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The month of August'17 was driven primarily by domestic events more than global ones. The month started with RBI's bi-monthly policy announcement wherein RBI was hard pressed to reduce policy rates by 25 bps. Though the policy continued to remain “neutral”, RBI's “over cautious” stance saw interest rates hardening post the policy announcement as market participants had already factored in a 25 bps rate cut but were hoping for a 50 bps cut. As the month progressed, sentiments turned further negative thanks to the elevated retail and wholesale inflation print and muted industrial and services growth. This was reflected in the performance of the Equity markets as well. The bellwether indices which were near their historical highs were seen correcting over 5% in a matter of just few days. Geo – political tension between countries and a resultant profit booking further weighed down the performance of the Indian equity indices. Besides, outflows of foreign funds, month-end dollar demand from oil companies, aggressive hedging strategy adopted by importers in the wake of currency volatility et. al. kept rupee volatile during the month. Meanwhile, foreign banks also bought greenback which further impacted the USD-INR movement. Towards the end of the month, RBI's annual report showed that 99% of demonetised currency returned to the central bank. GDP numbers further painted a bleak picture about the growth of the Indian economy in Q1FY18 due to the uncertainty revolving around the implementation of GST.

Market Performance*

The domestic equity markets represented by the benchmarks Nifty 50 and S&P BSE Sensex saw range bound movement during the month, to close at 9917 and 31730 respectively on 31st August 2017. During the entire month, Indian equity markets remained weak amid selling pressure in realty and healthcare sectors. Lower than expected corporate earning numbers for Jun'17 quarter weighed on market sentiment. Ongoing geopolitical tensions between the U.S. and North Korea added to the losses. Securities and Exchange Board of India's imposition of trading restrictions on 331 companies, suspected to be used as medium for various financial manipulations.

IIP^

Index of Industrial Production (IIP) contracted 0.1% YoY in Jun'17, as against 8% growth a year ago. In terms of industries, eight of the 22 industries showed growth. A sharp contraction in capital goods production was seen to be a something to be worried about. Capital goods output contracted 6.8% in Jun'17, compared to a 3.9% contraction in the previous month. Output of the manufacturing sector showed de-growth of 0.4% in Jun'17 from a 1.2% growth in May'17. Mining output showed signs of positive growth of 0.4% in Jun'17 compared to a 0.9% contraction a month ago. Electricity generation, however, increased slowly to 2.1% in Jun'17 compared with a growth of 8.7% in May'17.

Inflation^^

India's retail inflation for the month of Jul'17 rose from a record-low to a three-month high of 2.36% primarily on account of an uptick in prices of food items including vegetables. The housing component too accelerated on a sequential basis that contributed to the rise in overall headline reading reflecting the impact of HRA under the 7th CPC recommendations. Wholesale inflation also followed the course with the inflation showed an upward movement after a two-month decline, rising to 1.88% as compared to 0.90% in the month of Jun'17. Going ahead, the pace of acceleration may not remain as sharp in the coming months as costs of vegetable prices, mainly tomatoes began moderating in Aug'17 as supply normalises.

GDP^

India, which had the mantle of world's fastest growing major economy, has now slipped below China in terms of growth. While China reported a growth rate of 6.9% during Q1FY18, India grew at 5.7% on a Y-o-Y basis on the back of destocking ahead of GST implementation and the prolonged impact of demonetisation on the businesses. The cash intensive sectors like manufacturing, mining and construction took the worst hit after the cash squeeze while financial services, transport, communication and defence services showed an impressive growth.

Triggers

  • Progress of monsoon in the Indian subcontinent has been fairly good and its impact on pushing inflation lower in coming months would be key element tracked by RBI to decide on the interest rate trajectory.
  • Markets are likely to remain nervous as tension between the US and North Korea continues. Also, face-off between China and India would further result in the rise in volatility and positions taken by investors being unwound. This has resulted in the search of safer havens and as a result, gold and treasury bonds have rallied. These events may carefully be watched out for and flows towards the emerging economies including India is expected to get impacted.
  • Global markets are likely to be effected by events in China, UK and the European countries and how the economies over the globe tackle the problem of persistent slowdown and restore market confidence.
  • RBI's annual report flagged risks such as an over-leveraged corporate sector and a stressed banking sector, because they could delay private investment demand revival. It also noted that farm loan waivers could add to upward pressures on inflation. However, once inflation peaks out, RBI may exercise an option of another policy rate cut. This could further boost the sentiments of both the equity and debt markets in India.
  • Though the growth of the country has slowed down, FY18 growth is expected to be led mainly by recovery in consumption, on the back of improved prospects for revival in economy led by satisfactory performance of monsoon. The effects of several reform measures unleashed by the government like demonetisation and the implementation of GST are also expected to bear fruit in the times to come.

Source:
# Department of Commerce
^ mospi.nic.in
^^ ICRA
* 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.

Aug'17 marked the slide of the benchmark Indian equity indices on the back of domestic and global geo-political issues and also due to profit booking by FPIs and a corresponding withdrawal of funds from the country. The S&P BSE Sensex slipped over 2.41% while Nifty 50 ended up losing 1.58% of its previous gains. Domestic macro-economic variables also were seen dampening the investor sentiments as inflation shot up to 2.36% as the prices of food items were seen increasing. IIP contracted and crude oil was seen rising marginally. Lower than expected corporate earning numbers for Jun quarter weighed on market sentiments. Imposition of trading restrictions on certain companies by the further led to the slither of the equity indices. If the ongoing geopolitical tensions between the U.S. and North Korea and cross border issues between Indian and Chinese army were not enough to continue making the conditions weak, a lower than expected GDP number added to the losses. Emerging markets saw a need for safer havens as the investors look for alternate investment avenues in the time of the ongoing uncertainties, resulting in the outflow of funds from EMs including India. To offset this mildly bearish undertone of FIIs, DIIs have pumped in strong flows into equities. In Aug'17, domestic investors invested a substantial amount, more than offsetting the FII selling and stabilizing equities to a certain extent.

Market Performance**

The bellwether indices viz. S&P BSE Sensex & Nifty 50 corrected by 2.41% and 1.58% respectively on last day of Aug'17. While S&P BSE Mid-cap index was seen trading up by 0.97%, S&P BSE Small-cap index was down 0.64%. S&P BSE Consumer Durables, S&P BSE India Oil & Gas and S&P BSE India Metal were the top performing sectors during the month rising by 7.49%, 6.96% and 6.91% respectively while S&P India Capital Goods, S&P BSE IT and S&P BSE Health Care fell by 7.37%, 3.58% and 3.57% respectively.

IIP^

Index of Industrial Production contracted 0.1% YoY in Jun'17, showing de-growth a 0.4% in manufacturing activities and marginal growth of 0.4% in mining activities. Electricity generation, however, increased slowly to 2.1% in Jun'17 compared with a growth of 8.7% in May'17. This clearly points towards the lingering impact of destocking ahead of GST implementation and demonetisation on the industrial sector.

Growth$

The Nikkei Purchasing Managers' Index (PMI) for manufacturing sector rose from 47.9 in Jul'17 to 51.2 in Aug'17 owing to a rebound in manufacturing new orders and output across India. The upturn reflected resumed growth of new orders, production and employment which was a substantial turnaround from July's GST-related contraction. However, services sector activity remained weak in Aug'17 due to the perceived impact of the goods and services tax (GST) as Nikkei India Services PMI declined for a second month in a row to 47.5 in Aug'17. The pace of decline was however softer compared with 45.9 in Jul'17. Aslightly quicker rise in cost burdens was registered, whereas output charge inflation softened from July's recent peak.

FPI Inflows*

During the month of Aug'17, the Indian equity markets witnessed inverse behaviors of domestic participants in comparison to the foreign players. Domestic investors invested in the equity market to the tune of Rs. 16,880 crores whereas FPI (Foreign Portfolio Investor) booked profit to the tune of Rs. 12,770 crores. Lowering inflation and strengthening rupee were the reason behind domestic participation whereas the global and domestic geo-political tension made the foreign players more cautious and moves to safe havens.

Outlook

Indian equity markets continue to be impacted by the global and domestic macros. India's growth outlook, though lower at the moment, seem to be bright and the recent key structural changes may improve the Indian economy for sustained growth over the long-term.

Market participants would continue to remain vigilant and track the development in global markets. Volatility from US Feds "quantitative tightening" is likely to be imparted on EM economies' exchange rates and financial markets.

Going ahead, inflation is expected to reverse its downward trend as a favourable base-effect wears off from Aug'17 onwards and prices of food items continue to accelerate, albeit at a slower pace than that seen in Jul'17. However, from here on factors including the impact of HRA under 7th CPC recommendations, better than average monsoon and smooth transition due to implementation of GST could play a vital role in headline readings. This might impact the interest rates in the country and thereby the performances of companies going ahead.

We believe that markets are likely to remain volatile in short term. Any correction in the market should be used to build positions rather than selling stocks in panic as the correction is largely on account of global factors, while the fundamentals of the company still remain intact.

Source:
^ MOSPI
$ 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.

Indian fixed income market saw marginal hardening of yields owing to the lack of any fresh triggers during the month of Aug'17. The yields could have hardened further had RBI not reduced rate by 25bps in its third bi-monthly policy, announced in the first week of Aug'17. The reduction in rates was a result of lowering retail inflation, smooth roll-out of the GST and better than normal monsoon. During the start of the month 10 year G-sec yields which were seen at 6.45%, increased during the mid of the month as supply dynamics came into play after the RBI conducted open market sales of debt securities to absorb excess liquidity from the system. The yields of benchmark 10 year G-sec hardened by 8bps towards the end of the month of Aug'17 to 6.53%. Globally, geopolitical tension kept the fixed income markets under pressure due to the ongoing riff between North Korea and US & Japan. On the domestic front, the cross border tension between Indian and Chinese military forces over Doklam also added fuel to the global worries. These tensions slowly managed to fade away which provided foreign players little comfort by the end of the month. Brent crude prices traded marginally lower to $52.38/barrel by the end of Aug'17 from $52.65/barrel at the end of Jul'17. The rupee continued to strengthen marginally against the USD, settling at 63.91 in Aug'17 as against 64.19 in Jul'17.

Q1FY17-18 GDP growth falls to a three-year low:^:

Gross Domestic Product (GDP) growth slid below 6% mark, as the Indian economy grew at 5.7% during Q1FY17-18 as suggested by the data released by CSO. The GDP growth rate for the first quarter was much slower than 7.9% seen in the same quarter a year ago and 6.1% in Q4FY17. Major factors which impacted growth were the moderation in private consumption and contraction in capital investment along with other major factor like the uncertainty regarding the implementation of GST in Q1FY18. Gross Value Added (GVA) growth was seen at 5.6%, against 7.6% in the same quarter of the previous year because of slow growth of the manufacturing sector. Manufacturing sector grew 1.2% in the Jun'17 quarter compared with 10.7% in the year-ago period.

Inflation rose, but well within RBI's target level:#:

The retail inflation for the month of Jul'17 increased to 2.36% as compared to 1.46% in Jun'17 led by a sharp jump in vegetable prices. India's wholesale price inflation rate picked up in July'17 after easing for four straight months, with food prices back on the rise. Government data showed that Wholesale Price Index (WPI) based inflation grew 1.88% in Jul'17 from 0.90% in the previous month and 0.63% in the same month of the previous year.

Fiscal deficit at 92.4% of full-year target at the end of July17&:

By the end of Jul'17, the capital expenditure by the government rose from 28.9% of the same period previous year to 30.8% which led to the government reaching to 92.4% of the fiscal deficit target of Rs. 5.05 trillion. In addition the revenue deficit target rose to 131.2% of the full-year target of Rs.3.2 trillion as compared to 93.0% the previous year.

Outlook:

Globally markets remained volatile due to the geo-political tension brewing between US and North Korea. Condition continues to remain uncertain in the US as political turmoil may intensify which could raise doubts regarding the Trump's reform agenda. On the Eurozone front, weakening Euro against the greenback due to the steady eurozone inflation data lowers the expectations of a rapid withdrawal of policy stimulus in the near term. Market participants are expected to remain cautious over the developments of and awaits any signals regarding timing of future rate hikes and balance-sheet reduction by Fed and ECB's plans to put an end to its QE program.

On the domestic front, RBI is faced with twin problems. On one hand, concerns over rising inflation and the RBI governor's worries over the farm loan waiver may reduce the possibility of rate cut in the next bi-monthly policy while on the other hand, RBI will have to reduce rates further to bolster growth post such meagre growth numbers. However, RBI is expected to be prudent and is expected to focus on ensuring effective transmission of policy rates rather than reducing interest rates in near future.

The recent figures on GDP growth and retail inflation could add to the volatility in the near future due to the base effect impact and the consequences of the implementation of 7th CPC pay-out. RBI flags upside risk to inflation, however it doesn't pose a threat to the current RBI's target of 2.0-3.5% in the first half of FY2017-18 and 3.5-4.5% in the 2H FY2017-18.

Taking into consideration the major reforms and stringent policies, a good monsoon in progress with favourable investment environment on the back of political stability provides the much needed thrust to fuel India's growth story.

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.