Skip Ribbon Commands
Skip to main content
home crmf > Pages > newsletterMay2017

FY 2018 started with the first RBI policy of FY18 in which the central bank kept the rates constant while reduced the LAF corridor to 50 bps from the then 100 bps. Consequently, the Reverse Repo was increased and the MSF rate was decreased by 25 bps each respectively. This resulted in the hardening of the 10-year G-sec yields while equity markets witnessed some profit booking. The month also saw major macro-economic variables turn favourable. While IIP, PMI indices and WPI were seen to be majorly positive, CPI registered a print higher than the previous reading, though it remained comfortably below RBI’s target of 4%. Indian Rupee continued appreciating against the US Dollar and Crude was seen trading in a tight range; hovering around ~$51 - $54 throughout the month. The US Federal Reserve maintained status quo on key rates but hinted for better data points and clarity on reforms by the government before taking a future course of action on interest rates in the next couple of months. Eurozone continued to witness uncertainty with elections in countries like Netherlands, France and Italy and the execution of the Brexit referendum by Great Britain.

Market Performance*

Indian equity markets touched new highs in the month gone by. Markets did witness profit booking in rate sensitive sectors post the RBI’s policy announcement. Market sentiments picked up in the second half of the month which saw S&P BSE Sensex surpassing the iconic 30,000 mark and Nifty 50 trading over 9,000. The benchmark indices, S&P BSE Sensex and Nifty 50 gained by 1.01% and 1.42% respectively.

Inflation^^

Higher fuel prices drive up Mar’17 CPI to five-month high at 3.81% compared to 3.65% in Feb’17. RBI expected headline CPI inflation to undershoot the target of 5% for Q4 of 2016-17 in view of the sub-4% readings for January and February 2017. For 2017-18, inflation is projected to average 4.5% in the first half of the year and 5% in the second half. Indicating risk further over inflation, RBI surprised investors in its first monetary policy for FY18, by increasing reverse repo rate by 25 basis points to 6% from 5.75%. The central bank kept policy rate unchanged at 6.25%. On the other hand, India’s wholesale inflation eased to 5.70% in Mar’17 from a three-year high of 6.55% in the previous month thanks to a slower increase in prices of fuel and in manufacturing sector, even as costlier vegetables pushed up food inflation during the month.

IIP^

India’s industrial output slipped to a four-month low, contracting 1.2% in Feb’17, mainly on account of decline in the manufacturing sector and lower offtake of capital as well as consumer goods compared to a growth of 1.99% a year ago. The decline in IIP for February 2017 is mainly on account of 2% contraction in manufacturing sector, capital goods output declining by 3.4%. The non-durable consumer goods output shrank by 8.6% while the output dipped by 0.9% in the consumer durables segment for Feb’17.

Trade deficit @

The trade deficit in India increased to USD 10.4 billion in Mar’17 from a USD 4.4 billion gap a year earlier. Imports surged 45.3% to USD 39.7 billion. It is the highest value since November of 2014, boosted by a 101.4% rise in oil and a 329.2% jump in gold purchases. Exports jumped 27.6%t year-on-year to USD 29.2 billion, reaching the highest value since Mar’14. Sales of non-petroleum and non-gems and jewelry went up 25.5%.

RBI’s monetary policy **

Below normal monsoon with likely El-Nino conditions in latter part of 2017, one-off impact of GST rollout and implementation of allowances of 7th CPC could result in an uptick in inflation prompted the central bank to keep its policy rates constant in its first bi monthly policy of the year. RBI however narrowed the policy corridor by raising the Reverse Repo by 25bps to 6%. The MSF and Bank rate were revised downwards by 25 bps and now stand at 6.50%. The MPC remains committed in bringing headline inflation close to 4% in a durable and calibrated manner. The Central Bank projected GVA growth to surge to 7.4% in FY18 from 6.7% in FY17. RBI stated that implementation of Standing Deposit Facility is under consideration by the Government.

Triggers

  • Though global markets are showing signs of recovery, volatility may continue to prevail on political uncertainty in Europe and pace of US rate hikes. Market participants may continue to be driven by global sentiments. USD/INR is likely to be continue to be driven by strong inflows and global factors.
  • The progress of monsoon is likely to help in determining the inflation trajectory going forward. With IMD forecast of normal monsoon with good spatial distribution prices of food items may remain under check.
  • Market participants will likely track the 4th quarter corporate earnings season.
  • Though crude oil prices seem to be stabilizing, whether it is able to sustain at current levels or not might be keenly tracked by market participants. OPEC meeting at end of May to take decision on extending the production cuts will likely be key factor driving crude prices.

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

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 steadily improve primarily driven by continuous inflows from the foreign & domestic participants, on the back of improving macro fundamentals, political factors and a strengthening rupee. These factors led the key market indices i.e S&P BSE Sensex and Nifty 50 continue their upward momentum. Improving CAD and fiscal deficit, increasing foreign reserves and contained inflation led to the appreciation of the Indian currency for the fourth month in a row during Apr’17 from INR/USD 64.85 on 31st Mar’17 to INR/USD 64.25 on 28th Apr’17.

 

On global front, events such as political concerns between the US and North Korea as well as US attack on Syria, political crisis in the Eurozone viz. election in Italy and France, have put the globe on greater uncertainty. During the month, global events led to the major economies remaining volatile. FTSE and Nikkei were seen trading down by 1.17% and 0.11% while NASDAQ, Hang Seng and Dow Jones were seen trading in green. The Indian equity markets continued to remain the preferred investment destination from the perspective of political stability and key structural reforms such as GST and corporate governance.

Market Performance**

The Indian Equity markets rose in the month of Apr’17. S&P BSE Sensex crossed 30,000 levels on 26th Apr’17 and Nifty 50 traded above 9000 mark. On net basis India’s bellwether indices viz. S&P BSE Sensex & Nifty 50 gained by 1.01% and 1.42% respectively while S&P BSE Mid- Cap & S&P BSE Small-Cap saw an increase of 4.98% and 6.50% respectively. On the sector front, most of the sectoral indices were in green. S&P BSE Realty remained the top gainer, rising by 20.25% followed by S&P BSE Consumer Goods and S&P BSE Oil & Gas, which rose by 8.63% and 6.57%, respectively. However, S&P BSE IT, S&P BSE Metal and S&P BSE HealthCare fell by 7.20%, 4.24% and 1.91% respectively.

Growth'

Rising to a five-month high of 52.5 in Mar’17, from 50.7 in Feb’17, the seasonally adjusted Nikkei India Manufacturing PMI indicated that operating conditions in the sector improved to a greater extent. Amid evidence of strengthening demand conditions, the level of new orders received by manufacturers rose significantly in Mar’17. Likewise, production expanded at the strongest rate since Oct’16 as firms sought to fulfill new and existing projects. The Indian service sector moved further away from the demonetisation-related contractions seen towards the end of 2016 and beginning of 2017. New business and output rose for the second straight month in Mar’17, with rates of expansion accelerating in both cases. The Nikkei India Services Business Activity Index posted above the critical 50.0 level for the second-month running in Mar’17, highlighting ongoing growth of output in the sector. Moreover, rising from 50.3 in Feb’17 to 51.5, the figure hinted towards a stronger rate of expansion.

IIP shrinks^

India’s industrial activity shrinks 1.2% in Feb’17 as compared to an increase of 2.7% in Jan’17 on account of faltering economic activities majorly in manufacturing. However, in the Apr’16-Feb’17 period, IIP registered a growth of 0.4% as compared to 2.6% a year ago. The manufacturing sector declined by 2% as compared to a growth of 2.3% reported in Jan’17. Meanwhile, capital goods too declined 3.4% in Feb’17 as against a staggering growth of 10.7% in Jan’17. Consumer goods too declined 5.6% from an uptick of 1% in Jan’17. In the consumer durables segment, output declined 0.9% as against a growth of 2.9% in Jan’17. The non-durables registered a sharp decline of 8.6% in Feb’17 versus fall of 3.2% in Jan’17. However, basic goods segment reported a growth of 2.4% in Feb’17 albeit at a slower pace since 5.4% reported a year ago. The segment rose 5.3% in Jan’17.

FPI Inflows**

April’17 was yet anothermonth which witnessed positive FPI (Foreign Portfolio Investor) flows.Due to strong domestic variables, FPIs invested ~ Rs.2,417Crs into the Indian equities in the month gone by. Not only by the FPIs, the domestic investors also invested in the equity markets to the tune of ~ Rs. 8,916Crs.

Outlook

Concerns related to the geopolitical tensions, weakness in global markets and US policy reforms and US Fed’s action is likely to drive the markets sentiments in near term.

The outcome of the monsoon, implementation of the allowances recommended by the 7th CPC and an upside risk arising out of one-off effect of GST could pressure inflation in coming months.

On back of strong FII flows and strengthening currency, Indian equity markets continue to gain momentum and expected to improve in medium to long term. While global risk remains high, the expectations of a recovery in corporate earnings will be the near-term trigger for Indian markets and the movements would be largely driven by 4Q corporate results as well the global trend.

With the political and regulatory stability the Indian equity market is in a structurally constructive phase. The strong macroeconomic condition with the economy shifting from informal to formal could provide confidence to the investors and improve the market sentiment. With the improving domestic environment, going forward the equity markets are likely to gather momentum on a longer term owing to inherent structural strengths of the economy with the bottoming of corporate profitability and prospects of domestic flows.

While India has a strong foot hold on the domestic front, short term volatilities could cause jitters in the markets on account of global cues. Such interim periods of heightened volatility should be viewed as opportunities and can be utilized to increase allocation toward equity assets.

Source:
^ MOSPI, ICRA
` Markit
** ICRA MFI Explorer, Data as on 28th April’17
* Mutual fund net inflow data is as of 25th April’17

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 new financial year started with RBI maintaining its neutral stance on its policy rates. In the month of April’17, RBI kept the policy rate unchanged at 6.25% but reduced the liquidity corridor to 50bps from the earlier 100bps. The decision impacted the 10 Year G-sec taking the yields up by 12bps in one-day ending at 6.77% on 6thApr’17 after the policy. Globally, the geopolitical tension continued with the US attack on Syria and escalations of tension with North Korea over nuclear testing. The Eurozone political crisis continued during the month of Apr’17 with the result of primary election in Italy as well as the unclear mandate in French presidential election. Ambiguous geopolitical situation across the major economies and non-clarity on implementation of policies under the Trump leadership led to dampen the investors’ mood which resulted in the yields of the US 10 Year bonds to fallresulting in investors flows to safe heaven asset.

On the domestic front, the central bank took key measures, from the announcement of the auction of T-bills worth Rs. 1 lakh crore under the MSS to increase in FPI limit in G-Sec by Rs. 170 bn (central government securities – Rs. 110 bn & SDLs – Rs. 60 bn). The auction of T-bill was to absorb excess liquidity in the banking system and the increase in FPI limit helped foreign investors regain confidence in the Indian fixed income market. The Yields of Indian 10 Yr G-Sec hardened by 28 bps for the month of Apr’17 ending at 6.96% as compared to 6.68% on 31st Mar'17. With the strengthening Indian markets due to strong macroeconomic scenario and political stability, foreign institutional investors (FIIs) as well as domestic participants continued to be net buyers with inflows of Rs. 19,469 crores and Rs. 57,259 crores respectively in the month of April’17.

RBI-Bi-monthly Policy in line with the expectations^

After the demonetization of high value currency, excess liquidity has continued to remain a key concern for the central bank. To further streamline the existing liquidity framework, the RBI in its first Bi-Monthly Monetary Policy for FY18, narrowed the LAF corridor to +/- 50 bps v/s the earlier +/- 100 bps. With this move, the gap between the rate at which RBI lends and borrows money from banks reduced to its lowest since the central bank began the liquidity adjustment facility in June’00. However, the committee maintained its pause on policy rates, whilst reiterating its neutral stance. The MPC forecasted an upside risks to its inflation projections, while GVA growth expected to remain healthy at 7.4% for FY18. Consequently, Repo rate continued to remain unchanged at 6.25% whereas, Reverse repo was increased by 25 bps to 6% and MSF reduced by 25bps to 6.50%.

Retail Inflation inching upward#

India’s retail inflation quickened to a five month high of 3.81% in Mar’17 as compared to 3.65% during Feb’17, though it was well below RBI’s projection of 5% for Mar’17. The uptick was led by increase in prices of food articles such as fruits, vegetables and fuel. Meanwhile, Core CPI that strips out food and energy prices inched higher to 4.9% in Mar’17 from 4.83% in February’17. WPI-based inflation fell to 5.70% in Mar’17 from a high of 6.50% in Feb’17, mainly due to a fall in mineral and fuel prices despite hardening in prices of food articles.

Fiscal Deficit~

India’s fiscal deficit for the FY2016-17 YTD (Apr-Feb’17) period rose to Rs. 6.05 lakh crore i.e. 113% of the budgeted target compared to Rs. 5.72 lakh crore in the same period a year ago. Government had budgeted a fiscal deficit of Rs. 5.34 lakh crore for FY17. However, the revenue deficit during Apr’16-Feb’17stood at Rs. 4.44 lakh crore which was 142% of the budget estimate.The total revenue receipt till Feb’17 was Rs. 10.94 lakh crore or 76.9% of the budget estimate.

Outlook:

Looking at the economic and geopolitical uncertainties, market across the globe are expected to remain volatile primarily because of unclear US government policies and the uncertain conditions in the European region. Escalating tensions in the Korean peninsula could lead to further volatility.

On the domestic front, the inflation levels are well within the limit, fiscal and current account deficits i.e. the twin deficit under control and the strong policy reform measures (implementation of GST) have helped enhance efficiency and productivity of the economy. These variables provide an opportunity to harness the unutilised potential and make the economy a favourable investment destination.

Prospects of improving monsoon are likely to provide respite to inflationary pressures. Appreciation of rupee and falling commodity prices especially crude oil will likely provide further comfort to policy makers. However, the unfavorable base effect, impact of increase in HRA allowances and GST could push inflation higher in the second half of the year. However, inflation is likely to undershoot RBI’s target of 4% -4.5% in H1FY2018.

Given risks to next year’s inflation trajectory, we expect interest rates likely to remain on hold for some time and RBI could decide to change its stance based on the macro-economic situation during the year. However, the current market dynamics provide an opportunity in other segments of bond markets viz. corporate bonds, State Development Loans (SDLs) where spreads (over G-Sec) are attractive. With excess cash lying with banking sector, SDLs and high quality corporate papers will likelyhave good demand in near future. Over longer term, we expect rates to drift lower as inflations remains benign and global economic situation stabilizes.

Source:
#MOSPI
^RBI
*MFI Explorer
~Controller General of Accounts
@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.