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The month of January'17 was a month which saw mixed data flows. On one hand, retail inflation and trade deficit improved but on the other, wholesale inflation saw an upswing and IIP recorded a downtick. The recovery from the effects of demonetization exercise and expectations from the Union Budget kept Indian markets buoyed. A better than expected earnings season propelled the equity markets and the absence of any external shocks resulted in the softening of the 10-year benchmark by ~ 10 bps. Fixed income markets saw outflows by FPIs on back of the US Federal reserve's announcement of increase in the US Fed rate in 2017. The uncertainty around various policies of US President Donald Trump, who was sworn in in the month of Jan'17, also kept the fixed income markets range bound.

Market Performance*

2017, unlike 2016, started on a positive for the domestic equity markets. Expectations that the Union budget will be pro-growth and will be extremely positive for most was the reasons for the markets performing well in the month of Jan'17. The reporting of Q3FY17 corporate earnings was better than the markets expected, taking into consideration the effect of demonetisation. As a result, the domestic equity markets represented by the benchmarks Nifty 50 and S&P BSE Sensex rose by 4.59% and 3.87% respectively.

Inflation^^

Retail inflation represented by CPI (Consumer Price Index) for December'16 printed 3.41% compared to previous month's 3.63%. The easing of inflation was led by continued cooling in food inflation which resulted in lowest inflation rate since November'14. The slowdown in inflation intensified in the last two months of 2016 after the demonetization campaign slumped currency in circulation thereby hurting consumption. The rising cost of manufactured products and petrol resulted in the Wholesale Price Index (WPI) to rise to 3.39% Y-o-Y compared to 3.15% seen in November'15. Inflation still comfortably remains within RBI's target zone and this could see the interest rates being reduced in the coming future.

IIP^

India's industrial production in November'16 grew 5.7% recovering from a downwardly revised 1.82% in October'16, shrugging off the initial impact of demonetisation. The rise was aided by positive base effect and was the highest reading since October 2015, mainly boosted by a rebound in manufacturing production (+5.5% from -2.4% in October'16) and mining (+3.9% from -0.7%). Also, output rose at a faster pace for electricity (+8.9% from +1.1% in October'16). The volatile capital goods sector grew for the first time in seven months at 15%, and consumer goods picked up by 5.6%. The index number for consumer durables in November'16 fell signaling a decline in demand for such goods after demonetization.

Trade Deficit##

India's trade deficit declined 9.9% to USD 10.37 billion in December'16 from USD 11.50 billion in December'15. India's merchandise exports increased 5.7% to USD 23.88 billion in December 2016 over a year ago while merchandise imports rose 0.5% to USD 34.25 billion. The share of oil imports in total imports was 22.3% in December'16, compared with 19.6% in December'15. Due to the recent volatility in the crude oil prices India's basket of crude oil surged 47.8% to USD 52.74 per barrel in December'16 over December'15.

Triggers:

  • A faster than anticipated pace of interest rate hikes in US may lead to tightening of global liquidity and volatility in the equity as well as fixed income markets.
  • Any administrative and policy reform measures by the Trump Government in the US as well as the issues related to the Eurozone i.e. European Union members exiting the European Union would be the key factor to be watched out for which may have adverse impact on the global markets. Protectionist policies espoused by Trump administration could have unforeseen impact on global growth, which was recovering somewhat post 2008 crisis
  • Volatile hovering around commodity prices could put pressure on the global financial markets.
  • Sharp slowdown in global growth which may lead to disinflationary pressure on some of the large developed economies
  • China remains a key element, to be looked for, as it is anticipated to remain in transitionary phase and sharp decline in Chinese economic growth could have adverse impact on commodity exporting economies.
  • Domestically, slower than expected transition to formal economy or resumption of currency circulation in domestic market could lead to slower consumption led growth.
  • The upcoming monetary policy will be keenly tracked by the market participants to decipher the future course of action.

Source:
* Bloomberg
^ mospi.nic.in
^^ ICRA & RBI
## Ministry of commerce

Disclaimer:
The information used towards formulating the outlook has been obtained from sources published by third parties. While such publications are believed to be reliable, however, neither the AMC, its officers, the trustees, the Fund nor any of their affiliates or representatives assume any responsibility for the accuracy of such information. CRMF, its sponsors, its trustees, CRAMC, its employees, officer, directors, etc. assume no financial liability whatsoever to the user of this document. Mutual Fund Investments are subject to market risk. Investors are requested to read the Scheme related documents carefully before investing.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

In the month of Jan'17, Indian equity markets have witnessed growth on the expectations of improvement in corporate earnings and an absence of any external shock. Indian equities began the month on a watchful note and gained momentum during the month. Market participants were primarily worried that the effect of demonetisatoin will weigh down the corporate earnings but the declared results of the companies exceeded expectations which led the market rising. On the global front, equities posted mixed performance amid region-specific cues. Caution ahead of Donald Trump's swearing in as the US president, affected the equity markets across the globe. US Federal Reserve Chair Janet Yellen's comment that the central bank could raise Fed rates if the economy accelerates helped US market to gain in Jan'17; similarly, Europe and Japan saw marginal increase. Amidst global disarray, volatile commodities (especially crude) and uncertain policies & administrative framework of Donald Trump, strong domestic macros and announcement about implementation of GST in this year kept Indian equity markets resilient in the month gone by.

Market Performance**

The Indian Equity markets saw positive momentum in the month of January'16. On net basis India's bellwether indices Nifty 50 and S&P BSE Sensex rose by 4.59% and 3.87% respectively while S&P BSE Mid- cap index & S&P BSE Small-cap index saw a sharp increase of 6.87% and 7.38% respectively. S&P BSE Metal and S&P BSE Consumer Durables were the top performing sectors during the month rising by 15.46% and 12.36% respectively. IT was the only sector that was seen in red with S&P BSE IT falling by 5.80%.

IIP^

Index of Industrial Production (IIP) surprised markets by registering a growth of 5.7% in November'16 as against 1.9% in October'16. The pace of expansion came as a surprise, as growth was widely expected to be affected by demonetization and well above market expectations. The rise can be attributed to the base effect as the index had plunged dramatically in November 2015.A break up of the IIP print reflects the growth of consumer durables being impacted by demonetization while non-durables have managed to perform well.

FPI Outflows**

Global growth concerns have accentuated outflows by FPI (Foreign Portfolio Investor) keeping Indian domestic equity markets under check. January'17 saw net FPI outflow of Rs. 1,287 Crs. Domestic market participants continued to remain bullish on the Indian equities as they increased their exposure to equities with the net purchase being ~ Rs. 5,468 Crs in January'17.

Outlook*

With constant new developments domestically as well as globally, Indian equity markets are expected to experience heightened volatility in the coming future. In the short term, the market participants are expected to take cues from the pending third quarter corporate earnings and will have to evaluate the actual impact of demonetisation on the Indian economy.

The opportunities presented by the demonetisation exercise might delay growth in the shorter run, but is expected to improve fiscal health of the government balance sheet on a long term. Implementation of GST this year should also help the companies in the organized sector as the companies in the unorganized sector would lose the cost advantage due to tax avoidance.

The upcoming RBI's policy in Feb'17 will be a key event to judge the near term direction of the interest rates in India. The biggest risks to the direction of the interest rates going ahead could be attributed to the increase in interest rates by the US Fed and consequent strength of the US Dollar. However, India's strong macros is expected to help reduce the impact of the rate hike.

With positive macros and interest rates expected to decline further, the long term potential of Indian economy remains intact, despite the near-term challenges seen. We continue to be constructive on equities and hence, in our opinion, we see merit in increasing allocation to equities in a staggered manner to even out the market volatility.

Source:
^ MOSPI, ICRA
** ICRA MFI Explorer

Disclaimer: The information used towards formulating the outlook has been obtained from sources published by third parties. While such publications are believed to be reliable, however, neither the AMC, its officers, the trustees, the Fund nor any of their affiliates or representatives assume any responsibility for the accuracy of such information. CRMF, its sponsors, its trustees, CRAMC, its employees, officer, directors, etc assume no financial liability whatsoever to the user of this document. Mutual Fund Investments are subject to market risk. Investors are requested to read the Scheme related documents carefully before investing.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

During the month of Jan'17, the domestic fixed income markets remained volatile on the back of uncertainty around the globe. Market participants continued to stay cautious of evolving macro-economic factors and developments domestically as well as globally. Jan'17 saw the Indian 10yr G-sec softening by 10bps to 6.41% towards the end of the month vis-à-vis 6.51% on 30th Dec'16. During the month, the US bond yields were seen to be range bound as market participant's awaited clarity on various policies and administrative framework to be implemented by the sworn in president, Donald Trump. This cautious approach was seen impacting the Indian Debt markets. Further, FPIs withdrew funds to the tune of ~Rs. 2,063 crs during the month of Jan'17. Domestic participants, on the other hand, showed conviction in the Indian Fixed income markets as Mutual Funds invested ~Rs. 34,500 crs in the month.

Retail Inflation eases while wholesale inflation increases#

India's retail inflation eased to nearly a three-year low of 3.41% in December'16, following a reading of 3.63% in Nov'16. Reduction in food prices coupled with contained services inflation helped stem any upside pressure to the headline. WPI for the month of Dec'16 came in at 3.39% as compared to 3.15% in Nov'16. Though food inflation contracted due to moderating vegetable prices, inflation for fuel items and manufactured goods rose on the back of hardening commodity prices, thereby taking the wholesale inflation higher than the rate seen in the previous month.

Trade deficit declined^

Trade deficit for Dec'16 narrowed to 10.37 bn USD compared to 13 bn USD in Nov'16. For the April to Dec'16 period trade deficit totals to 76.55 bn USD, roughly 23% decline from 100.08 bn USD in the same period last year. During the first half of the fiscal year, the main factor was the contraction in imports, which was far steeper than the fall in exports. During the Oct'16 - Dec'16 period however, both exports and imports started a long-awaited recovery, growing at an average rate of more than 5%. Steeper contraction in imports, compared to exports, during the first half of 2016-17 led to a sharp decline in trade deficit.

Comfortable Liquidity Conditions%

Liquidity conditions have remained comfortable during the month of Jan'17 on account of huge influx of deposits with the banks post demonetization, and consequent restrictions on withdrawals. This liquidity surplus is likely to go down as cash in circulation increases over time. However, it is expected that the total withdrawn currency is unlikely to be fully replaced, leaving some portion as permanent deposits with banks. To manage this huge inflows, RBI issued cash management bills (CMBs) and variable rate reverse repo transactions of different maturities to manage the liquidity. As a part of its open market operations, RBI conducted variable term reverse repo to the tune of Rs.3 lac crs. and issued cash management bills (CMB) worth Rs.3.5lac crs. Call rates closed at a weighted average of 6.05% as compared to 6.02% on the last day of the month as compared to the previous closing. On net basis, the system-wide liquidity turned into surplus mode to the tune of Rs. 6.35 lac crs. as on 31-Jan-2017. Going ahead, with the easing of withdrawal limits by RBI, the systematic liquidity would get affected but is expected to still remain in surplus zone.

Outlook:

Uncertainty around commodity prices, especially crude oil, may continue to impact the fiscal situation of emerging economies including India. However, increase in US shale oil production is likely to dampen price increases due to OPEC production cuts, though the global volatility is likely to keep the domestic debt market volatile in the near term. However, actions such as remonetisation and implementation of GST in the next fiscal would boost the growth of Indian economy in medium to long term.

The change in the outlook for global interest rates as a result of the US elections and the implied change in expectations of US fiscal and monetary policy are expected to impact India's capital flows. The US Federal Reserve's intention to increase policy rates in 2017, faster than expected, might lower the capital inflows and result in higher outflows from the emerging economies. However, the US FED has indicated that the rate increases are likely to be “gradual”.

Domestically, the government sticking to its fiscal target and recent demonetisation has resulted in the inflation numbers hovering around 3.5%. Market participants expect that Mar'17 inflation would undershoot RBI's target of 5% by a large margin. Given the expected inflation and strong domestic macros, we expect RBI to cut policy rates by 25-50bps during the next couple of policies. However, global uncertainty could result in heightened volatility in the near to medium term. This volatility presents long term investors with an opportunity to make fresh allocations with a 1 – 3 years' timeframe.

Source:
~CGA
#MOSPI
^RBI
*MFI Explorer
@Bloomberg
%STCIPD

Disclaimer: The information used towards formulating the outlook has been obtained from sources published by third parties. While such publications are believed to be reliable, however, neither the AMC, its officers, the trustees, the Fund nor any of their affiliates or representatives assume any responsibility for the accuracy of such information. CRMF, its sponsors, its trustees, CRAMC, its employees, officer, directors, etc. assume no financial liability whatsoever to the user of this document. Mutual Fund Investments are subject to market risk. Investors are requested to read the Scheme related documents carefully before investing.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.