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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§  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.

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



– 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.