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September 2017 was a month which saw both Indian equity and fixed income markets under pressure on the back of fiscal deficit woes, increasing inflation print, high crude oil prices and negative global cues. Inflation inched up due to an increase in vegetable prices, impact of House Rent Allowances as well as introduction of GST. Crude Oil prices surged during the month buoyed by tensions between the US & Iran and due to the expectations that OPEC might decide to extend its production-cut deal. Indian markets also reacted to a China downgrade by S&P, a UK downgrade by Moody's, and start of 'QE Unwinding' by the US FED. The geopolitical tensions around the globe dented the sentiments of the market participants as foreign players withdrew funds from Indian equity markets, resulting in the falling of the equity indices. The reduction in flows in the Indian fixed income markets also resulted in the 10-year benchmark yields hardening by over 14 bps during the month gone by. A sharp uptick in the US dollar demand amid rising prospect of US Fed rate hike by the end of 2017 along with exodus of capital outflows were the trigger points exerting pressure on the Indian Rupee which depreciated to 65.28/USD towards the end of Sept'17.

Market Performance*

Geopolitical tension around the globe, a weaker currency and outflow of funds by FIIs impacted the performance of Indian equity markets. Bellwether indices viz Nifty 50 and S&P BSE Sensex closed at 9788.60 and 31283.72 respectively on the last day of September 2017. The Nifty 50 fell by 1.30% while the BSE Sensex plunged by 1.41% during the month of September'17.

IIP^

Reassuringly, industrial growth, represented by Index of Industrial Production (IIP), saw a modest expansion of 1.2% in Jul'17 after contracting by 0.2% in Jun'17. As per sector based classification, the pick-up in production activity was led by growth in the Mining sector at 4.8% (YoY) and Electricity sector at 6.5% (YoY). Manufacturing growth stood at 0.1% compared to a contraction of 0.5% observed in the previous month. As per Use based classification, primary goods saw an expansion of 2.3% while infrastructure/construction saw an expansion of 3.7%. Capital goods output declined by 0.4%, compared to the contraction of 6.0% observed in Jun'17.

Inflation^^

Headline CPI for Aug'17 stood at 3.36%, compared to the previous month's reading of 2.26%. This surge can partly be attributed to the lack of base effects, which aided in disinflation observed in the recent past. Additionally, price pressures arising from a rise in vegetable prices, impact of house rent allowances as well as the introduction of GST have contributed to this uptick in retail inflation. As seasonal pricing pressures on vegetable diminish, the headline print can be expected to remain near RBI's near term target. Transient effects of HRA and GST can be expected to continue to weigh on inflation outcomes in the coming months. Reaching a four month high, wholesale inflation quickened to 3.24% in Aug-2017 from 1.88% observed in the previous month. Food inflation continued to be a major factor contributing to this jump despite some deceleration observed on a sequential basis in the index.

Balance of Payments:$

Balance of payments for the April-June 2017 quarter stood at $11.40 billion up from $6.969 billion in the year ago period. The net foreign direct investment at $7.2 billion in the reporting quarter almost doubled from its level in the same period last year.

Trade Deficit##

India's exports grew 10.29% on a yearly basis to $23.82 billion in Aug'17 from $21.60 billion in the same period of the previous year on account of rise in shipments of engineering, petroleum and chemicals, which grew 19.53%, 36.56% and 32.41%, respectively. Imports too grew 21.02% to $35.46 billion in Aug'17 from $29.30 billion in the year-ago month. As a result, trade deficit in Aug'17 widened to $11.64 billion from $7.71 billion during the same period of the previous year.

Triggers

  • The ongoing geo-political tensions has made investors around the globe extra cautious. Markets may remain circumspect over geopolitical situation, ambiguity over crude oil prices and domestic macro-data and adopt a wait & watch approach in the short term.
  • The strengthening US Dollar due to overall dollar strength on back of hawkish Federal reserve and relatively strong US economy
  • Going ahead we expect focus of market participants to shift to the upcoming quarterly results and globally, on unwinding of balance sheet by the U.S. Fed.
  • Domestic macroeconomic data and investment trend of overseas investors will be the prime pointers of direction for the Indian market in the time to come.

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

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 equities experienced a slight decline in Sep'17 as foreign portfolio investors pulled money out of the country at a fast pace amongst a slide in the Indian Rupee. The Indian equities performed well during the first half of the month but lost ground in the second half owing to the global geo political tensions, weak domestic macro data and increasing crude prices along with the weakening currency. FPIs shifted money from the expensively valued domestic stocks to cheaper destinations on worries that corporate earnings growth will take time to revive post the implementation of GST. Another reason for the outflow of funds was the caution ahead of the normalisation of easing by the US Fed. Crude oil prices also hit a two-year high in Sep'17 on account of the combined effect of a pick-up in demand, tightening supplies due to production cuts by OPEC and reduction in the crude oil inventories in the US. Overall, the domestic market indices displayed range bound movement and ended below the levels seen at the start of the month.

Market Performance**

The month of Sept'17 saw mixed performance by equity indices. Bell weather indices like S&P BSE Sensex & Nifty 50 were seen underperforming various other indices. The S&P BSE Sensex fell by 1.41% in Sept'17 to close at 31823.72. Nifty 50 also fell by 1.30% to close at 9788.60. Meanwhile, S&P BSE Mid-Cap fell by 0.67% while S&P BSE Small-Cap gained 0.76%.

On the sectoral front, S&P BSE Metal and S&P BSE Auto were the sectors which rose by 2.10% and 2.07%, respectively during the month. The market was dragged down by negative sentiments in S&P BSE Telecom, S&P BSE FMCG and S&P BSE Realty which were seen falling by 4.94%, 3.95% & 3.38% respectively.

IIP^

After contracting by 0.1% in the month of Jun'17, industrial growth expanded modestly by 1.2% in the month of Jul'17 possibly on the back of some restocking by companies following GST rollout and a marginal uptick in the core sector. Even though this expansion is not exceptional, it presents an encouraging picture and the future trends in industrial production are essential in determining a rebound in growth impulses in the economy.

PMI`

The Nikkei India Manufacturing Purchasing Managers' Index (PMI) increased to 51.2 in Aug'17 from 47.9 in Jul'17. The upside was driven by new orders and output across the country. The expansion was modest; however, it reflected a substantial turnaround from the contraction in Jul'17 due to the rollout of GST. Nikkei India Services PMI Business Activity Index came in at 47.5 in Aug'17, down from 45.9 in Jul'17. This was the second consecutive month of contraction of service PMI.

FPI Outflows**

Continuing the trend witnessed in the last month, FPIs (Foreign Portfolio Investor) reduced exposure to Indian equities in the month of Sept'17 also. On net basis foreign investors removed funds to the tune of Rs. 11,392 Crs. from the Indian equity markets; primarily led by slowing growth in corporate earnings coupled with high valuations of Indian stocks and strengthening US Dollar leading to weakness in the rupee.

Outlook

Global financial markets have been driven mainly by the changing course of monetary policy in US and Eurozone, generally improving economic prospects and oscillating geo-political factors. Equity markets in most developed economies have continued to rise while the emerging markets, including India have seen some stress. Going ahead, the impact of tapering of QE & Balance sheet unwinding on emerging economies like India will be a crucial milestone to be watched for.

Domestically, Indian macro-economic variables have impacted the equity markets negatively. Foreign investors were seen booking profit on the back of geopolitical worries and increase in crude prices. In the near term, Indian equity markets could remain volatile and the direction may primarily be driven by the credit growth and the upcoming corporate result season. We expect the impact of operating & financial leverage on the company may come into play in H2FY18.

Once the ongoing geo-political issue de-escalate, the markets will revert to its fundamentals which remain strong for India.

The recent structural changes by the government are likely to be growth augmenting over the medium- to long-term by improving the business environment, enhancing transparency and increasing formalisation of the economy. Going ahead, these steps along with improving macroeconomic variables could augur well from a long term perspective.

Despite the short term aberrations, on a long term horizon, we believe India is slowly heading towards a period of sustainable growth. A 'Buy on Declines' strategy could be beneficial for a long term investor in the current environment.

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.

Yields in the Indian fixed income market rose for the second consecutive month in Sept'17, with the 10-year benchmark hardening on the back of rising inflation, expectation of increase in fiscal deficit due to slump in economic growth, higher crude oil prices and a weakening currency. Weaker domestic growth, measure by GDP, compelled the ministry of finance to propose a plan to improve economic activities and increase growth in the time to come. The 10-year G-sec yields which were seen at 6.52% during the beginning of the month, hardened by 14bps towards the end of the month to 6.66%, primarily due to the combined impact of a slow growing economy and geo political tensions in the globe. Retail inflation in Aug'17 at 3.36% inched higher than the previous month; closer to RBI's target of 3.5% in H1FY18. On the global landscape, during its FOMC meeting in Sept'17, US Federal Reserve decided to maintain accommodative stance however kept its interest rates unchanged awaiting more clarity on labor market conditions and inflation data points. However, the FOMC stuck to increasing rates at a “gradual” pace, increasing probability of Dec'17 hike. Brent crude prices increased significantly by $5.14/barrel to $57.54/barrel on 29th Sept'17 from $52.38/barrel at the end of Aug'17 due to supply side controls in production by OPEC. The month also saw US Dollar strengthening which resulted in a weaker Indian rupee falling by Rs.1.37 against the USD to settle at Rs.65.28 per dollar on 29th Sept'17. Overall, Sept'17 can be seen as a month to forget for the Indian debt market participants on the backdrop of lacklustre domestic macros, likelihood of extension of GST disruption and the reversal of the tailwinds enjoyed by the domestic economy due to benign commodity prices and falling inflation.

RBI maintains status quo^:

RBI, in its Oct'17 policy, decided to maintain status quo and keep the repo rate unchanged at 6% owing to the uncertainty posed by the path inflation would adopt, teething problems shown by GST, and firming up of crude oil prices in Sept'17. Explaining its rationale for revising downwards GDP estimates from 7.3% to 6.7%, RBI noted that the loss of momentum in Q1FY18 and the first advance estimates of Kharif food grains production are early setbacks that impart a downside to the outlook. RBI also acknowledged that the implementation of GST has had an adverse impact, rendering prospects for the manufacturing sector uncertain in the short term. This may further delay the revival of investment activity, which is already hampered by stressed balance sheets of banks and corporates. RBI expects growth to pick-up in next few quarters as disruptions from GST fade away

Retail Inflation surges again#:

The retail inflation for the month of Aug'17 grew at 3.36% as compared to 2.36% in Jul'17 led by a sharp jump in vegetable prices. Indian Wholesale Price Index (WPI) based inflation increased 3.24% YoY in Aug'17 from 1.88% in the previous month. The rise in inflation was due to an increase in food inflation and prices of manufactured items.

Government exhausted 96.1% of full-year fiscal deficit target:

The capital expenditure by the government rose to 35.5% and revenue expenditure to 45.8% by the end of Aug'17, due to which the fiscal deficit for the government reached to 96.1% of the total target of Rs.5.46tn. In addition, the revenue deficit has overshot its budgetary estimate and rose to 133.9% of the full-year target of Rs.3.2tn as compared to 91.7% the previous year.

Current account deficit (CAD) increased sharply in Q1FY18&:

India's (CAD) increased sharply to $14.3bn (2.4% of GDP) in Q1FY18 from $3.4bn (0.6% of GDP) in Q4FY17 and $0.4bn (0.1% of GDP) in the same period of the previous year. On the back of increase in trade deficit impacted by a larger increase in merchandise imports led the CAD increased on a yearly basis. In the financial account, net foreign direct investment almost doubled to $7.2bn in Q1FY18.

Outlook:

Global markets could continue to remain volatile after US Fed's indication of initiating reduction of its balance sheet along with the tapering of asset purchases by ECB. With the US labour market strengthening and expectations of improvement of economic activity, US Fed may gradually increase its interest rates during the year. However, the actual path of the rate hike will largely be data dependent. Going forward, the US Fed Policy decision would be instrumental in defining the path of the markets globally.

On domestic front, relatively better monsoon has helped stabilize food prices that were a cause of concern over the last couple of months. We expect inflation to be near RBI's target thereby providing a boost to the overall economy going ahead. However, a weaker rupee, reversal of a favourable base effect and volatile crude oil prices would weigh heavily on the inflation in the near term. In the near term, concerns over increase in fiscal deficit, on expectations of probable fiscal stimulus measures by the government could keep the fixed income market volatile.

While RBI continued to remain “neutral” in the policy, MPC would monitor incoming data closely and targeted to keep the headline inflation close to 4% on a durable basis. While acknowledging that growth has slowed down, RBI would like to wait for more data to separate the transient factors from enduring factors. Various structural reforms are expected to provide impetus to growth on the back of improving business environment and increasing formalisation of the economy which augment well over the medium to long term for the economic growth.

In short term, we expect markets to be a bit volatile owing to forex outflows. However, with the bonds being bought on every rise, we continue to believe that the appetite in the market is still present. Based on the current market sentiments, we expect the yields to be volatile in the near term. With sharp slowdown in growth and inflation largely under control, over the medium to long term, these factors are likely to favour lower yields.

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.