21/07/2016
Economic Data
Rates: The monetary policy meeting in the month of June led to the benchmark rates being unchanged. The tone was hawkish with a focus on the upside risks in relation to a rise in inflation.
Growth: April's Index of Industrial Production (IIP) declined by 0.8% Year on Year (Y-O-Y), which was significantly lower than market expectations. The disappointment was led by a weak demand in the consumer non-durables and capital goods category.
Inflation: May's Consumer Price Index (CPI) was at 5.8% Year on Year (Y-O-Y), which was higher than market expectations. The same was led by elevated food prices. Wholesale Price Index (WPI) was at 0.8% Year on Year (Y-O-Y). This was also a high number as per market expectations vis-à-vis commodity and food prices.
Trade Deficit: May's trade deficit inched up to $6.3bn in comparison to $4.8bn in April but the average monthly trade deficit for April-May stood at $5.5bn, which was in contrast to $9.8bn in the previous year.
Equity Market
Nifty gained 1.56% and Sensex gained 1.24% during June. The month was eventful on the policy front as various vital policies were announced across important sectors. The Government announced an increase in the Foreign Direct Investment (FDI) limits in sectors like Aviation, Defence , Media, and Single brand retailing. The Union Cabinet also approved of the 7th Pay Commission's recommendations for a 24% hike in wages for 10 million government employees. The Cabinet approved of the Civil Aviation Policy with a key focus on enhancing regional connectivity.
While Domestic growth and inflation indicators were disappointing, the monsoon's progress however improved towards the end of the month which reduced seasonal deficit to 11%.
The key external event was Britain's decision to leave the European Union (EU).
Deal activity was subdued in June with 7 deals amounting to $383 million. The key deals were the Mahanagar Gas Initial Public offer (IPO) of $154 million in the primary market and Providence's 3.4% stake sale in Idea Cellular ($206 million) in the secondary market. Foreign Institutional Investments (FII's) saw a slight uptick of $716million in the month of June in comparison to May, bringing in their Year-to-date (YTD) tally to net inflows of $2.9 billion. Domestic investors reversed their position to net sellers from a notable buying phase in May with net outflows of $324 million in the month, with a Year-to-date (YTD) inflow of $1.5 billion. Among Domestic Institutional Investments (DII's), Insurance companies led the selling bracket with a $364million outflow while Mutual funds were purchase marginally to the tune of $40 million in June.
Outlook
The Monsoon session of the parliament is scheduled to begin from the 18th of July. Expectations are high given that the long pending Goods and Service Tax (GST) legislation could be passed by the Rajya Sabha in this session.
1st quarter result season and progress of south-west monsoon are expected to bring in positive sentiments in the market in terms of a shorter term.
Nifty traded at 18.6x and 15x - FY17 and FY18 earnings respectively, for a related earnings per share (EPS) growth expectation of 15.2% and 24.7%. Earnings were cut by a marginal 1.5% each for FY17 and FY18 over the last quarter.
Valuations for the broad market at 15x forward earnings are broadly aligned with long-term averages as renewed government spending, commodity rebound; large non-performing asset (NPA) recognition and better rural outlook provided the earnings are visible.
Accelerating reforms and growth built upon a platform of stable macro-economic signifies that India continues to standout globally amongst emerging market peers on account of stable domestic flows.
Fixed Income Market
The bond market traded in a narrow range ahead of US Federation policy (middle of the month) and the UK referendum vote (popularly known as Brexit vote).
US Federation policy makers did not uplift the rates as they chose to wait for the result of the Brexit vote.
Towards the month end, in a historic referendum, the people of the United Kingdom (UK) chose to leave the European Union (EU). Post Brexit, Great British Pound (GBP) lost about 10% in global equity markets on account of huge sell-offs. Bond yields across the globe eased.
At home, Reserve Bank of India (RBI) delivered the June policy and kept all the policy rates unchanged. Reserve Bank of India (RB)I showed some discomfort with the rising Consumer Price index (CPI) inflation and chose to wait for more inflation data and monsoon progress before easing the rates further.
In an unexpected move, Dr Rajan decided not to continue as governor of the Reserve Bank of India (RBI) for a second term. Bond yields rose sharply to 7.55%, recording a 10 year high. High Consumer Price Index (CPI) coupled with Dr Rajan putting in his papers led to yields underperforming until Brexit. Post Brexit, the absence of Foreign Institutional Investments (FII's) selling and weak global growth outlook pushed yields lower especially on long term bonds.
On the liquidity front, the Reserve Bank of India (RBI) announced just one Open Market Operation (OMO) of INR 10,000 crores during the month; this has infused a total liquidity of INR 80,000 crores in the first quarter of this fiscal.
The 10-year benchmark bond experienced high volatility due to global and domestic cues. The same was traded in a wide range during the month and closed at 7.45%, slightly lower than 7.47% at the end of the previous month.
Outlook
Rate cut expectations, which did not exist before Brexit have started to rise. Brexit has created a highly uncertain political environment in both the European Union (EU) and the United Kingdom (UK). Fall in bond yields across the globe supported the view of easy liquidity and lower yields in India also.
Domestically, though the Consumer Price Index (CPI) inflation has picked up recently with higher prints are expected in next month. Expectations of dovish Governor and the sublime impact of a global slowdown are triggering lower yields.
Monsoon has picked up recently with heavy rainfall expected in July. Good monsoon would lower high food inflation expectations.
On the liquidity front, aggressive Open Market Operations (OMO's) and delivery of forwards has finally pushed liquidity to surplus mode towards June end. Though initial Open Market Operations (OMO's) did not push yields lower, we believe it has changed demand supply dynamics significantly. Net supply in first quarter was insignificant.
No rate hikes in US, lower global growth and aggressive Open Market Operations (OMO's) by the Reserve Bank of India (RBI) would push yields lower.
Source: Bloomberg
