The Indian equity markets ended the month on a positive note, on back of weak INR, lower crude oil prices and the lower inflation data with S&P BSE Sensex trading above the 35000 mark. Market players however remained a little cautious due to the escalating tension about global growth, recent development in Italy and the forthcoming state elections in some of the major Indian states. On the global front, market remained observant on the G20Summit outcome and US-China trade war worries. For the month of Nov'18 market participants also remained cautious awaiting cues on the economic outlook depending on the Federal Reserve's meeting. Based on global and local events, broad market indices strengthened for the month of Nov'18 and Nifty 50 was up by 4.72% (M-o-M) while S&P BSE Sensex was up by 5.09% (M-o-M). S&P BSE Midcap and S&P BSE Small cap indices were also up by 2.92% (M-o-M) and 1.59% (M-o-M) respectively. On the sectoral front, S&P BSE Consumer Durables and S&P BSE India Realty index were amongst the few sectors which rose by 7.23% and 6.66%, respectively during the month. The markets witnessed negative returns in S&P BSE Healthcare and S&P BSE India Metal amongst the few indices, which were seen falling by 2.67% and 5.53% respectively.
Globally, financial markets are focussed on the US monetary policy & tariff action by US against many countries especially China. The outcome of US monetary policy meet is quite critical as it comes against backdrop of a significant comment by US Fed Chairman that policy rates are now closer to neutral. This is quite different from the commentary that came post the previous Fed meet. The implications of this is on both fronts, global growth outlook as well on currency and markets of emerging economies. Ideally the emerging economies should benefit when US Fed stops raising rates as long as there are no concerns over growth outlook for USA and the world.
On domestic front, markets are evaluating multiple variables, both global and domestic, and implications of those variables on Indian economy and equity markets.
Oil prices retreated by nearly 15$ during the month and brought much needed change in fortunes for Indian economy. Rising oil prices was a big worry for India's macro-economic stability in H1FY19 and a sharp fall from 86$ to 59$ in past 2 months has provided a muchneeded support on fiscal deficit, current account deficit, inflation and interest rates front.
Indian economy grew at 7.1% in 2Q19, a moderation from 8.2% in 1Q and weaker vis a vis consensus expectation. The broad trends in monthly data (auto, airline, cement etc) indicate weaker Q3FY19 though the credit growth has picked up smartly with banks gaining market share as NBFCs have retreated.
The results declared during the month for Q2FY19 were broadly in line with market expectations but the management commentary accompanying the Q2 results, points towards a slowing momentum going ahead and some moderation in earnings estimate are expected for H2FY19. In the near term, volatilities in Indian equity markets are likely to continue as market sentiments are focussed on outcome of elections (5 states in mid-december and as well as centre in 2019).
On the medium to long term, growth prospects for India remains strong and equity markets offer investors an opportunity to participate in the economic growth. Foreign investors may take a temporary breather, ahead of the elections, the structural growth opportunity would attract them to India over medium to long term. We believe Indian investors too should remain focussed on this opportunity that is offered by India's growth story. A strategy of continuing the SIP would be beneficial for a long-term investor in the current environment.
During the month of November'18, yields in the Indian fixed income markets softened due to a reduction in the crude oil prices and strengthening of the rupee. In its fifth bi-monthly monetary policy review, Monetary Policy Committee (MPC) lowered inflation projection sharply to 2.7-3.2% from 3.9-4.5% for the second half of 2018-19, while maintaining the policy stance at 'calibrated tightening'. During the month of Oct'18, retail inflation lowered at 3.31% on the back of reduction food price. On the global front, concerns pertaining to Italy budget and Brexit deal alleviated. Italy re-submitted its 2019 budget to the EU with lower debt, though growth and deficit figures remained unchanged. Overall the slowdown in the global economy owing to geopolitical factors also maintained downward pressure on the commodity's price especially crude. Owing to the domestic as well as global circumstances, fixed income yields softened during the month of Nov'18 by 25bps to 7.61% on 30th Nov'18 as against 7.85% on 31st Oct'18.
RBI in its monetary policy repeated its commitment in achieving the medium-term target for headline inflation of 4% on a durable basis however cut its H2FY19 inflation forecast to 2.7-3.2% from 3.9-4.5% earlier. It pegged H1 FY20 inflation at 3.8-4.2%. Market participants would closely monitor food inflation, crude oil prices and currency movements which will impact the movement of inflation going ahead.
While the policy outcome was in expected lines, the factors highlighted are alarming. The Central bank has painted a picture depicting neutral growth and decreasing inflation. Although, the domestic food price outlook remains largely stable to moderating, generalized momentum could be watched for in prices of items excluding food, especially emanating from crude oil. The pressure by currency and the possibility of fiscal slippages may add to this momentum in the future. Based on an overall assessment, GDP growth for 2018-19 has been projected at 7.4% (7.2-7.3% in H2) as in the October policy, and for H1FY20 at 7.5%, with risks somewhat to the downside. Significant acceleration in investment activity and high frequency indicators suggest that Increased capacity utilisation in
the manufacturing sector is likely to be sustained. All this put together, credit offtake and external demand trajectory will guide the
movement of GDP in the coming months.
Volatile crude oil prices and other input costs may also drag down investment activity and could impact the profit margins of corporates. In addition, volatile movement in rupee and trade related conflict could impact the export growth which could lead to a further widening of India's CAD in FY19. Going ahead, we expect the RBI to be more data dependent and it is expected to closely monitor data, both domestically and internationally and decide the course of interest rates more prudently. Slower growth and lack of corporate pricing power should start reflecting in lower inflation going forward. Oil prices have also retreated from highs, giving some respite. The management of fiscal by the government is likely to be a key factor in future policy outcomes. While short term volatility in the interest rates is likely to remain, macro-economic factors of slow growth with moderate inflation is likely lead to lower interest rates over the medium term.
**ICRA MFI Explorer, Bloomberg
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