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Month of Dec'17 saw Indian Equity and Fixed Income markets driven majorly by local factors such as results of two state election, RBI status quo on interest rate, mixed macro-economic data print and measures taken by the government to increase borrowing to control revenue slippage. Equity market saw major indices closing in green on back of series of such events. Bellwether indices viz. S&P BSE Sensex and Nifty 50 touched all-time highs of 34000 and 10500 respectively. However, the fixed income markets were seen under tremendous pressure with the yields hardening during the month. Near the close of the year, the Indian 10-year benchmark touched 7.40% level on back of the excess supply owing to the additional borrowing planned by the Indian government.

Market Performance*

The Indian equity markets ended the last trading month of 2017 on a positive note due to the elevated sentiments of the market participants post the victory of ruling party in state elections. Markets were seen in the positive territory as Nifty 50 and S&P BSE Sensex grew 2.97% (M-o-M) and 2.74% (M-o-M) respectively. The mid and small cap space also witnessed a positive rally with indices growing by 5.35% (M-o-M) and 5.50% (M-o-M) respectively. The calendar year 2017 witnessed Nifty 50 gaining 28.65% and S&P BSE Sensex gaining 27.91% during the year.

IIP^

India's Index of Industrial Production (IIP) slowed to 2.2% in Oct'17 from an upwardly revised 4.1% (3.8% originally reported) in Sep'17 and 4.2% in the same period of the previous year. The manufacturing sector also slowed to 2.5% in Oct'17 from 4.8% in the same period of the previous year. IIP growth for the period from Apr to Oct'17 also slowed to 2.5% from 5.5% in the same period of the previous fiscal.

Inflation^^

The Consumer Price Index (CPI) based inflation for the month of Nov'17 came in at 4.88% (Y-o-Y) as compared to 3.58% (Y-o-Y) in Oct'17, highest in the last 15 months. The main driver of the CPI inflation was food inflation which grew at 4.42% (Y-o-Y) in Nov'17 compared with 1.90% (Y-o-Y) in Oct'17. Retail inflation growth thus surpassed the Reserve Bank of India's (RBI) medium-term target of 4% but was well within the band of 2%-6%. As expected inflation in Housing segment has also been rising possibly due to implementation of HRA allowances under the 7th Central Pay commission, However the impact is likely to dissipate from Jan'18 onwards,

Balance of Payments: #

India's Jul'17 -Sep'17 current account deficit (CAD) widened to USD 7.2 billion (1.2% of GDP) compared to USD 3.4 billion (0.6% of GDP) (Y-o-Y) in the same quarter of last year. The widening of the CAD on a Y-o-Y basis was primarily on account of a higher trade deficit of USD 32.8 billion on account of larger increase in merchandise imports relative to exports. The net foreign investment recorded net inflow of USD 2.1 billion, lower than USD 6.1 billion in second quarter last year on account of net sale in the equity market.

Trade Deficit: ##

India's trade deficit contracted to USD 13.83 billion in Nov'17 from USD 14.02 billion in Oct'17. Exports grew 30.55% to USD 26.20 billion in Nov'17 after declining 1.12% to USD 23.10 billion in the previous month due to improved global demand, government incentives and simplification of GST refund process. India's imports in Nov'17 grew 19.61% to USD 40.02 billion from USD 33.46 billion in the same period of the previous year.

Triggers

  • With the opposition putting up a decent match in Gujarat, the state elections which are going to take place in Karnataka, Madhya Pradesh, Rajasthan, Chattisgarh, Mizoram, Meghalaya, Nagaland and Tripura would be a key trigger for the stock markets.
  • The upcoming Union Budget would be closely tracked by all market participants for getting a sense on fiscal consolidation stance of the government and also steps to taken to invigorate the investment cycle
  • The possibility of rate hikes by the new US Fed's Chairperson may also be keenly watched by the market.
  • Recapitalization of public sector banks will be one of the major events to watch out for and how the government would take it forward, which would result in strengthening of the banking system.
  • The RBI's monetary policy in Feb'17 would be next key trigger. The RBI will be very cautious with the way inflation has panned out in the recent past and will closely be closely watching incoming data.
  • Equity participants would closely wait and watch the earning this season to measure impact recovery phase going.
  • The trajectory of crude oil prices and the movement of Indian Rupee could also be key triggers in the coming month.
  • Global developments would continue to drive the market movement. Investors would look at the pace of the hike in US and the policies of the other developed and emerging economies in the world.

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

The Indian equity market continued to remain volatile for the second consecutive month, though it managed to reverse the last month's losses to inch closer towards all-time highs. Indian equities began on a cautious note and remained range bound throughout the first half of the month of Dec'17. Higher inflation, widening of India's CAD clubbed with the sell off from FPIs resulted in the markets remaining under stress. The ruling party, BJP's victory in the Gujarat and Himachal Pradesh elections and the subsequent reverberations led the key indices to mark all time new highs. Increasing government spending to spur the economic growth has resulted in the government raising additional market borrowings of Rs. 50,000 crore through dated government securities. Despite the mixed local macro-economic data and strong global developments, Indian markets ended the year 2017 at all-time highs.

Market Performance**

The Indian Equity markets remained relatively positive throughout the month of Dec'17. On net basis India's barometer indices viz. S&P BSE Sensex & Nifty 50 grew by 2.74% & 2.97% respectively while S&P BSE Mid- cap index & S&P BSE Small-cap index grew by 5.35% & 5.50% respectively.

S&P BSE Metal, S&P BSE Telecom and S&P BSE Realty were the top performing sectors during the month rising by 7.46%, 6.97% and 6.65% respectively. S&P BSE Power, S&P BSE Oil & Gas and S&P BSE Bankex were the major sectors under pressure falling by 2.63%, 2.23% and 0.79% respectively.

Growth`

India's manufacturing sector rose to a 13-month high in Nov'17. The improvement came as a reduction in Goods and Services Tax (GST) rates and strong demand condition boosted new order flows. The Nikkei India Manufacturing Purchasing Managers' Index (PMI) rose from 50.3 in Oct'17 to 52.6 in Nov'17. This is the fourth consecutive month during which the manufacturing PMI came in above 50. The Nikkei India Services Purchasing Managers' Index (PMI) plunged from 51.7 in Oct'17 to 48.5 in Nov'17 thereby marking the first contraction in three months.

IIP^

From an upwardly revised 4.1% (3.8% originally reported) in Sep'17 and 4.2% in the same period of the previous year, India's Index of Industrial Production (IIP) slowed to 2.2% in Oct'17. Strong growth impulses emanating from the mining sector aided despite the sequential contraction observed in both manufacturing and electricity sectors. Sectoral trends highlight that while Mining (7.1% M-o-M) grew significantly while Manufacturing (-1.0%) and Electricity (-0.5%) posed a major drag on the overall IIP. Adding to the unfavourable base, considerable drawdown in inventories after the implementation of GST coupled with lesser working days in the festive period can be the contributing factors for this decline.

FPI Outflows**

The month of December'17 saw an outflow by FPIs (Foreign Portfolio Investor) on account of expected rate hike by US Fed and profit booking. The net FPI outflow for the month was Rs. 5883 Crs. The corrections in markets during the last month were viewed as an attractive investment opportunity by Mutual funds who increased their exposure to equities with the net purchase being Rs. 6113 Crs (as on 21st Dec'17).

Outlook

Most domestic economic indicators are relatively positive or are showing signs of recovery. The steps that the government has taken in the past year of implementing a one tax regime, ordinance to implement the bankruptcy law and proposal of the FRDI Bill, recapitalisation of banks et. al. has resulted in the country being on a strong footing. Going forward, India is expected to be one of the fastest growing Emerging Market economies the coming year, in absence of any external shocks.

In the medium term, markets will keenly monitor the upcoming budget in Feb'18 and closely monitor the global growth trajectory.

Dec'17 quarter corporate earnings, which will start trickling in during the second week of Jan'18, could highlight the impact of measures taken by the government. Market participants are expecting the earnings to improve in the coming quarters. The optimism in the revival of corporate earnings is largely on the hope of lower interest rates and pickup in economic activity in some of the economy related sectors.

We believe that the long term growth story is still intact & as earning growth picks up there is a strong likelihood of PE expansion. While the year 2017 was seen as a year of high growth, Indian economy seems to be showing sign of improvement and we may see momentum building up from H1FY19. The interim corrections can be used as an opportunity to enter the market by investors having medium to long term investment horizon and should adopt a staggered approach to equity investments in order to even out the market volatility.

Source:
^ MOSPI, ICRA
` Markit
** 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.

Indian fixed income markets witnessed constant pressure during the month of Dec'17 on the back of increasing crude prices, significantly high inflation numbers and increased borrowing by the government. The month of Dec'17 remained eventful with RBI continuing “neutral” stance whilst keeping the key interest rates unchanged in the initial part of the month, inflation print being high in the mid-month and government's announcement to borrow an additional Rs.50000 crores through scheduled auctions during the end of the month. India's economic growth, however, improved significantly in Q2FY18 owing to the sharp rise in industrial activity led by improved demand and re-stocking post Goods and Services Tax (GST) implementation. The country's fiscal deficit during Apr-Nov'17 increased significantly due to increased expenditure and low revenue. On the global front, US 2Y-10Y spread contracted to lowest level in 10 years as US inflation continued to remain low. US Fed in its Dec'17 FOMC meeting, raised the benchmark rate by a 25 bps to a target range of 1.25 - 1.5% and committed to raising rates in a 'gradual' manner. ECB in its recent meeting also remained hawkish with an intention to boost the economy.

From the domestic economic front, retail inflation for the month of Nov'17 remained under pressure due the rising food and vegetable price. Brent crude prices rose due to supply disruption as well as fall in crude oil inventories by the end of Dec'17 by ~$3.30/barrel to $66.87/barrel from $63.57/barrel by the end of Nov'17. The rupee appreciated marginally against the USD, settling at Rs. 63.87/$ on 29th Dec'17 as against Rs. 64.75/$ on 30th Nov'17. These factors resulted in the hardening of yields throughout the month of Dec'17 with the Indian 10-year Benchmark G-sec rising from 7.06% on 30th Nov'17 to 7.33% on 29th Dec'17.

RBI in its 5th bi-monthly policy retains “neutral” stance^:

Monetary Policy Committee (MPC) in its 5th bi-monthly policy review kept the key policy repo rate unchanged at 6.0%, while retaining its “neutral” stance. Also, given the risks to inflation, the MPC raised its inflation expectation to 4.3-4.7% for the second half of FY2018. Consequently, the reverse repo rate stood unaltered at 5.75%, and the marginal standing facility (MSF) rate and bank rate each remained at 6.25%.

Fiscal Deficit widened significantly:&:

India's fiscal deficit during Apr-Nov'17 stood at 112% or 6.12 lakh crore of the budgeted target for FY2018 majorly due to the sluggish revenue on the back of lower GST collections and higher expenditure. However, fiscal deficit was seen at 85.8% of the budget estimate for the corresponding period last year. Total revenue receipts remained at Rs. 8.67 lakh crore or 54.2% while, total expenditure amounted to Rs. 14.79 lakh crore or 68.9% of the financial year estimates. Due to the fiscal slippage, the government announced additional market borrowing of Rs 50,000 crore for the current financial year.

Retail Inflation rose significantly to 4.88% in Nov'17#^:

Retail Inflation for the month of Nov'17 rose to a high of 4.88% as compared to 3.58% in the previous month though it remained within RBI's target of 2%-6%. The consumer food price index also grew 4.42% in Nov'17 from 1.90% in the previous month and 2.03% in the same period of the previous year. WPI based inflation rose to an 8-month high as it grew 3.93% in Nov'17 from 3.59% in the previous month. The growth of WPI food index also accelerated from 3.23% in Oct'17 to 4.10% in Nov'17. Prices for vegetables grew for the 2nd consecutive month and increased 59.80% in Nov'17 from 36.61% in the previous month. Overall, food inflation continued to put pressure on short term inflationary expectations.

CAD narrowed on a QoQ basis#:

Current Account Deficit narrowed to $7.2 bn (1.2% of GDP) in Q2FY18 from $15.0 bn (2.5% of GDP) in Q1FY18 but has increased substantially as compared to $3.4 bn (0.6% of GDP) in the same quarter of the previous fiscal. Due to a significant increase in merchandise imports which resulted in higher trade deficit widened the CAD numbers on a yearly basis. On a cumulative basis, India's CAD grew to 1.8% of GDP in the H1FY18 from 0.4% in H1FY17, which can be attributed to the widening trade deficit.

Outlook:

    In the third quarter, the U.S. economy grew at its fastest pace in more than two years, powered by robust business spending and healthy GDP numbers which expanded at a 3.2% annualized rate during the last quarter. This along with the changes in the tax structure and 3rd rate hike in Dec'17 hints at the US economy being in good shape and can expect it to stick to the projected rate hike cycle in the coming year. However, inflation continues to undershoot FED's target of 2%, which also is leading to flattening of yield curve. In the past yield curve flattening has been one of the early signs of possible recession in the US economy

    The moderation in vegetable prices and lowering of tax rates on various items by the GST Council could keep inflation within comfortable zone. The impact of revision in government HRA on housing inflation is also likely to dissipate from Dec'17. RBI would keep a close watch on the evolving trajectory of inflation before taking any further decision on rate revision in its upcoming policy.

    On the back of government's announcement of increased borrowing has raised concern among the market participants about the fiscal prudence which could keep the bond yield under pressure in near term. RBI partially cancelled the last auction of Dec'17 as the yields were deemed to be high. This is likely to provide support to the market.

    We believe that the next big event would be Feb'18 Budget. We expect some short-term volatility amid negative sentiments but the long-term picture remains healthy. We continue to believe that a strategy which focuses on current accruals and active duration management could offer better risk-adjusted returns. Investors should use this current environment of negative market sentiment to slowly increase debt allocation in their respective portfolios.

Source:
#MOSPI
^RBI
*MFI Explorer
@Bloomberg
&CAG

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.