despite all global news which took higher how ever its has cooled down faster than expected reflecting underlying weak demand i.e. slow world economy
• The GDP growth was pegged at 4.5% which was marginally lower than consensus despite heavy lifting form the government spending. This will give RBI enough reason to go for the cut again. The only question arises is whether the cut is of 15bps or 25 bps.
• India is probably preparing for inclusion in JP Morgan EM bond index. This will be a huge positive for long bonds
• Liquidity is in huge surplus mode but market is yet to price this new phase. Positive liquidity is a more important tool than repo rate cut.
• Global bond yields of developed economies continue to remain low or in the negative zone. This may lead to a chase for sovereign assets which are still offering high real rates sooner than later probably the index inclusion may act as a trigger
• We expect at least 50-75 bps cut in the policy rates in FY 20. Market may still be in denial mode which gives a window of opportunity for the long term investors
• In a nut shell key driver for returns will be corporate spread compression or flattening of the yield curve. It will start with AAA/PSU followed by NBFC/HFC like Bajaj/HDFC and then it may percolate to lower grade NBFC and other corporate bonds.
• We believe that the investment opportunity in short duration bond funds, banking and PSU funds, credit funds and dynamically managed duration funds is still present and become more attractive. Investors may look to invest in the funds depending on the scale of risk appetite and the investment horizon.

Key Market Events of October 2019

• India moved from 77th to 63rd position in the World Bank's Ease of Doing Business rankings this year.
• In line with expectations, RBI MPC delivered a 25bps rate cut (taking cumulative cut to 135bps in 2019) and provided a strong forward guidance for further rate cuts to support growth
• US Fed cuts policy rate by 25 bps, but signals pause in easing cycle
• GST collection declined 5.29 per cent to Rs 95,380 crore in October 2019, in comparison to the same month last year.
• Headline CPI rose to 4% yoy in September primarily led by vegetable price inflation
• Aug IIP declined 1.1% yoy (capital goods -21%, consumer durables -9.1%), sharpest fall in industrial output growth since Feb’13 reinforcing fears of a structural slowdown and deteriorating consumer sentiment.
• India Manufacturing PMI came in at 51.4 in September 2019, unchanged from the previous month's 15-month low.
• Sep Trade Deficit narrowed to $10.9bn as deterioration in import growth outweighed exports. Import growth fell to a 3-yr low on lower oil, gold and capital goods whereas exports weakness was more broad-based.
• The Union Cabinet raised Dearness Allowance of ~5mn government employees and ~6.5mn pensioners by 5% costing the exchequer approximately ~Rs160bn.
• The International Monetary Fund (IMF) downgraded growth of the global economy. In the October World Economic Outlook, IMF forecast a 3 % growth in 2019, the slowest pace since the global financial crisis. It also estimated that the U.S.-China trade tensions will cumulatively reduce the level of global GDP by 0.8 % by 2020.

Debt Outlook

• The head line and core inflation have converged core is moving towards 4% as expected. As per the RBI outlook this is likely to stay in the range for coming year which is very positive for the rates cycle.
• Brent crude oil fell back to ~US$58-60 per barrel despite all global news which took higher however it has cooled down faster than expected reflecting underlying weak demand i.e. slow world economy
• The upcoming GDP growth data which is expected to come at the end November, we believe GDP growth can fall sharply. Therefore providing RBI enough reason to go for the cut again. The only question arises is whether the cut is of 15bps or 25 bps.
• India is probably preparing for inclusion in JP Morgan EM bond index. This will be a huge positive for long bonds
• Liquidity is in huge surplus mode but market is yet to price this new phase. Positive liquidity is a more important tool than repo rate cut.
• The FOMC delivered one more rate cut of 25 bp as expected. Global bond yields of developed economies continue to remain low or in the negative zone. This may lead to a chase for sovereign assets which are still offering high real rates sooner than later
• We expect at least 50-75 bps cut in the policy rates in FY 20. Market may still be in denial mode which gives a window of opportunity for the long term investors
• In a nut shell key driver for returns will be corporate spread compression. It will start with AAA/PSU followed by NBFC/HFC like Bajaj/HDFC and then it may percolate to lower grade NBFC and other corporate bonds.
• We believe that the investment opportunity in short duration bond funds, banking and PSU funds, credit funds and dynamically managed duration funds is still present and become more attractive. Investors may look to invest in the funds depending on the scale of risk appetite and the investment horizon.

Key Market Events

• GST collection slips in September, falls behind INR 1 lakh crore for second consecutive month
• Corporate tax rate cut to 22% (no incentives) vs 30% earlier (with incentives). To promote “Make in India” & to capitalize on changing global trade scenario, FM also announced reduction in tax rates for new manufacturing companies created after 1st Oct’19 where tax rate is cut to 15% (no incentives) vs 25% earlier (with incentives).
• July IIP accelerated to 4.3% vs 1.2% June print. Mfg. led with growth of 4.2% while electricity disappointed with just 4.8%. Intermediate goods grew double digits while weak auto sales weighed on consumer durables
• Headline CPI Inflation picked up only marginally to 3.21% in Aug despite a vegetable price spike. Moderation in fuel and light inflation squared off squared off to some extent the sharp pick-up in vegetable prices
• Wholesale price-based inflation was unchanged at 1.08 % in August even as prices of food items rose. The wholesale price index (WPI)-based inflation was at 1.08 % in July this year and 4.62 % in August 2018.
• Aug trade deficit at $13.4bn was flat vs Jul. Imports fell by 13.5% whereas exports by 6%. Shipments of gems and jewellery, engineering goods, petroleum products recorded negative growth
• On the global front, US FOMC delivered a second hawkish cut of 25bps as widely expected whereas trade war concerns receded as China agreed to buy US farm products as a goodwill gesture ahead of high-level trade talks set to start early next month.
• Geopolitical Risks were on the rise as attacks on Aramco plants catapulted crude prices by ~$10/bbl overnight. However, faster restoration of affected plants provided relief to crude and oil beta stocks. ?

Debt Outlook

• The RBI’s Monetary Policy Committee (MPC) voted to cut policy rates by 25bps while maintaining their accommodative stance necessary to revive growth. Consequently the policy repo rate stands at 5.15% (from 5.40%)
• In the third bi-monthly resolution of August 2019, CPI inflation was projected at 3.1% for Q2:2019-20, 3.5-3.7% for H2:2019-20 and 3.6 % for Q1: 2020-21 with risks evenly balanced. The actual inflation outcomes for Q2 so far (July-August) at 3.2 % have been broadly in line with these projections
• The CPI inflation projection is revised slightly upwards to 3.4 % for Q2:2019-20, while projections are retained at 3.5-3.7% for H2:2019-20 and 3.6% for Q1:2020-21, with risks evenly balanced
• RBI is committed to maintain adequate liquidity in the system through various instruments which is crucial at the current juncture. The key question is the transmission of the lower policy rates. While banks have moved to external benchmark linked loans for incremental retail and SME loans, the pace of monetary transmission still remains slow.
• We believe that RBI has further appetite for 25-50 bps additional cut from hereon. Although the timing may be staggered as the move will be data dependent and as the data suggests in future RBI shall act
• We urge investors to continue to remain invested / enhance allocation to fixed income strategies, notwithstanding intermittent volatilities
• This is clearly a dovish policy set against the backdrop of weaker growth and risks to financial stability.

Key Market Events of August 2019

• RBI cut repo rate by 35bps to 5.40% while maintaining 'accommodative' stance
• 1QFY20 real GDP growth fell to 6-year low of 5% yoy led by a sharp decline in private consumption. Nominal GDP growth at 8% YoY touched new post-GFC lows.
• RBI to transfer a record surplus of Rs 1.76 lakh crore to the government.
• The Reserve Bank of India’s consumer confidence survey released on Wednesday reported a drop in confidence in July as Indian households remained pessimistic about jobs and the general economic situation. The current situation index dropped to 95.7 last month from 97.3 in May and 104.6 in March. The future expectations index (FEI) fell by four points to 124.8 in July.
• Headline CPI fell slightly to 3.15% in July with core inflation accelerating to 4.3% and food inflation declining to 2.3%
• July trade deficit narrowed to Rs13.4bn (4-m low) led by a sharp drop in oil bill (-22% yoy) and modest recovery in exports (+2.3% yoy)
• FM Nirmala Sitharaman announced relief measures that included upfront release of Rs700bn of PSU bank recap, quicker GST refunds to MSMEs . To aid the ailing Public Sector Banks, the FM announced another round of consolidation wherein 10 PSBs were merged into 4 entities; merged entities to have better lending capacity.
• Indian Markets (Nifty -0.85%) corrected further in Aug’19, the decline was more pronounced in Small/Mid-Caps.
• On the global front, trade wars intensified as China’s retaliatory tariffs on $75 bn US imports instigated Trump to raise tariffs on $550 bn worth of Chinese imports by 5%.
• On the domestic front, pessimism prevailed with most sectors declining over last month. Withdrawal of tax surcharge on FPIs and RBI's surplus transfer of INR 1.7tn barely helped reverse the trend.

Debt Outlook

• The head line and core inflation are converging and core is moving towards 4%. As per the RBI outlook this is likely to stay in the range for coming year which is very positive for the rates cycle.
• Correction in Brent crude oil to ~US$58-60 per barrel indicates lack of demand i.e. slow world economy
• The GDP data announced came at 5% vs expectation of 5.70% says it all . This will enable RBI to ease further in the October policy. The only question arises is whether the cut is of 15bps or 40 bps.
• Liquidity is in huge surplus mode but market is yet to price this new phase. Positive liquidity is a more important tool than repo rate cut.
• Global bond yields of developed economies in the negative zone may lead to a chase of for sovereign assets which are still offering high real rates sooner than later
• We expect at least 40-65 bps cut in the policy rates in FY 20. Market may still be in denial mode which gives a window of opportunity for the long term investors
• The Jalan committee report was approved and accepted by the government and the RBI Board in which they recommended a transfer of Rs. 1.76tn to the government from profit and contingency reserves. This has made fiscal bit comfortable.
• In a nut shell key driver for returns will be corporate spread compression. It will start with AAA/PSU followed by NBFC/HFC like Bajaj/HDFC and then it may percolate to lower grade NBFC and other corporate bonds.
• We believe that the investment opportunity in short duration bond funds, banking and PSU funds, credit funds and dynamically managed duration funds is still present. Investors may look to invest in the funds depending on the scale of risk appetite and the investment horizon.

Key market events from July 2019

• The Indian economy grew by 6.8% in 2018-19, slightly lower than 7.2% in the previous Financial Year (FY). India continued to be the fastest growing major economy in the world and ranks third in terms of size after the U.S. and China.
• Industrial production grew at 3.1 per cent in May, mainly on account of improvement in power generation.. The Index of Industrial Production (IIP) had expanded by 3.8 per cent in May 2018.
• The GST Council decided to reduce GST rate on electrical vehicles (EVs) from 12 % to 5 % and on EV chargers from 18 % to 5 % from August 1, 2019. The move is aimed at accelerating the adoption of eco-friendly mobility solutions.
• The retail inflation based on the Consumer Price Index (CPI) stood at 3.05 per cent in May and 4.92 per cent in June 2018.
• Wholesale prices in India rose by 2.02 percent year-on-year in June 2019, easing from a 2.45 percent gain in the previous month and below market expectations of 2.35 percent.
• India's current account (CA) balance deficit grew to $68 billion in 2018-19 from $49 billion the previous year, according to the International Monetary Fund (IMF).
• The government's fiscal deficit touched Rs 4.32 lakh crore for the June quarter, which is 61.4 % of the budget estimate for 2019-20 fiscal.
• Non-banking finance companies, the mainstay for credit to SMEs and retail consumers, continued their slide with latest RBI data showing further compression in credit. Bank credit to NBFCs fell by over Rs 6,000 crore between April and June, once again highlighting the risk aversion towards the sector. 
• The U.S. Federal Reserve cut its key interest rate for the first time in a decade. The central bank reduced its benchmark rate which affects many loans for households and businesses by a quarter-point to a range of 2% to 2.25%.

Debt Outlook

• Market expected 25 bps repo rate cut in this meet. From that point of view 35 bps cut was a positive surprise for the market. RBI also decided to maintain the accommodative stance of monetary policy.
• Globally too, the outlook in key yields is dovish, with US Fed rate outlook remaining quite benign.
• The central bankers believe that there are more downside risks to economic growth. Parallel to this, the RBI is of the view that the inflation has limited upside risk and is likely to remain in the acceptable range. The path of CPI inflation is projected at 3.1 per cent for Q2:2019-20 and 3.5-3.7 per cent for H2:2019-20, with risks evenly balanced. CPI inflation for Q1:2020-21 is projected at 3.6 per cent
• The liquidity situation in the banking system is expected to remain positive for the foreseeable future. In that backdrop, the rates are likely to trend downwards over a period of time.
• We believe that RBI has further appetite for 25-50 bps additional cut from hereon. Although the timing may be staggered as the move will be data dependent and as the data suggests in future RBI shall act
• We believe that the investment opportunity in short duration bond funds, banking and PSU funds, credit funds and dynamically managed duration funds is available. Investors may look to invest in the funds depending on the scale of risk appetite and the investment horizon.
• Overall a dovish policy and positive for the fixed income market.

Equity Update

• Budget 2019 Highlights: Govt aims for $5 trillion economy, intends to spend INR 100tn on infrastructure over the next five years. Other highlights - Housing relief to middle class, NBFC credit enhancement, PSB capital infusion of INR 700bn, ease in Foreign Direct Investment limits in select sectors, more tax on the rich, fiscal deficit target of 3.3% of GDP
• RBI cut repo rate by 25bps to 5.75% and changed its monetary policy stance to “accommodative” from “neutral”
• FY20 GDP growth forecast was revised further by 20bps to 7.0% with GDP growth for 1HFY20 being revised down by 40bps to 6.4-6.7%. 2HFY20 GDP growth forecast range was extended to 7.2-7.5% from 7.3-7.4% earlier
• May trade deficit widened to 6-month high of $15.4bn as import growth outpaced export growth on the back of a 37% spike in gold imports. Imports rose 4.3% with only 17 of 30 major product groups showing export growth. Both gold and oil imports were up by 37.4% and 8.2% while non-oil imports expanded by 2.9%.
• April IIP picked up to 6-month high expanding to 3.4% from 0.3% in March with broad-based sectoral contribution.
• Manufacturing growth remained subdued at 2.1% with 14 of 23 industry groups showing positive growth.
• India received $42 billion in FDI in 2018, a growth of 6%. Manufacturing, communication and financial services – were the top three recipients of inflows in India.
• Current account deficit (CAD) increased to USD 57.2 billion or 2.1 % of GDP in FY19 as against 1.8 % in the previous year.
• US Fed holds rate steady, signals possibility of a rate-cut this year
• Indian markets (Nifty -1.3%) had a weak month with most sectors under-performing.

Debt Outlook:

• The head line and core inflation are converging and core is moving towards 4%. This may bring much desired comfort to the RBI.
• Correction in Brent crude oil to ~US$62-63 per barrel may further provide comfort to RBI .
• The latest comments from the RBI governor suggest that RBI is focusing on growth which indicates low interest rate environment going ahead
• Liquidity is in huge surplus mode but market is yet to believe it and price it accordingly. Positive liquidity is a more important tool than repo rate cut. Thus OMO and FX swap shall take back stage.
• FOMC has turned dovish and major part of the developed economies are yielding near zero or negative rates which will add pressure to the yields.
• We expect at least 50-75 bps cut in the policy rates in FY 20. Market is still in denial mode which gives a window of opportunity for the long term investors
• Bimal Jalan committee report will be the key event to watch and if the report indeed suggests a large number to be transferred from RBI Excess reserves to the Government, this will be positive for the markets. However different scenarios of transfer of excess reserves will have different impact across the curve depending on how it will be used.

We believe that the investment opportunity in short duration bond funds, banking and PSU funds, credit funds and dynamically managed duration funds is still present. Investors may look to invest in the funds depending on the scale of risk appetite and the investment horizon.

Equity Market Update:

• The Indian economy advanced 5.8 % year-on-year in the first quarter of 2019, slowing from a 6.6 % expansion in the previous period.
• Revenue from goods and services tax (GST) witnessed 10% growth from the year-ago period at ?1.13 trillion in April, the highest ever since the implementation of the indirect tax system on 1 July 2017. The revenue in April 2018 was Rs 1,03,459 crore
• India has moved up one place to rank as the world's 43rd most competitive economy on the back of its robust economic growth, a large labour force and its huge market size, while Singapore has toppled the US to grab the top position, a global study showed.
• The annual rate of inflation based on wholesale price index stood at 3.07 % in April compared to 3.18 % in March.
• Trade deficit for the month of April has widened to $15.33 billion, mainly on the back of increased imports and lower growth in exports. India's exports rose marginally by 0.64 % in April to USD 26 billion while imports increased by 4.5 % to 41.4 billion compared to the year-ago month. Trade deficit in 2018-19 increased to $176.42 billion, compared to $162.05 billion in the previous year.
• Industrial production in India rose 0.1 % year-on-year in February 2019, following a downwardly revised 1.4 % increase in the previous month.

Debt Outlook:

• The head line and core inflation are converging and core is moving towards 4%. This may bring much desired comfort to the RBI.
• Correction in Brent crude oil to ~US$62 per barrel may further provide comfort to RBI .
• Q4 GDP came much below expectation at 5.8% YoY. This may make RBI focus on growth, in addition to inflation targeting.
• General election is over and the NDA Government returned to power with a stronger mandate. This takes away the uncertainty of fractured coalition Government
• It is likely that RBI will continue to infuse liquidity in the market through OMO and FX Swaps
• We expect at least 25 bps cut in the policy rates in June’19 monetary policy with high probability of change in stance to accommodative - giving signal of possibility of further rate cuts in near future.
• The corporate bond spreads have normalized in PSU AAA assets upto 5yrs. However the curve remains steep and spreads on long dated PSU are wide, which provide investment opportunity.
• On longer end (5-15 years category), the yield curve can move down with a flattening bias. In 1-5 year category the same can remain steep and move with a steepening bias if the RBI gives higher than expected rate cuts
• We believe that the investment opportunity in short duration bond funds, banking and PSU funds, credit funds and dynamically managed duration funds is still present. Investors may look to invest in the funds depending on the scale of risk appetite and the investment horizon.

Equity Update:

• Maruti Suzuki Reported 17% YoY Decline In Volume In April 2019; Domestic Sales Down 19% YoY
• March Indicator Analysis Suggests Weakness - 2W sales were down17% YoY In March’19 and Domestic air passenger growth at 0.1% YoY was slowest in 69 months In March’19
• Tight Liquidity, Tight Credit, High Interest Rates, and Lack of Transmission are impacting Corporate India
• GST Collections In Apr’19 Stood At Their All-time High of INR 1.14trn
• Broad Corporate Earning Trends So Far:

Tech Sector - Broadly inline – Guidance a touch soft

Automobile - Below expectation across the board

FMCG - Below expectation across the board

Cement - Above expectation with likely improvement in pricing going ahead

Private Sector Banks - Broadly online, Strong rebound in corporate Banks

• Brent Crude Continues To Inch Higher: Oil prices recently touched six month high on the fears that USA may not grant any further waivers beyond May 2019. Upside risk persists through geo political tensions as Iran cant afford complete ban due to its fragile economy
• IMD Predicts A Near Normal Monsoon In 2019
• As EM Allocations Have Gone Up, India Has Seen Greater Deployment By FII. Year-to-date, FII Have Net Bought US$10bn In Indian Equities, The Largest Among The EM Asian Markets
• Small And Mid Cap Still Down From Peaks Despite Recent Pullback. Midcap Valuations Still At Discount to Large Caps.
• Indian Markets Higher Than Most Peers On Valuation

Debt Outlook

• The much expected rate cut has been delivered and the tone has been somewhat dovish.
• But since the stance remains neutral, market is not willing to discount more cuts despite inflation not being a real concern as of now and in the near future. Growth is becoming an area of focus for the markets now.
• RBI will continue to infuse liquidity in the market through OMO and FX Swaps
• Key issues such as election and fiscal still continue to linger. They may not let the bond yields to react to policy. Oil and credit concerns increased due to recent downgrades in NBFC’s. This added to the problems and led to widening of the bond spreads.
• We believe higher spreads in AAA upto 5 yr segment is getting more attractive. This is due to the fact that the yields are firm and chances of rate cut are high. Once we are done with the event risk and some clarity emerges; we may look to increase duration.
• We believe that the investment opportunity in short duration bond funds, banking and PSU funds, credit funds and dynamically managed duration funds is still present. Investors may look to invest in the market depending on the scale of risk appetite and the investment horizon.

Equity Update:

• As EM Allocations Have Gone Up, India Has Seen Greater Deployment By FII. Year-to-date, FII Have Net Bought US$6.6bn In Indian Equities, The Largest Among The EM Asian Markets.
• YTD, FIIs Have Bought Banks, Energy The Most And Sold Industrials, Metals/Mining
• Opinion Polls: Recent Opinion Polls Favours Incumbent NDA
• From Extreme Risk Aversion Broader Markets Have Bounced Back Very Strong
• While Political Sentiments Have Improved, Many HighFrequency Indicators Indicate Slowing Momentum
• Factors impacting Corporate India: Tight Liquidity, Tight Credit, High Interest Rates, Lack of Transmission
• Domestic Passenger Vehicle Sales Declined By 1.1% In Feb’19. Two-wheeler Domestic Sales Declined By 4.2% In Feb ‘19
• Cement Output Rose By 11% In Jan’19 While Steel Output Growth Dropped To 8.3%
• Coal output growth was 1.7% in Jan’19, While Refinery products contracted by 2.6% in Jan'19
• Air Passenger Traffic Growth Decelerated To 57-month Low Of 5.6%
• Corporate Profit Is At Lowest Point: Nifty-500 – Corporate Profit To GDP Ratio Has Touched A 15-year Low
• Indian Markets Higher Than Most Peers On Valuation
• While Valuations Not Cheap, Patience To Be Key As We Await For Earnings To Pick Up

Debt Outlook

• The RBI has decided to cut rates further by 25 bps, but has continued to maintain its stance at neutral. The central bank has also revised the inflation and the GDP forecast downwards
• The RBI has reassured that they will be actively managing liquidity and all tools are on the table, with FX swaps being an additional tool. This means OMO is likely to continue.
• Further rate cuts may be on the table, however the election and the fiscal will be watched closely. By the time we have our next policy meeting, the election will be behind us. If all goes as per market expectation, then we may get one more cut as early as next policy.
• The US Fed has also indicated that a pause in rates is round the corner. If that happens, the next move may be a cut from FOMC (Federal Open Market Committee)
• Fiscal overhang is clearly disturbing long end of the yield curve. Given the overall situation, we expect further steepening of the curve and is likely to remain same for some time.
• The credit spreads have started shrinking post the dollar swap. Since more swaps are expected, the shorter end has the potential to offer an attractive risk-reward tradeoff
• We prefer to be overweight on spread assets over gilt. We believe that credit accrual funds and such duration funds which are overweight on corporate bonds may outperform over the medium term 
• Given the overall macro picture, the RBI is creating more space to cut rates and bring liquidity to neutral. Funds with modified duration between 0.6-2 may be relatively attractive investment opportunity for investors with low risk appetite.
• However, as the curve steepens and due to supply overhang, the 10yr and above assets may spike. This may be a good opportunity to accumulate since every rise may keep limiting the downside and increase the upside. As the supply pressure abates, we expect the duration to perform most likely in around Q2 of FY 19-20.
• We believe that the window of investment opportunity in short duration bond funds, banking and PSU funds, credit funds and dynamically managed duration funds is still available. Investors may look to invest in the market depending on the scale of risk appetite and the investment horizon.

Key Events:

• RBI cuts rate by 25 bps to 6.25% from 6.50% and stance changed to ‘neutral’ from ‘calibrated tightening’.
• Dec IIP stayed subdued at 2.4% in Dec, despite improving significantly from Dec lows of 0.5% on account of contraction in mining segment and poor showing by manufacturing sector
• India's GDP has slipped to 6.6 % in the third quarter of FY19. The economy had grown 7.1% in the second quarter and 8.2% in the first quarter, logging 7.6% for the first half.
• Jan trade deficit widened to $14.7bn from the 10-month low of US$13.1bn in Dec on the back of fall in exports led by fall in petro products. Brent prices jumped up 4.1% in Dec leading to an increase in oil imports from $11.2bn from $10.7bn
• The GST collections in January rose to Rs 1.02 lakh crore, the second highest monthly mop-up after April.
• The government has approved recapitalisation of Rs 48,239 crore in 12 public sector bank.
• Prime Minister Narendra Modi launched his government’s ambitious Rs 75,000-crore scheme for farmers, the Pradhan Mantri Kisan Samman Nidhi (PM-KISAN), by transferring the first instalment of Rs 2,000 each to over one crore farmers.
• On the global front, Trump-Kim summit ended prematurely in Hanoi with the 2 leaders failing to strike a deal.
• FIIs reversed Jan’s selling trend to record inflows of ~$2.25bn, taking the YTD total to ~$2.1bn. DIIs however turned sellers for the first time since Mar 2017 with outflows of ~$86mn with the YTD total standing at inflows of ~$220mn.
• Deal activity picked up in Feb after weakness over last few months with 8 deals totaling ~$2bn.
• Indian equities (-0.4%) closed the month on a tense note as geo-pol pressures mounted following the Feb 14 militant attack on CRPF in J&K with both India and Pakistan engaging in aerial action

Observations:

• In each of the last six elections, despite the verdict being a surprise, the market did not show any significant divergence from the trend seen pre-elections. There was some occasional volatility, but no sustained impact on the indices due to elections
• Impacting Margins: Tight Liquidity, Tight Credit, High Interest Rates, Lack of Transmission
• The Capacity Utilisation Seems To Have Bottomed Out And Now Edging Closer To Average Levels
• Robust Manufacturing Activity Augurs Well For Future Capex Growth. Manufacturing PMI At 53.9 Was Second Highest In 13 Months And Took The 3mmato A 6-year High Of 53.7
• Earnings – Improving Momentum, Though Earnings Cuts Still Persist
• While Valuations Not Cheap, Patience To Be Key As We Await For Earnings To Pick Up Further
• Corporate earnings, especially of domestic oriented companies showing improving trend

Debt Outlook

• We expect that RBI will ensure sufficient liquidity such that overnight rate hovers around the repo rate. RBI may continue to use OMO or may opt for CRR to infuse liquidity in to the system
• Further rate cuts are possible as early as April. The RBI has already acknowledged that inflation is not a concern. And we have a governor whose take is that central bank should work towards bringing back growth.
• The Fed has also indicated that a pause in rates is round the corner and has official and if that happens, the next move may be a cut from FOMC (Federal Open Market Committee)
• Fiscal overhang is clearly disturbing long end of the yield curve
• The credit spreads have widened and we believe it has the potential to offer an attractive risk-reward tradeoff particularly in the short end
• For now, concerns about India’s planned record debt sale, uncertainty about upcoming elections, higher oil prices and cross border tensions will put pressure on bonds. Yields may climb as high as 7.75-7.80% before falling as some of these worries start to fade. (unless RBI announces OMO in 7.17% 2028 erstwhile10 yr benchmark which will lead to short squeeze )
• Upto 5 year Gilt and AAA rated bonds are poised to be the best beneficiaries of the present environment as the bulk of the central bank’s purchases are in the shorter-end of the yield curve.
• Going forward, sharp fall in crude and the upcoming election result may be a provide an opportunity to begin/increase allocation in duration funds
• We prefer to be overweight on spread assets over gilt. We believe that credit accrual funds and such duration funds which are over-weight on corporate bonds may outperform over the medium term
• Given the overall macro picture, the long pause (with a strong possibility of one more cut) and neutral liquidity, funds with modified duration between 0.6-2 shall be relatively better investment opportunity

Equity Update:

Key Events:

• GST Council doubled exemption limit and raised threshold for availing composition scheme providing relief to MSMEs. Council increased exemption limit to Rs.20 lakh for NE and Rs. 40lakh for rest of India and also allowed Kerala to levy 1% calamity cess on intrastate sales for a period up to 2 years.
• India's GDP is expected to grow at 7.3 % in the fiscal year 2018-19, and 7.5 % in the following two years, the World Bank has forecast, attributing it to an upswing in consumption and investment. The bank said India will continue to be the fastest growing major economy in the world.
• Nov IIP dropped to 17-month low of 0.5% (vs 8.5% in Nov 2018) grossly undershooting expectations. Manufacturing growth contracted by 0.4% while capital goods were also down 3.4%. Positive growth was seen only in 10 out of 23 industry groups in the manufacturing sector
• Dec trade deficit narrowed further to 10-month low of US$13.1bn on the back of fall in oil (3.1% YoY growth) and gold imports. Export growth has remained stagnant, staying weak across all major categories as the short period of currency depreciation does not seem to have impacted export growth.
• DII buying picked up again after a rather muted end to previous year while FIIs still remained net sellers.
• Indian equities (-0.3%) started the year flat MoM with Nifty staying firmly below the 11,000 mark. Crude made recovery amid supply cuts, as INR depreciated. Global macro concerns were in focus with slowdown in China and Fed signaled patience on further hikes

Updates:

• After Strong Outperformance In Dec-18, Large Under-performance In Jan 2019
• Crude Oil Price Off From Recent Highs, But Recovered Well In Jan
• Potential NBFC Slowdown to Have Material Economic Implications.
• Weak Auto Sales Reported In Dec-18

Debt Outlook – Long End

• The budget has not only given a surprise for the FY 20 but for FY19 as well. There is an extra borrowing of ~Rs.36,0000 Cr which has spooked the bond market as of now.
• RBI has kept the OMO support for the market and has announced Rs.36,000 Cr worth of OMO for the month of Feb and the same shall continue till March.
• With CPI remaining contained and central bankers like US Fed giving dovish commentary, the RBI may be expected to turn dovish. Due to expansionary fiscal policy, a rate cut will be a difficult call. However, can’t exclude this completely taking into account high real rates among peers.
• The credit spreads have widened and we believe it has the potential to offer an attractive risk-reward tradeoff
• Over all scenario clearly favors 1-5 year yield curve since credit spreads are also high in the segment we prefer them over gilts. Key driver of returns may be accrual and not duration.
• Going forward, sharp fall in crude and the upcoming election result may be a turning point for the call on accrual over duration
• We prefer to be overweight on spread assets over gilt. We believe that credit accrual funds and such duration fund which are over-weight on corporate bonds may outperform over the medium term

Debt Outlook – Short End

• Short term rates have come down as expectation of rate hikes has reduced over the course of last 1 month due to falling crude oil prices
• However, the yield curve is steep. We expect that yield curve may flatten from now till March end
• Earlier NBFC were running ALM mismatch and were issuing large amount of commercial paper. Post the recent refinance crisis faced by NBFC, they are correcting their ALM by issuing lesser amount of commercial papers and higher amount of NCD. We expect NBFC yield curve to remain steep in the near term

Equity Update

Key Events:

• India's November trade deficit narrowed to $16.67 billion due to a fall in gold imports. In October, the trade deficit was at $17.13 billion.
• The Reserve Bank of India left the key rates unchanged at 6.5 percent and in line with its stance "of calibrated tightening of monetary policy", cut inflation forecast to 2.7%-3.2% for the second half of this fiscal year from 3.9%-4.5%, with risks tilted to the upside. The growth forecast for this fiscal year was maintained at 7.4%.
• The government appointed Shaktikanta Das as the new RBI Governor in place of Urjit Patel. Mr Das is a retired IAS officer of the 1980 TN cadre.
• Govt sought parliamentary approval for PSU bank recapitalization for additional Rs. 410bn in order pull some lenders out of PCA ambit .
• GST collection dropped to ?94,726 crore in December 2018, lower than ?97,637 crore collected in the previous month. The total number of sales returns or GSTR-3B filed till 30 December 2018, is 72.44 lakh.
• The GST meet concluded with 6 items being removed from 28% tax bracket, while 28 items continue to remain in the slab.
• Indian equities stayed flat after Nov’s recovery (Nifty -0.1%, +3% YTD outperforming major global indices in local currency terms) despite rude falling below $55 and INR strengthening as global-risk off spooked investors.

Thrusts:

• Oil prices are stable
• INR Stabilization
• Growth on strong footing
• RBI on a glide path to ensure liquidity
• Strong Domestic Flows
• SIPs Continue To Remain Firm Consequently Inflows Continue To Hold Near The $1.2bn Mark
• Resilient Performance By Indian Equities In The Face Of Global Carnage

Drags:

• Valuation still expensive
• Earnings – Can it recover in 2019?
• Political Uncertainty

Debt Outlook – Long End

• Macroeconomic picture has changed for good. However, chances of fiscal slippage may remain given the current year is an election year but the probability for the same is low
• The 10 year gilt is in a neutral zone and trading between 7.25-7.45%. It will continue to do so till market gets clarity on fiscal discipline
• The new Governor Mr. Shaktikanta Das, believes that inflation is benign and we need to look at growth as well. Given a benign mindset we will not be surprised in case there is a policy action in the upcoming Monetary Policy Review
• RBI has become more aggressive on OMO’s and has conducted Rs50,000 Cr OMO in Dec. It has announced additional of Rs50,000Cr for the month of Jan’19. RBI has indicated that the OMO is likely to continue till March 2019. However, it is all dependent on the liquidity situation
• The credit spreads have widened and we believe it offers an attractive risk-reward tradeoff
• We prefer to be overweight on spread assets over gilt. We believe that credit accrual funds and such duration fund which are over-weight on corporate bonds, may outperform over the medium term

Debt Outlook – Short End

• Short term rates have come down as expectation of rate hikes has reduced over the course of last 1 month due to falling crude oil prices
• However, the yield curve is steep. We expect that yield curve may flatten from now till March end
• Earlier NBFC were running ALM mismatch and were issuing large amount of commercial paper. Post the recent refinance crisis faced by NBFC, they are correcting their ALM by issuing lesser amount of commercial papers and higher amount of NCD. We expect NBFC yield curve to remain steep in the near term

Key November Highlights of Equity Markets:

• The Monetary Policy Committee (MPC) kept repo rate unchanged at 6.5%. It also left LAF corridor unchanged, leaving reverse repo and MSF at 6.25% and 6.75% respectively
• Sep IIP growth slipped to 4.5% due to slower expansion in mining (0.2%) pulling down overall industrial growth. Manufacturing was up 4.6% while electricity generation rose 8.2%. Capital goods production slowed to 5.8%. Positive growth in 17 of the 23 industry groups in the manufacturing sector
• The soft patch in CPI continued with the Oct print declining further to 3.3%, marking 4 straight months of deceleration. Core inflation remained elevated at 5.8%. WPI also hit 4-month high of 5.28% reflecting the impact of pass-through of higher commodity prices and INR depreciation. Food prices witnessed softening with deflation at 1.49% in Oct.
• Oct trade deficit reverted to trend breaching US$17bn despite strong growth in exports (17.9% YoY) and lower gold imports (US$ 1.7bn vs US$ 2.6bn prev), offset by higher oil and cap goods imports (16.3% YoY). In imports, electronic goods (+32% YoY), base metals (+30%) were leaders while in exports, pharma (+13%) and textiles (+22%) revived from Sep.
• Indian equities recovered from Oct lows (Nifty +5%) as crude falling ~22% over the month stoked the bullish sentiment, driving INR up.
• FIIs turned buyers after 3 months of selling albeit of a smaller quantum, while DII buying slowed significantly with Insurance companies turning net sellers.

Debt Outlook – Long End:

• Suddenly all the problems seem to be vanishing. Crude has fallen and INR is stabilizing. Further, while RBI has maintained the hawkish guidance, but would be doing aggressive OMO Purchases of bonds.
• Gilt has moved in advance and is coming to a neutral level of 7.25% which means it is pricing neither a hike nor a cut.
• RBI has highlighted that in case the upside risk to inflation does not materialize the case for easing may open up.
• Gilt yield curve which was pricing aggressive tightening is very close to the neutral zone. Further move will depend on rate cut expectation building - if at all any space opens up in future.
• RBI has become more aggressive on OMO’s and has conducted Rs 50,000 Cr OMO in Nov and has announced Rs40,000 Cr additional support for the month of Dec. The have also said that OMO is likely to continue till march 2019. However, it all is dependent on the liquidity situation.
• The credit spreads have widened and we believe it offers attractive risk-reward tradeoff
• We prefer to be overweight on spread assets over gilt. We believe that credit accrual funds and duration fund which are overweight on corporate bonds, are likely to outperform over the medium term
• We have tactically increased the duration across, since the sharp sudden fall in oil prices and OMO purchase has changed the 10 yr trajectory. However other factors such as election risks has kept us on the side-lines

Debt Outlook – Short End:

• Short term rates have come down as expectation of rate hikes has reduced over the course of last 1 month due to falling crude oil prices
• However the curve is steep. We expect that yield curve may flatten from now till March end due to year end supply pressures

Earlier NBFC were running ALM mismatch and were issuing large amount of commercial paper. Post the recent refinance crisis faced by NBFC, they are correcting their ALM by issuing lesser amount of commercial papers and higher amount of NCD. We expect NBFC yield curve to remain steep in the near term.

Market positives:

• Domestic Growth
• Corporate Earnings
• Govt Reforms (IBC/GST etc)

Market Pressures:

• Oil Prices
• Trade wars
• Withdrawal of QE
• Credit Squeeze
• NPA cycle
• US bond yields
• Valuation
• Political Uncertainty

Key Highlights:

• India has jumped 23 spots in the new World Bank Ease of Doing Business (EODB) 2019 rankings to take up the 77th spot, with a score of 67.23.
• GST collections in October crossed the INR 1 lakh crore mark.
• Reserve Bank of India’s monetary policy committee (MPC) kept repo rate unchanged at 6.5% in its fourth bi-monthly monetary policy review for this fiscal year.
• September trade deficit narrowed to lowest levels in 5 months to $14bn from $17.4bn previously with deceleration in both exports (-2.2% YoY from 19.3% Aug) & imports (10.5% from 25.4%). Major commodity groups showed positive export growth with petroleum products (26.8%) & inorganic chemicals leading the pack (16.9%)
• September CPI print remained unchanged at 3.8% , despite a surge in global oil prices, sharp increase in winter crops MSP & below normal monsoons. Food inflation stood at 1.1%, showing little MSP pass-through yet, while core inflation (ex- transport) remained elevated at 5.7%. WPI rose to 5.13% in Sep with hardening of food & fuel prices.
• The five crucial states of MP, Chhattisgarh, Rajasthan, Telangana and Mizoram are headed into elections starting mid-Nov with 83 LS seats at stake.

Indian equities continued to be weak through October (-5%) in the backdrop of worries around liquidity tightness in the credit markets, fear of defaults, rupee depreciation and global risks.

Debt Outlook – Long End

• A depreciating INR, volatile crude oil prices and other global uncertainties may force the RBI to remain guarded. A rate hike in December remains a possibility if not a certainty
• We expect headline CPI to start rising towards 4% in the coming month and subsequently to 5%.
• With a normal monsoon, we expect food supply to provide some cushion from oil price inflation
• RBI has become more aggressive on OMO’s and has conducted Rs36,000 Cr OMO in Oct and announced Rs40,000 Cr additional support in the month of Nov.
• We maintain that the RBI needs to do a total of Rs200,000 Cr OMO but timing and choice of stock is critical.
• The 10 year yield is not easing below 7.80% - this despite declining crude prices, relatively stable INR, Rs.86,000 Cr liquidity infusion by RBI and the announcement of additional OMOs worth Rs. 40,000 Cr in Nov.
• We believe that upside risk in yield may be more in bonds. Therefore we would preferably stay away from duration and concentrate on carry.
• Currently our portfolios are running low average maturities. This enables us to allocate in higher duration easily whenever the market may provide buying opportunities.
• Over the next 6 months, markets may discount most of the negative surprises. This may eventually provide prospective buying opportunities at attractive levels.

Debt Outlook – Short End

• RBI surprised the market by keeping status quo on rates and RBI also infused liquidity through OMO. We saw 25-30 bps downward movement in yield as the market was discounting 25 bps rate hike
• However the yield curve up to 1 year was steep due to credit concern

We expect term spreads up to 1 year to reduce as credit concern abate and market gets confirmation of long pause in interest rates

• Market has its own pulls and pressure:

             Positives - Domestic Growth, Corporate Earnings, Govt. Reforms (IBC/GST etc.)

             Negatives - Oil Prices, Trade wars, Withdrawal of QE, Credit Squeeze, NPA cycle, US bond yields, Valuation, Political Uncertainty

• Crude prices are surging ahead, reaching 83.02 USD per barrel at the end of September

• Depreciating Rupee is a cause of concern
• Forex Reserves Are Down US$25.6bn From The Apr’18 Peak Of US$426.1bn
• Deposit With PCA Banks Is Fast Emerging As Bottleneck For Credit Growth
• Similarly, PSU banks under PCA have seen their market share in deposits decline from 26% in FY16 to 20% in FY18, with majority of the lost market share being picked up by Private sector banks
• Midcaps and Smallcaps corrected sharply during month
• Midcap Valuations Now Approaching Parity with Large Caps
• Domestic Flows Into Equities Remain Stable. Equity buying by domestic investors supporting markets
• While Valuations Not Cheap, Patience To Be Key As We Await For Earnings To Pick Up Further

• FII Demand Weakens - USD 6.4bn has gone out of Indian debt market in FY19 compared to inflow of USD 18.5bn in FY18
• CPI Drops - CPI declined to a 10- month low 3.7% in August 2018, lower than MPC’s medium-term target of 4.0%
• Yield Sharpens - Bond market yields rise on account of depreciating rupee and increasing Brent crude prices
• Brent Crude Climbs - Brent Oil Has Biggest 2018 gain in September as Iran sanctions rattle market at ~$83 per barrel
• Trade Deficit Widening - At $17.4 billion, India’s trade deficit in August has eased from a near five-year high of $18.02 billion in July
• Falling Rupee - In six months to September, the rupee depreciated 4.09% to close at 72.49 against the US dollar
• RBI Infuses Liquidity - The Reserve Bank of India bought 100 billion rupees of bonds on 27th Sept’18. This was also the fifth such auction by RBI in this fiscal
• Fed Rate Hike - US Fed raised interest rates by 25bps from 2% to 2.25%. This is the eighth time the Fed has hiked the rate since 2015

Debt Outlook – Long End

• A depreciating INR, rising crude oil prices and global uncertainties may force the RBI to be hawkish and go for another hike to defend the currency.
• We expect headline CPI to start rising towards 4% in the coming month and then subsequently to 5%. As the monsoon was normal, we expect food supply to provide some cushion from oil price inflation
• RBI is back with OMO and has done Rs 20,000 cr OMO in Sept and has announced Rs 36,000 cr additional support in the month of Oct. We maintain that the RBI needs to do a total of Rs 200,000 cr OMO but timing and choice of stock is critical
• The Government has announced a sharp decrease in H2 borrowing program. On the other hand, RBI announced OMO calendar for the month of October worth Rs 36,000 cr which has helped the yields rally to 7.95%. We believe it will be difficult for the bond to breech 7.90% and sustain in an environment where INR is deprecating and crude is rising. The upside risk in yields is still open and clear
• Currently our portfolios contain low average maturities. This enables us to allocate in higher duration easily whenever the market may provide buying opportunities
• Over the next 6 months, markets may discount most of the negative surprises. This may eventually provide prospective buying opportunities at attractive levels

Debt Outlook – Short End

• The short term yield curve is already steep - given the uncertainty in the macro economic variable
• Less than 1 year market is pricing in a 25 basis point hike in the upcoming policy. However, if the hike is more than expected, the yield curve may flatten
• We expect the short term yield curve to flatten as 1-3 year is discounting more than 50 bps rate hike now. However, the liquidity tightness and currency depreciation may cause some volatility. The 1-3 year curve provides adequate risk reward tradeoff.

Positive Signs:

• Domestic Growth
• Corporate Earnings
• Monsoon

Negative Signs:

• Oil Prices
• Trade Wars
• Withdrawal of QE
• US Bond Yields
• Valuation
• Political Uncertainty

Macroeconomic conditions:

• Crude is back to $77+. Crude oil imports are under US sanctions pressure, pushing up the prices
• Depreciating INR is a cause of concern. Since Jan ’18, it has depreciated by 12.6% till Sept ‘18
• Barring Autos, the current growth in most segments is at Pre-Demon level, which is subdued in business cycle context
• Domestic Consumer demand is strong
• Monsoon season rainfall for India as an average is 8% below normal
• High Frequency Indicators point to strength in Domestic Growth and Bank Credit Growth has Perked Up
• Midcaps and Small caps corrected sharply during month

Cautious Approach:

• Global Factors - Turkish Crisis, Trade Wars, High Crude Oil Prices etc.
• Fiscal deficit could be higher if: i) divestment targets of Rs.80,000 crores will not be met ii) Oil prices remain high iii) Election bound spending
• Steep Valuations
• Political uncertainty
• Indian Markets higher than most peers on valuation
• Domestic Flows Into Equities Remain Stable

While valuations are not cheap, patience is set to be key as we await for earnings to pick up further

How August 2018 unfolded:

• GDP growth surges at an 8.2% in Q1 of 2018-19. Highest growth in two years and strongest since Q1 2016.
• CPI declined to 4.2% in July 2018, lower than market expectation
• Bond market yields rise on account of depreciating rupee and increasing Brent crude prices
• Brent Crude extends ~6% in the Aug month, due to ongoing concerns over tighter global inventories tied to U.S. sanctions on Iran.
• • Sharp surge in imports led to worsening of trade deficit to $18.02bn in July’18 ($16.6bn in June’18) as against a deficit $11.45bn during July’17.
• Rupee has declined ~3.3% in August. It plunged to a fresh record of low of over 71 against US$
• Fiscal deficit has reached 86.5 per cent of the Budget Estimate.
• Foreign direct investment in India grew by 23 % to USD 12.75 billion during the April-June quarter of 2018- 19

Factors impacting the markets:

• RBI has managed to keep overnight rate close to the repo rate. As the currency is under pressure, RBI may go a little slow on the OMO purchases for adding durable liquidity. However, the overnight rate is likely to remain around repo rate
• The CPI inflation moderated sharply to a nine-month low 4.2% in July 2018 (+2.4% in July 2017) from 4.9% in June 2018 (+1.5% in June 2017)
• The core-CPI inflation remained elevated, with only a mild decline to 6.3% in July 2018 from 6.4% in June 2018; an uptick in inflation for miscellaneous items weighed against the correction in the other components
• Inflation for food and beverages eased considerably to 1.7% in July 2018 (+0.4% in July 2017) from 3.1% in June 2018 (-1.2% in June 2017), benefitting from the base effect.
• The urban CPI inflation eased to a four-month low print of 4.3% in July 2018 from 4.8% in June 2018
• The rural CPI inflation softened considerably to a nine-month low 4.1% in July 2018 from 4.9% in June 2018

Debt Outlook – Long End:

• A depreciating INR, rising crude oil prices and global uncertainties may force the RBI to be hawkish and go for another hike to defend the currency.
• We expect headline CPI to decline in the near term. Although this is subject to a normal monsoon and stability in Brent crude prices.
• There has been a pause in the OMO purchases causing further rise in yields. Going forward, OMOs are needed but the timing is uncertain, thus keeping the yields elevated. A one off OMO may cause a short rally but market needs a series of OMOs to sustain a decent rally which is unlikely in the current environment.
• The 10yr bond will have the next resistance level at 8%. A decisive break above will open up space for further strength to 8.40%. This may not be achieved in a hurry but will certainly alter the direction in the near term.
• From valuation stand point, the market is at fair levels and is largely a trading market. The market sentiments are overweighing the valuations, indicating further volatility ahead with an upward bias.
• Currently our portfolios contain low average maturities. This enables us to allocate in higher duration easily whenever the market may provide buying opportunities.
• Over the next 6 months, markets may discount most of the negative surprises. This may eventually provide prospective buying opportunities at attractive levels.

Debt Outlook – Short End:

• The short term yield curve was already steep - given the uncertainty in the macro economic variable
• As highlighted in our previous note, the short end of the yield curve may be unlikely to have an impact due to the recent rate hike. This was reflected in the yield curve in the month of August.
• We expect the short term yield curve to remain steep over the next month. However, the liquidity tightness and currency depreciation may cause some volatility

Equity Market Updates:

1. Brent Crude came dropped to USD 73.07 per barrel from USD 78.6 per barrel in the month of July 2018
2. US imposes 25% traffics on $50 billion of imports & then an additional 10% on $200 billion of imports from China, and China retaliates in kind.
3. India Pips France To Become World’s 6th Largest Economy. 10 Years Ago, India’s GDP Was Half Of France’s GDP And Now Within Striking Distance To Overtake UK.
4. Hiring Trend in Domestic Demand Driven Sectors is High. Hiring Activity sees 9% rise in June 2018 as compared to June 2017.
5. Midcaps and Smallcaps corrected sharply during the month of July
6. Domestic Flows Into Equities Remain Stable. Equity buying by domestic investors is supporting the markets.

Key Factors to watch out for:

1. Monsoon: Cumulative June-July monsoon showers have been 6% below normal.
2. Estimated 21% Earnings Growth In FY19 Would Be A Major Acceleration Over The Past Several Years

Market Performance in the last one year:

NIFTY Index - 12.3 %

NSE Midcap - 2 %

NSE Small cap - (4.6 %)

IT - 35 %

FMCG - 20.3 %

Energy - 18.2 %

Real Estate - 3.6 %

Private Bank - 11.9 %

Debt Market Updates:

1. MPC hikes repo rate by 25 basis points to 6.50%, keeps stance neutral
2. CPI rises to 5.0% in June 2018, lower than market expectation
3. Bond market Yields Soften on drop in Brent crude price and on CPI data
4. Brent Crude declined ~8% in the July monthly, largest monthly decline in 2 years
5. Trade Deficit widened to over five-year high of $16.6 billion compared to $14.62 billion in May 2018
6. PMI, rose to 53.1 in June from 51.2 in May, at the strongest pace in 2018
7. Second-quarter GDP jumps 4.1% for best pace in nearly four years
8. The Chinese economy advanced 6.7 % YOY in June. China's industrial production rose by 6 % YOY in June 2018
9. 10 year Gilt Yield became 7.7% from 7.91% in the month of July 2018
10. RBI has managed to keep overnight rate close to the repo rate. As the liquidity in the system reduces due to the increase in the Currency in Circulation, RBI may start conducting Open market operations, possibly in Q2, as against Q3 & Q4 of FY 2018-19

Debt Outlook – Long End

1. RBI hiked repo rate by 25 bps in August month. The hike was largely to anchor inflationary expectation and stem Rupee depreciation
2. We believe that the CPI has peaked at 5% on headline and is expected to decline in the near term. Although this is subject to a normal monsoon and stability in brent crude prices.
3. RBI continued the monthly trend of Rs 10000 cr OMO in July. This is likely to continue in August month as well.
4. Present gilt levels provide a real interest rate spread of more than 200 bps from peak CPI levels. At these levels, the yields may be already discounting additional 1 to 2 rate hikes (if any). However the higher oil price and Rupee depreciation remains the key source of risk
5. The 10 year bond has reached 7.70% post the rate hike and needs some large stimulus for a meaningful rally below 7.60-65%
6. From valuation stand point, the market is at fair levels and is largely a trading market

Debt Outlook – Short End

1. The short term yield curve was already steep given the uncertainty in the macro economic variable

The extreme shorter end of the yield curve up to 3 months had moved up during last week of July 2018 on account of IPO related outflow and demand for funds

•        GDP Growth: India's GDP grows at robust 7.7% in Q4 of FY18, full year growth at 6.7%.

•        Karnataka Elections: BJP emerged as the single largest party (104 of 222 seats). Post-election, we saw major upheaval with BJP first forming the government before subsequently the Cong-JD(S) coalition coming to power with H D Kumaraswamy sworn in as CM.

•        Monsoon: The south-west monsoon hit Kerala on 29 May, 3 days ahead of schedule. India is likely to witness the third successive normal monsoon with IMD forecasting a normal monsoon at 97% of long period average.

•        Trade Deficit: Apr trade deficit remained unchanged at $13.7bn, while exports expanded 5.2% YoY led by growth in engineering goods, drugs and pharma. Imports growth slowed further to 4.6% (lower than previous 7.1%).

•        Inflation: CPI inflation spiked for the first time in 3 months, rising to 4.58% from 4.28% in Mar, higher than expectations. Core inflation (CPI ex-food ex-fuel) surprised with a 5.9% rise YoY from 5.4% in Mar. Wholesale prices also breached a fourmonth high of 3.18% in the month, on the back of rising crude oil and food prices.

•        Indian equities moved sideways in May on the back of mixed political news, Q4 results and outflows from FIIs and FPIs.

·         RBI surprised the markets by announcing the OMO of INR 10,000 cr in the beginning of the month which took the 10 yr bond yields down to 7.55%. However it was short lived as the follow through OMO announcement did not come and Brent crude oil prices hit 80$ which took the 10 yr bond yields to 7.94%, with the month closing at 7.83%.

·         The 10 yr Gsec spread vis-a-vis the repo rate is now at 183 bps. These levels are similar to those witnessed in the 2013 cycle in wake of the currency crisis.

·         The CPI is expected to Inch up to 5-5.50% by July and peak around these levels: if we have normal monsoon, Brent stabilizes at current levels of 70-80$ mark; and there is nominal increase in MSP.

·         The present gilt levels provide a real interest rate spread of more than 200 bps from peak CPI levels indicated above. Thus at these levels, the yields may be already discounting 1 to 2 rate hikes.

·         Given that the Brent is hovering around 75- 80$ mark and Q4 GDP print was better than expected; the probability of 1-2 repo rate hikes in calendar year 2018 has increased. However, as it is already priced in current yields across the curve, forward guidance and tone of monetary policy will decide the direction of yields.

·         The yield levels at the shorter end are also discounting 1-2 rate hikes. Going forward, we expect the short term rates to stabilize around current levels with minor volatility.

·         RBI left the policy rates unchanged in the April policy. RBI lowered their projections for CPI inflation: CPI is now estimated to range between 4.7-5.1% in H1FY19 and 4.4% in H2FY19. 

·         The India Meteorological Department(IMD) forecast says that there will be 97% normal monsoon for the year 2018-19.

·         Mar trade deficit widened to $13.7bn from $12bn last month as exports slipped into YoY contraction led by decline in gems & jewellery and textiles. Imports growth slowed but stayed positive at 7.1%. With this, FY18 trade deficit rose to $156.8bn (~6.4% of GDP) from $108.5bn last year (~4.9% of GDP).

·         India’s Industrial Production data for the month of Feb stayed buoyant at 7.1% which was higher than consensus estimates of 6.8%. While base effect post demonetization has been supportive, the double-digit expansion in 10 out of 23 manufacturing sector suggest broad-based strength. Growth in capital goods rose to 20% YoY, highest in 28 months.

·         India added around 34.6 lakh people to the formal workforce between September 2017 and February 2018, according to payroll data released by Employees' Provident Fund Organisation (EPFO) and National Pension System (NPS) for the first time.

·         Domestic mutual fund holdings in Indian Equities increased further to 6.6% (+24bps Q/Q) and at life time highs, continuing the strong momentum up 200bps since Sep-16 (pre-demon quarter).

·         Indian equities (Nifty 50 +6.2%) saw some recovery post the YTD correction as early earnings trends across sectors were broadly supportive. Outcome of Karnataka state elections and MSCI rebalancing will be keenly monitored by investors this month.

·         Inflation : 

– The CPI inflation moderated to a five-month low 4.3% in Mar 2018 (+3.9% in Mar 2017) from 4.4% in Feb 2018 (+3.7% in Feb 2017, as vegetable prices eased further on fresh supplies. However core inflation, that strips out the impact of food and fuel prices, continued to rise hitting a 43-month high at 5.4%

– Inflation based on wholesale prices eased marginally to 2.47% in March (2.48% in Feb 2018) on cheaper food articles, especially pulses and vegetables. WPI was 5.11% in March last year.

·         Trade Data :

– India's merchandise exports fell 0.7% to US$ 29.11 billion in March 2018 over a year ago,

– imports moved up 7.1% to US$ 42.80 billion.

– The trade deficit jumped 28.6% to US$ 13.69 billion in March 2018 from US$ 10.65 billion in March 2017.

·         Monsoon 2018: The India Meteorological Department (IMD) forecast says that there will be 97% normal monsoon for the year 2018-19, which could be a good news for the rural economy that suffered due to the twin impact of drought years and demonetisation.

·         GST Collection :First time since the rollout of the new tax regime in July 2017, the Goods and Services Tax (GST) collection crossed ?1 trillion in the month of April this year.

·          Monetary Policy: The RBI left its key policy rate unchanged at 6% for the 4th meeting on Apr 5, 2018. Policymakers said the decision is consistent with the neutral stance of monetary policy.

·         Manufacturing sector activity improved marginally in April, rose from 51.0 in March to 51.6 in April, indicating faster improvement in the health of the country’s manufacturing economy than in the prior month.

·         India’s industrial output grew 7.1 percent in February from a year earlier, government data showed.

·         Rating agency Fitch kept India’s sovereign rating unchanged at BBB-, the lowest investment grade for the 12th year with stable outlook even as it praised the implementation of the Goods and Services Tax (GST).

·         The World Bank noted that the Indian economy has recovered from the effects of demonetisation and the GST and predicted a growth rate of 7.3% for the country in 2018.

·         India will again emerge as the world’s fastest-growing major economy at least for the next two years, the IMF said. India’s growth will rise steadily to 7.4 % for 2018-19 and 7.8 % for 2019-20, against 6.7 % in 2017-18.

·         North Korean leader Kim Jong Un and South Korean President Moon Jae-in agreed to finally end a seven-decade war this year, and pursue the “complete denuclearization” of the Korean Peninsula.

·         RBI provided roadmap wherein the FPI limits would increase by 0.5% each year to 5.5% of outstanding stock of securities in 2018-19 and 6% of outstanding stock of securities in 2019-20.

·         India's GDP for the third quarter of 2017-18 grew at 7.2%.

·         The government unveiled a Rs 2.88 lakh crore market borrowing roadmap for the first half of FY19, which would be 22.6 % lesser than Rs 3.72 lakh crore raised during the same period last financial year.

·         India’s Industrial Production data for the month of Jan stayed strong at 7.5% which was higher than consensus estimates of 6.4%. This was led by capital goods which was up 14.6% and Consumer NonDurables which was up 10.5% similar to what we have seen in the Oct-Dec period.

·         CPI inflation eased for the second consecutive month to 4.4% in Feb (from 5.1% in Jan). This was partly led by a decline in vegetable prices along with normalization in the underlying CPI ex of the outliers (ie vegetables, pulses, transportation and housing) from 4.3% to 4%.

·         During the month, one of BJPs’ key allies TDP pulled out of the NDA alliance over the issue of granting special status to the state of Andhra Pradesh.

·         Election results for 3 bye-polls – 2 in the state of UP and 1 in the state of Bihar came out during the month and the BJP lost out in all 3 of them.

·         Capital market activity saw a pickup in Mar with 27 deals totaling $6.4bn during the month. Among the key ones were the IPOs and large $1.4bn block deal in TCS where Tata Sons sold part of their stake.

·         Indian equities (-3.6%) saw deepening of the YTD correction in March as concerns over a global trade war escalated during the month and the BJP suffered political setbacks in by-polls as well as with its erstwhile ally TDP in Andhra on the domestic front.

·         Inflation :

– The CPI inflation eased sharply to a four-month low of 4.4% in February 2018 (+3.7% in February 2017) from 5.1% in January 2018 (+3.2% in January 2017). This was due to easing prices of vegetables and fruits

– Annual wholesale price inflation last month eased for the third straight month in February to 2.48%, from a provisional 2.84% rise in January, helped by a softer rise in food and fuel prices.

·         Trade Data :

– India's exports increased by 4.5% to $25.8 billion in February 2018 as compared to $24.7 billion in February 2017.

– Imports rose by 10.4% to $37.8 billion in February.

– This led to narrowing of the trade deficit to $12 billion, its lowest in five months.

·         The Nikkei India Manufacturing Purchasing Managers Index (PMI), fell from 52.1 in February to a five-month low of 51.0 in March, indicating the slowest improvement in operating conditions recorded by the survey since last October.

·         Fiscal Deficit: India's fiscal deficit for the April-February period ballooned to Rs 7.16 lakh crore, which is 120% of the revised target for FY 18.

·         The government unveiled a Rs 2.88 lakh crore market borrowing roadmap for the first half of FY19, which would be 22.6 % lesser than Rs 3.72 lakh crore raised during the same period last financial year.

·         GST collections slid for the second straight month to Rs 85,174 crore in February as only 69% of the assesses filed returns.

·         The US economy expanded an annualized 2.9% on quarter in the last three months of 2017, higher than 2.5% in the second estimate.

·         Parliament passed a key bill that will empower the government to enhance the ceiling of tax free gratuity to Rs 20 lakh from the existing Rs 10 lakh for employees falling under the Payment of Gratuity Act.

·         The United States Department of Commerce (USDoC) has raised anti-dumping duty on shrimp exports from India to 2.34% from 0.84%, a move which will lead to “some margin compression” across the supply chain.

·         The World Bank projected India’s GDP growth at 7.3% for the next financial year and accelerate further to 7.5% in 2019-20.

·         India’s 3Q GDP rebounded to 7.2% as negative supply shocks on account of the demonetization and GST seem to be fading away. Investment growth surged to double digits from 8.9% last quarter to 13% in 3Q in line with what we have been seeing with some high frequency indicators.

·         RBI kept its policy rates unchanged in line with street expectations however inflation forecasts were pushed up and growth forecasts pared down – indicating likely difficult policy challenges going forward.

·         Jan trade deficit widened to $16.3bn which is well above the recent average of $13.4bn – this was driven by a strong acceleration in imports to $40.7bn (+26%) as well as a slowdown in exports to $24.4bn (+9%) which was particularly pronounced in textiles and gems & jewellery.

·         India’s cabinet approved a plan to allow private companies to bid for coal mines for commercial production, a move that would help the country cut imports and boost local production.

·         India replaced Germany to reclaim the third spot on the Hurun Global Rich List 2018 with 131 billionaires. India added 31 new billionaires over the last year while the combined wealth of the Indian billionaires increased by 49% to $454 billion.

·         Indian equities (-4.9%) gave up all the gains from the early part of the year in the month of Feb with the heightened global volatility weighing on sentiment and FIIs turning large net sellers. The introduction of LTCG in the budget and the unraveling of the massive ~$2bn scam involving PNB and heightened global volatility were also viewed as a dampener by market participants.

•        GDP:

– India regained its status as the world's fastest-growing major economy in the Oct-Dec quarter ie 7.2%, surpassing China for the first time in a year as government spending, manufacturing and services all picked up.

• ·         RBI keeps Repo rate and Reverse repo rate unchanged at 6% and 5.75% respectively in its latest monetary policy.

• ·         Inflation :

o   CPI inflation for January eased to 5.07 %, compared to a 17-month high of 5.21 % in December.

o   The WPI for the month of Jan was recorded at 2.84%; easing further on lower food prices as compared to 3.58% in the previous month.

• ·         Trade Data :

o   Merchandise exports increased 9.1 % to $24.38 billion in January compared to a year ago,

o   Imports surged 26 % to $40.68 billion.

o   Trade deficit jumped 64.6 % to $16.30 billion in January.

• ·         India's manufacturing sector growth eased slightly in February to 52.1 from 52.4 in January indicating a factory output and new business orders rose at a slower pace. 38

• ·         The interest rates on provident funds declared by EPFO for FY 2018 was pegged at 8.55%

• ·         The Indian service sector remained in expansion mode in Jan, registering the fastest rise in activity in three months. The seasonally adjusted Nikkei Services Business Activity Index improved to 51.7 in Jan, up from 50.9 in Dec

• ·         India’s cabinet approved a plan to allow private companies to bid for coal mines for commercial production, a move that would help the country cut imports and boost local production.

o   In its latest outlook, the IMF raised its forecasts for global growth to the fastest since 2011, upgrading projections for major economies including the U.S., Germany and China. India to reclaim its tag as the fastest growing major economy at 7.4% and 7.8% in FY 18 and FY 19 respectively.

o   Government announced the much awaited details of the Rs2.11tn bank recapitalization plan unveiled in Oct17 with capital infusion of ~Rs880bn (~$13.8bn) into public sector banks in this fiscal year.

o   GST Council cut tax rate on 29 goods, including second-hand vehicles, confectionery and bio-diesel, while veering around to simplifying return filing process for businesses.

o   The government collects Rs 86,703 crore as GST for December as against Rs 80,808 crore in November.

o   Nov IIP surged to 8.4% vs 2.2% in Oct led by manufacturing sector. Capital goods output improved further to 9.4% vs 6.6% in Oct. Electricity production inched up to 3.9% vs 3.2% and mining also rose marginally to 1.1% in Nov.

o   Dec trade deficit rose to 3 year high to $14.88bn vs $13.8bn in the previous month led by rally in crude, and gold prices.

o   Indian equities (+4.7%) started the year on a strong note with Nifty crossing the 11100 mark.

o   Inflation :

– Retail inflation stood at 5.21% in the month of December 2017 - higher from 4.88% in November 2017 and 3.41% in the similar month of previous year.

o   Trade Data :

– India's exports grew to $27.03 billion (up 12.36%) last month from $26.19 billion in November 2017.

– Imports during the month, posted a sharper rise of 21.12 per cent to $41.91 billion led by gold, silver, precious stones, petroleum and electronic goods.

– This widened the trade deficit to $14.88 billion in December 2017 compared to $10.54 billion in December 2016.

o   Growth of the eight core sectors slowed to a five-month low of 4 per cent in December 2017 due to negative performance of segments like coal and crude oil.

o   U.S. economic growth unexpectedly slowed (slowed to 2.6% from 3.2% in third quarter) in the fourth quarter as the strongest pace of consumer spending in three years resulted in a surge in imports. This brings the growth in 2017 to 2.3%.

o   Federal Reserve officials, meeting for the last time under Chair Janet Yellen, left borrowing costs unchanged while adding emphasis to their plan for more hikes, setting the stage for an increase in March under her successor Jerome Powell.

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NFO Period: January 29^th, 2018 to February 12^th, 2018.

• ·         Close-ended Multicap fund structure allows the Fund Manager the freedom to fully invest without cash flow issues.
• ·         Take a longer term performance perspective.
• ·         Flexibility to move across market capitalization.
• ·         Small portion of NAV goes into Put Buying to hedge the Fund & limit downside risk.
• ·         In a declining market , put option appreciates in value allowing profit booking to invest in stocks at lower Nifty levels.

Please click here to know more about the fund

§  BJP won its 6th consecutive term in Gujarat with 99 of 182 seats and also secured a comfortable win in Himachal Pradesh with 44 of 68 seats. Key to note in Gujarat is while BJP has done well in urban seats the race was tighter than expected for the rural seats.

§  In line with street expectations, RBI held status quo on policy rates at 6% (voted 5-1) and maintained neutral policy stance. The MPC statement however struck a vigilant tone on inflation and revised its 2HFY18 CPI forecast marginally higher to 4.3-4.7% from 4.2-4.6% earlier.

§   The Finance Ministry notice in the last week of Dec confirmed fears of fiscal slippage as it announced extra borrowing of INR 500 bn (0.3% of GDP) through government bonds over and above the budgeted net borrowing of INR 3482 bn for FY18.

§   Oct IIP slowed to 2.2% vs 3.8% in Sep as manufacturing sector slowed to 2.4% vs 3.4% last month. Capital goods output was in the green for the 3rd straight month.

§  FIIs reversed position to net sellers in Dec after 2 consecutive months of buying with net outflows $ 1025mn. The total net inflows from FIIs for the year 2017 stood at $7.8bn. DIIs continued to remain buyers for the 9th straight month with net inflows of $1.2bn led by Mutual Funds at $951mn.

Macro Data:

§  India reported a fiscal deficit of 6.12trillion Rs($95.77 billion) for Apr-Nov, or 112% of the budgeted target for the current fiscal year that ends in Mar. This was mainly due to lower GST collections and higher expenditure.

§   The RBI kept the repo rate unchanged at 6% in its latest credit and monetary policy review, as was widely expected given the concerns on the rising headline inflation and firm global crude oil prices.

§   Inflation : Retail inflation soared to a 15-month high of 4.88% in November mainly due to higher food prices.

§  Trade Data : India's exports rose at a fast clip in November, reversing the contraction in the previous month. Value of exports was $26.2 billion against imports of $40 billion, yielding a trade gap of $13.8 billion, higher than $13.4 billion same month last year but less than $14 billion in October.

§  Eight core sectors grew by 6.8% in November 2017, on robust performance in segments like refinery, steel and cement. Favourable base effect also helped.

§  India's factory activity expanded at the fastest pace in five years in December, buoyed by a rise in output and new orders, which allowed firms to raise prices. The Nikkei Manufacturing Purchasing Managers' Index, rose to 54.7 in December from November's 52.6.

§  The government reduced the interest rates on small saving schemes, including National Savings Certificates (NSCs), Public Provident Fund (PPF) and Kisan Vikas Patra (KVP), by 0.2% for the fourth quarter of the fiscal (January-March).

§  The U.S. economy grew at its fastest pace in more than two years in the third quarter, powered by robust business spending, Gross domestic product expanded at a 3.2 % annualized rate last quarter.

§  US Federal Reserve officials followed through on an expected interest-rate (target range of 1.25% to 1.5%) increase and raised their forecast for economic growth in 2018, even as they stuck with a projection for three hikes in the coming year.

Click Here For Outlook 2018

Ø  Macro Data:

• ·         The government's fiscal deficit during the first seven months (April-October) of the current fiscal was Rs 5.25 lakh crore, or 96.1% of the budgeted target for the current fiscal year that ends in March 2018.
• ·         Inflation :

– Consumer prices in October rose 3.58 % over the same month last year, on the back of rising food and fuel prices. CPI inflation in September was revised to 3.28 %

– Wholesale inflation picked up in October to a six-month high to 3.59% in October driven by faster rises in prices of food and fuel products.

• ·         Manufacturing activity improved in November to its highest level since October 2016 on the back of growth in new orders and output. The Nikkei India Manufacturing Purchasing Managers’ Index recorded a value of 52.6 in November, up from 50.3 in October.
• ·         Eight core sectors grew at a slower pace of 4.7% in October, chiefly due to subdued performance of cement, steel and refinery segments.
• ·         The country’s Index of Industrial Production rose 3.8 % in September, compared with the revised 4.5 % in August (a nine-month high) and 5.7 % in September last year.
• ·         The RBI cancelled a bond sale via open market operation worth Rs 10,000 crore scheduled, citing “evolving liquidity conditions

Ø  Trade Data :

• ·         India’s merchandise exports declined for the first time in 14 months in October as exporters struggled with a liquidity crunch because of delayed refunds under the goods and services tax (GST) regime.

– Exports fell 1.1% in October to $23.1 billion (against $28.6 billion in September,2017) while imports expanded at the slowest pace in 10 months at 7.6% to $37.1 billion (against $37.6 billion in September)

– India’s trade deficit in the month was $14 billion (against $9 billion in September)

Ø  India’s Rating:

– Global rating agency Moody’s upgraded India’s sovereign bond rating for the first time in nearly 14 years. It lifted the India’s rating to Baa2 from Baa3, changed its rating outlook to stable from positive as “risks to its credit profile were broadly balanced.

– Global rating agency Standard and Poor on Friday retained India’s sovereign rating at BBB- with a stable outlook

Ø  GST:

– The GST Council reduced rates on 210 items of which 180 were in the top 28 per cent bracket.

– A uniform 5 per cent tax was prescribed for all restaurants, both AC and non-AC

·         Sovereign Rating Upgrade: India’s improving growth outlook and structural reforms agenda got a boost with Moody’s upgrading India’s local and foreign currency rating to Baa2, a notch above Baa3 earlier. Moody’s cited reforms such as GST, measures to address the banking system NPL, Aadhaar-enabled direct benefit transfer etc.

·         The Q2 GDP print came in at 6.3% reversing the decelerating trend. The recovery was led by manufacturing which saw a smart rebound to 7%. In terms of expenditure, both private and govt consumption growth remained weak but investments i.e: GFCF (Gross fixed Capital Formation) growth improved to 4.7%. Net exports were up marginally as well.

·         India’s rank improving by 30 places in World Bank’s Ease of Doing Business Survey supporting the view of transitions being underway in the economy.

·         The Central Cabinet approved an ordinance approving an amendment to the Insolvency and Bankruptcy Code to prevent wilful defaulters from bidding for stressed assets.

·         FIIs finally turned into large net buyers once again with $2.8bn of buying in November; taking the YTD net buying to $8.6bn. DIIs remained buyers to the tune of $1.4bn in November; which took the DII YTD tally to a staggering ~$12.8bn. Mutual Funds once again drove the inflows with $1.6bn being poured-in; while Insurers were small net sellers of $220mn.

·         Capital market activity swelled in Nov-17, with some sizeable IPOs like HDFC Life and block trades like that in Bharti Airtel.

Macro Data:

• ·         Inflation :

– Consumer prices in September rose 3.28 % over the same month last year. CPI inflation in August was revised to 3.28 %

– Wholesale inflation fell to 2.60% in September as prices of food articles, led by vegetables, softened.

• ·         India’s factory output rebounded strongly to a nine-month high of 4.3% in August as companies stepped up production to restock warehouses ahead of the festival season, after they reduced output in June and July owing to uncertainties regarding implementation of the goods and services tax (GST).
• ·         Services sector activity expanded for the first time in three months in September -- but only slightly. The Nikkei India Services PMI stood at 50.7 in September -- from 47.5 in August.
• ·          India’s fiscal deficit at the end of the first half of the current fiscal touched 91.3% of the budget estimate, mainly due to rise in expenditure. In absolute terms, the fiscal deficit was Rs4.99 trillion during the April-September period of 2017-18.
• ·         Trade Data :

– India’s merchandise exports grew (rose 25.7% to $28.6 billion) at the fastest pace in six months in September, on the back of expansion in shipments of chemicals, petroleum and engineering products

– While imports too rose by 18.09 % to USD 37.6 billion in September from USD 31.83 billion in the yearago month.

– Trade balance stood almost flat at USD 8.98 billion in September 2017 against USD 9 billion in September 2016

                           Economical Update:

• ·         The finance ministry announced a Rs2.11 trillion bank recapitalisation plan for state-owned lenders weighed down by bad loans, seeking to stimulate the flow of credit to spur private investment.
• ·         Out of the total commitment, Rs1.35 trillion will come from the sale of so-called recapitalisation bonds. The remaining Rs76,000 crore will be through budgetary allocation and fundraising from the markets.
• ·         India jumped 30 spots to secure a place among the top-100 countries on World Bank's ease of doing business ranking list in 2018.
• ·         Bharatmala highway road project launched: Finance Minister Arun Jaitley announced a number of highway/road projects at an estimated cost of Rs 7 lakh crore.
• ·         The Railways is looking to invest over USD 150 billion over the next five years which would help create one million additional jobs.
• ·         Narendra Modi’s ambitious National Investment and Infrastructure Fund has got a major boost with the Abu Dhabi Investment Authority committing to put in up to $1 billion.
• ·         The RBI left its key interest rates unchanged, while slashing the statutory liquidity ratio (SLR) by 50 basis points.

·         Game changing event unveiled by Finance Ministry – recapitalisation of PSU banks to tune of Rs 2.1 lakh crores announced. The two components of the plan are – issuing recapitalization bonds worth Rs1.35trn (~0.8% of GDP) and Rs760bn through fiscal resources and capital raise.

·         Government has announced ambitious plans to develop 83,677km of roads with an investment of Rs6.92trn over the next five years with Bharat-Mala scheme. The funding will be mix of Government funds, debt and private investment.

·         Aug IIP surged to 4.3% vs 1.2% in Jul, the highest since demonetisation indicating normalization post GST rollout. Manufacturing output rebounded to 3.1% in Aug as Capital Goods recorded 5.4% growth after months of decline. Mining expanded to 9.4% vs 4.8% in Jul and electricity generation also picked up to 8.3% vs 6.5% in previous month

·         India World Bank business ease ranking improves to 100, jumping 30 points from previous survey

·         Deal activity stayed strong in Oct with total of 19 deals amounting to ~$3bn largely led by primary market.

·         Indian equities (+5.6%) rallied in Oct led by Government’s large scale recapitalization plan to boost public sector banks and continued domestic inflows.

Equity Market

• Series of Articles on Economic Slowdown appeared in the Media creating doubts in the minds of Investors.
• Significant tension over developments in North Korea and subsequent posturing by US President Donald Trump pointing to increased escalations led to global jitters, impacting Indian equities.
• Since government has significantly front-ended capex, deficit has already reached 96%(Apr-Aug) of full year budget estimate. With inflation also bouncing off from its lows, bond yields and Indian rupee traded a bit weak during the month.
• Clamor for government’s need for a stimulus gained ground – from recapitalizing PSU banks to providing sops to communities impacted by GST.
• FII selling intensity was the highest on a monthly basis after Jan 2008. Continued strong flows to Mutual Funds and other DII absorbed most of the FII selling during this period.
• High frequency indicators suggest an encouraging trend for multiple consumption categories, however private capex and bank credit continue to be subdued.

   Debt Market

• India’s GDP growth slumped to a three-year low of 5.7% during April June—lagging China for the second straight quarter —as manufacturing slowed ahead of the GST launch amid demonetisation effect.
• Factory output grew unexpectedly in August to bring the country’s manufacturing sector back into growth zone on surge in new business orders after the GST-related contraction in July, a monthly survey showed. The Nikkei India Manufacturing Purchasing Managers’ Index (PMI) rebounded to 51.2 in August from a low of 47.9 in the previous month, indicating a substantial turnaround from July’s contraction amid confusion over the new GST (Goods and Services Tax) regime.
• India’s fiscal deficit at July- end touched 92.4 % of the budget mainly because of front loading of expenditure by various government departments.
• Monetary Policy: 

1. The RBI, in its fourth bi-monthly policy review for 2017-18, kept the repo rate unchanged at 6 percent.
2. Reverse repo has been retained at 5.75 percent.
3. Cuts economic growth forecast to 6.7% from 7.3% for FY’18.
4. Projects inflation at 4.2-4.6 pc in the second half.
5. Focus on keeping headline inflation close to 4 pc on a durable basis.

The market continues to swing from end to end. As I write this, the market is consolidating at its peaks but remains steady. At one end the growth moderation has caused some concerns. But at the other end is the uptick in the industrial production as marked by IIP. In July, IIP grew by 1.2% yoy against -0.1% in June. In Aug-17, exports picked up by 10% over the last year. But we will have to wait and see if this trade growth is more sustainable.

Point remains that there are some issues. But the structural reforms have come in. The push for transparency in capital management, tax compliance and general corporate governance may stimulate entrepreneurship. This is likely to result in sustainable long term growth over a period of time. Having said that, much needs to be done on the policy front.

The initial teething troubles howsoever temporary, have an economic cost. Simplification and ease of doing business are the hallmarks of GST; and that principle must be ensured.

The monetary policy stance continued to remain unchanged for October 17. Inflation concerns are clearing dominant in central banker??s risk matrix. Growth may now increasingly be dependent on the swift resolution of the stressed banking assets; and the resumption of the banking credit to the commercial sector.

In this backdrop, the market valuations may appear on the higher side to some. Especially to those comparing their experiences with the 2007- 08 market. But we forget that that market fell because the rest of the world was in a major global crisis then. No such shock risk is on the horizon. At least in the financial space for now.

Moreover, FIIs sentiments decided the market direction in 2008. But in 2017, domestic institutions, especially the Mutual funds have emerged as the major force in the equities market. And they are adding depth to the market. It's likely that major indices may remain range bound with some volatility from time to time. However, value may be available for picky fund managers. And such funds are likely to lead the performance pack henceforth.

The Aum inflow in the mutual funds industry continues to remain robust. The Q2 quarter has seen an incremental growth of around Rs 1.42 Lakh crore over Q1 FY18. That is a Q-o-Q growth of around 7%. Kotak Mutual Fund Average Aum for July-Sept 17 quarter was at around Rs 1.10 lakh Crore. We saw an average Aum growth of around 9% Q-o-Q in the said period. We remain convinced that this trend is set to continue as more and more households reallocate their savings from physical to financial assets.

The opportunity for us as investment professionals is to now provide a robust service structure and build sacred trust with the retail investors. We must remember that not all investors are Kumbhakarna. Many investors tend to adopt an Ekalvya route with their investment decisions. And unless such an investor is focussed, disciplined and self-learning, the possibility of getting exposed to high risks is rather huge. Therefore we would need to help them appreciate the quality of our advice/service in generating alpha for the investors. And such businesses who do that; will be able to retain most of their investors through the market cycle.