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Indian equity market participants witnessed a gradual upward movement of the indices while the debt market participants experienced volatility seen by hardening of yields. The month started with the union budget announcement which was seen to be a pro-growth budget by the market participants. The budget concentrated on addressing rural distress and increased budgetary allocation towards key infrastructure areas such as roads and railways hoping that greater public investment would kick start the economy. However, the FM maintained fiscal target of 3.2% for FY2018 while pushing the 3% target to FY2019. In another policy surprise, RBI not only maintained status quo on key rates, but also shifted its stance to “neutral” citing need to closely watch not only the trajectory of most domestic macro-economic variables but also developments around the globe. The month also marked disclosure of key economic data like CPI, WPI, PMI, fiscal deficit, etc. Investors waited for the Q3FY17 GDP data to gauge the impact on demand post demonetization by the government. Market participants were seen waiting for global cues primarily on the U.S. President's speech that might provide details on tax measures and infrastructure spending. Towards the end of the month, the markets got some support after the announcement that the states have agreed to implement Goods and Services Tax from Jul 1, 2017.

Market Performance*

Inflows by foreign investors, worries about the deteriorating asset quality in the banking system, volatile oil prices, growth oriented Union Budget 2016-17, RBI policy were the events which affected the Indian equity markets. Markets rallied gradually in February'17, with the domestic equity markets represented by the benchmarks Nifty 50 and S&P BSE Sensex increasing by 3.72% and 3.93% respectively.

Inflation^^

Retail inflation represented by CPI (Consumer Price Index) for Jan'17 edged lower to 3.17% vis-a-vis 5.69% in Jan'16. Continued deceleration in food prices outweighed the rising services inflation momentum and hence saw a print lowest since Jan'12. Wholesale inflation denoted by WPI (Wholesale price index) stood at 5.25% for Jan'17 as compared to 3.39% for the previous month and -1.07% during the corresponding month of the previous year. WPI was seen going up due to the firming up of oil prices and select commodities such as basic metal alloys which mirrored global trends and further due to base effect.

IIP^

India's industrial production in Dec'16 contracted to -0.4% vs 5.7% in Nov'16 on the back of demonetisation of high value currencies, a month after recording a 13-month high growth due to positive base effect. The fall was primarily attributed to the plummeting of consumer durables by over 10% and an overall decline in manufacturing space. Mining and electricity output grew 5.2% and 6.3% respectively in Dec'16, while manufacturing contracted by 2% during the month.

Trade Deficit##

India's goods exports rose in January for the fifth straight month on the back of stronger commodity prices, despite growing protectionist and anti-trade sentiment in the United States and Europe. Data released by commerce ministry showed that the merchandise exports grew at 4.32% in Jan'17 while imports grew by 10.7%, leaving behind a trade deficit of USD 9.8 billion, lowest in four months. Improved demand from the United States, European Union and Japan helped increase India's exports for the fifth month in a row in January, indicating that demonetisation has not hit exports as much as feared.

RBI's Monetary Policy **

RBI yet again rattled markets by hitting the pause button on policy rates, citing cautious approach in lieu of developments as the finer details of the demonetization process emerge. Giving a strong signal of limited room for easing rates from hereon, RBI also changed its stance from 'accommodative' to 'neutral'. The shift reflects the central bank's decision to exert caution on the inflation front in its journey towards the medium-term inflation target. RBI also lowered its growth estimates by 30 bps to 6.90%.

GDP@

India's economic growth slowed marginally to 7% in October-December 2017 quarter slowing from an upwardly revised 7.4% rise in the previous quarter. The sectoral data reflected minimal impact of demonetisation on account of a sharp rise in agricultural growth and a pickup in manufacturing sector growth. This number has brought a positive surprise to many, especially after the recent downward projection of growth by RBI in its bi-monthly policy.

Triggers:

  • Global headwinds continue to impact the domestic markets, thereby making the market sentiments weak. Uneven global growth within large developed economies could potentially continue to impact emerging markets. Domestically we are well positioned in terms of macro-economic indicators, once the global tide turns; India is likely to do well. Market participants may continue to track global situation.
  • 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. Markets await more clarity on fiscal policy coming out of Trump administration.
  • Though crude oil prices remain to be volatile, the India currency has been resilient and has appreciated against the US Dollar, the movement of both crude oil and of the USD INR pair might be closely monitored in the coming future.
  • All eyes will now be stuck on RBI policy in April'17 and on the progress of the implementation of GST from Jul 1, 2017.

Source:
* Bloomberg
^ mospi.nic.in
^^ ICRA
$ Ministry of commerce
** RBI
@ Edelweiss

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.

On the back of positive cues from the domestic macro-economic indicators, strengthening rupee, FII inflows and a growth oriented union budget, the Indian Equity markets staged a rebound in the month of Feb'17. Budget 2017-18 brought some respite to the range bound Indian equities market. To strengthen the economy while sticking to the roadmap for fiscal consolidation, the government focused on ensuring macro-economic stability and prudent fiscal management (fiscal deficit target at 3.2% for FY2017-18), boosting the consumption based domestic demand and continuing with the pace of economic reforms and policy initiatives. RBI, however maintained status quo on the policy rates while changed its policy stance for 'accommodative' to 'neutral'. The Q3FY17 earning seasons and most macro-economic indicators hint at the effect of demonetization to be short lived. Globally too, some degree of stability returned during the last month, after a sweltering 2016. The US Fed did not increase key rates in their Feb'17 policy and global indices like FTSE, Nikkei and Strait Times ended the month with an uptick vis-à-vis previous month end. Indian economy grew at 7.0% in Q3FY17 as India was able to achieve robust growth despite unfavorable global conditions.

Market Performance**

Continuing the positive run from Jan'17, the Indian Equity markets rose in the month of Feb'17 as well. On net basis India's bellwether indices viz. S&P BSE Sensex & Nifty 50 gained 3.93% and 3.72% respectively while S&P BSE Mid- cap index & S&P BSE Small-cap index rose by 5.40% & 5.84% respectively. All the sectoral indices ended the month higher than their previous month's close except Auto which contracted 1.48% as compared to Jan'17.

Growth'

The Nikkei Manufacturing PMI in India rose to 50.7 in Feb'17 from 50.4 in Jan'17; making it the second straight month of expansion and the highest reading since Nov'16. Output and new orders rose at faster paces and new export orders expanded for the first time since Nov'16 while business sentiment remained positive. However, there were evidences of an intensification of inflationary pressures, with input costs rising at the fast pace & output price inflation also accelerating. The Nikkei Services PMI in Feb'17 also registered growth as businesses recovered from the demonetisation-related disruptions; posting 50.30 in Feb'17 from 48.70 in Jan'17.

IIP^

Amidst signs of faltering industrial activity due to demonetisation, India's factory output contracted to -0.4% in Dec'16. Output of consumer durables segment declined by 10.3% during the month under review from robust growth of 16.6% reflecting the impact of currency crunch while the consumer non-durable space contracted by 5%. Overall consumer goods output showed a contraction of 6.8%. Capital goods segment, barometer of investments, declined by 3% as against 18.6% decline a year ago. As per the use-based classification, the growth rates are 5.3% in basic goods and (-)1.2% in intermediate goods. However, the power generation showed a growth of 6.3% in Dec'16. The mining output also grew by 5.2% in Dec'16 compared to 2.8% in the same month a year ago. Overall, 17 out of 22 industry groups in the manufacturing sector showed negative growth in Dec'16.

FPI Inflows**

In contrast to Jan'17, which saw outflow of funds by FPIs from the equity markets, FPIs invested ~ Rs. 9902 Crs. Domestic market participants continued the trend of increasing allocation towards the Indian equity markets to the tune of ~ Rs. 2,174 Crs.

Outlook

Going forward, implementation of structural reforms by the government, improving macroeconomic variables and expectation of lower interest rates would be the key drivers of Indian equity markets. Further, corporate earnings have shown resilience but might have some disruption when GST is implemented in Jul 2017. However, we expect earnings to recover at a much faster pact during the 2HFY18 but there are several factors both domestically and globally which can create significant bouts of volatility.

Domestically the macro-economic variables of our country have been robust and no negative surprises in the Union Budget 2017- 18 has helped India being a preferred investment destination in the Emerging market space. Going forward, foreign investors may closely monitor the progress of the key structural changes and corporate earnings growth which will be one of the many determinant factors of their investments in the Indian Subcontinent.

Going forward, despite the near-term challenges, the long term potential of the Indian equity markets remains intact. Government reforms across sectors, economy shift from informal to formal as well as the expectation of improvement in government tax revenues are some of the policy reforms which would further strengthen the Indian economy translating into strong equity market.

We expect the equity markets to further improve in medium to long term and the current phase could be seen as an opportunity by the investor to enter the market and take exposure to Indian equities. One could invest in equity funds that allow participation in Indian growth story by adopting a staggered approach to equity investments in order to even out the market volatility.

Source:
^ MOSPI, ICRA
` Markit Economics
** 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.

Feb'17 was seen as a volatile month as market participants continued to remain cautious after a series of events. The month started on a positive note with the union budget, wherein the government kept the fiscal deficit numbers controlled @ 3.2%. However, the situation reversed in a week when RBI rattled markets by changing its policy stance. The RBI changed its policy stance to 'neutral' from 'accommodative' to give itself more flexibility in the ever changing macroeconomic situation and evolving global dynamics. As a result, on the day of the policy, the yields of Indian 10 yr G-Sec hardened by 31 bps. For the month of Feb'17, Indian 10yr G-sec hardened by 46bps to a print of 6.87% on 28th Feb'17 vis-à-vis 6.41% on 31st Jan'17. Some respite was seen when the economy expanded at the rate of 7% in the Q3FY17. Advanced economies around the globe were highly volatile owing to the uncertainty around the policy action. The US bond yields was seen to remain flat during the month of Feb'17 as the Federal Reserve kept interest rates unchanged in its FOMC meeting suggesting the economy was still on a moderate growth path. In the Eurozone, European Central Bank (ECB) remained under immense pressure to tighten policy ahead of the elections in major countries. Improved domestic macros such as reduced retail inflation, contained trade deficit along with the US Fed not increasing interest rate led to the appreciation of Rupee during the month (INR/USD66.69 on 28th Feb'17 v/s INR/USD67.19 on 31st Jan'17). This led to the infusion of funds to the tune of ~Rs. 5,960crs by FPIs during the month of Feb'17. Domestic participants continued to show conviction in the Indian Fixed income markets as Mutual Funds invested ~Rs. 39,090crs in the month.

Sixth bi-monthly policy: Cautious stance^

RBI in its sixth bi-monthly policy kept the key policy rates unchanged but surprised market participants by changing its stance from 'accommodative' to 'neutral'. Sticky core inflation, uncertainty around the financial markets across the globe and the rising commodity price were the major triggers for the RBI to maintain status quo, while hardening its stance. Market participants, who had already factored in a 25 bps rate cut, reacted to this surprise as interest rates hardened across the yield curve.

Retail Inflation eases while wholesale inflation increases#

India's retail inflation continued softening to 3.17% in January'17 as compared to 3.41% in December'16. Most of the fall in inflation has come on account of reducing food prices, aided by distress selling due to demonetization. However, WPI for the month of January'17 shot up to 5.25% from 3.39% a month ago on the back of rising fuel prices, even though the food and vegetable prices contracted.

Outlook:

Markets globally have remained uncertain awaiting cues from major advanced economies. US fiscal policies and the anti-euro sentiment in Europe gaining strength, could dampen the mood of the market participants in the near future. The uncertainty regarding the pace of FED rate hikes could further create additional volatility. The ever uncertain global environment could hurt investor sentiments and keep them on the edge. In the emerging market space, India stands out with strong macro-economic landscape and ever vigilant RBI.

While Indian macro-economic environment continues to remain robust, the geo-political situation globally could continue to cloud its medium term outlook. We expect RBI to remain cautious awaiting clarity of new US economic and trade policies and impact of Brexit in Europe. Local developments on inflation trajectory (post demonetization), impact of GST implementation on growth and inflation, and clarity on monsoons may further provide data to RBI to determine future course of policy actions.

With respect to the retail inflation, the joint efforts by RBI and the government to keep the inflation under check are commendable. Government adherence to its fiscal deficit target is seen as a positive by RBI. Expectation of improving discretionary consumer demand & transmission of past policy rates might translate in the increase in the consumption as well as investment demand. Going ahead we might see inflation being under pressure owing to hardening profile of international crude prices, volatility in the exchange rate on the back of global financial market developments and the impact of implementation of 7th CPC. With the last two inflation numbers near 3.5%, we expect the March 2017 inflation print to undershoot 5%. However, RBI expects CPI to be in the range of 4.0-4.5% in the H1FY2017-18.

With the unexpected move by RBI, interest rates across the yield curve hardened. A major up-move of yields from here is unlikely, though the market may take time to settle down and develop a trading range with repo expected to stay at 6.25% for sometime. While in short term yields may remain range-bound, over medium term we expect yields to resume the downward trend, as robust macro-economic factors continue to support lower rates. In a scenario of global volatility creating local uncertainty, in the near to medium term, however, gives another opportunity to long term investors to make fresh allocations, in a phased manner, with a 1 – 3 years' timeframe.

Source:
#MOSPI
^RBI
*MFI Explorer
@Bloomberg

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.