Skip Ribbon Commands
Skip to main content
home crmf > Pages > newsletterSep2018

Indian equity indices in the month of Aug'18 rose on back of positive sentiments amongst the market participants and further on back of positive & improving macro-economic data. The month started on a positive note with predictions of rainfall of around 95% of the Long Period Average (LPA) by the India Meteorological Department (IMD) and normal rainfall for Aug and Sep. The Indian service sector has remained in expansion territory for the second consecutive month in July which further boosted sentiment. We saw S&P BSE Sensex crossed the 38000 mark for the first time in the history though it did not close at those levels. This was supported by the announcement of Reserve Bank of India (RBI) to pay dividend of Rs. 50000 crore to government. There was optimism in the market over the declining oil prices and support in the buying momentum of the foreign and domestic institutional investors (FII & DII). There was positive momentum witnessed in the market but at the fag-end the trading sentiment, became fragile amid escalating trade war tensions globally and firmness in crude oil prices. 
 
On the global front, U.S. markets were also positive, on back of good US data & upbeat corporate earnings. The Fed chair has kept the policy door open for a future rate hike in the next policy meeting as it stuck with its plan of gradually raising interest rates while maintaining its upbeat outlook on the U.S. economy and labour market and if the strong growth in income and jobs continues. Globally market participants were positive, driven by optimistic outcome of the trade talks between the U.S. and Mexico. Buying interest also found support from the official data showing the growth in the U.S. economic activity. On the fixed income sided, the domestic bond yields hardened during the month and the 10-year G-sec closed at 7.95%. The hardening was on back of the review by the Monetary Policy Committee (MPC), in its third bi-monthly policy which increased the key policy repo rate by 25 basis points to 6.50% from 6.25% and retained its 'neutral' stance. This was backed by rupee declining to a record low against the U.S. dollar after the Turkish lira plunged against the U.S. dollar affecting the other emerging economies of the world. Fears of the foreign outflows from the domestic debt markets raised concerns amongst the fixed income market participants.

Market Performance*

The Indian equity markets ended the month in a positive note and touched fresh highs, on back of strong macro-economic factors, amount of tax growth, normal rains projection by the India Meteorological Department (IMD) for the month of August & September and the strong corporate earnings cycle. Nifty 50 was up by 2.85% (M-o-M) whereas S&P BSE Sensex was up by 2.76% (M-o-M). The S&P BSE Midcap and S&P BSE Small cap indices were also up by 5.42% (Mo-M) and 3.67% (M-o-M) respectively.

GDP^

India remains the world's fastest growing major economy, with the Q1 (April-June) FY19 GDP at 8.2%. This is mainly on back of strong performance in manufacturing and agriculture sectors. India's Gross Value Added (GVA) for the quarter under consideration has been estimated at 8%, up from 5.6% a year ago. The growth states that the worst may be over and the troublesome things of demonetisation and the initial confused implementation of Goods and Services Tax (GST) may finally be behind us. The recovery in the demand is also seen by the growth in manufacturing sector (13.5%). Manufacturing, construction and public administration were the three fastest growing sectors in Q1 FY19, which was further benefited from a favourable base effect.

IIP^

India's Index of Industrial Production (IIP) moved to a four-month high of 7% in June'18 as compared to 3.9% (revised upwards from 3.2%) in May'18. This was due to the benefit of the low base effect of last year when manufacturing had slowed down as dealers cut stocks and put fresh orders on hold ahead of the goods and services tax rollout. 19 out of the 23 industry groups in the manufacturing sector recorded positive growth in June'18. Mining output rose 6.6% compared with a 0.1% growth in June last year while manufacturing output improved 6.9% compared with a decline of 0.7%. Electricity generation growth stood at 8.5% compared to 2.1% last year.

Inflation^^

The Consumer Price Index (CPI) based inflation for the month of July'18 slowed down to 4.17% as compared to 4.99% in June'18. India's inflation cooled down to subdued food prices after the Monetary Policy Committee (MPC) raised interest rates for the second straight time. The inflation had slowed for the first time after rising for the past four months. The MPC projects inflation at 4.6% in the September-ending quarter, 4.8% in the second half of FY19, and 5% in the first quarter of FY20. Vegetable prices declined by 2% in July almost after a year, bringing down the overall inflation.

Trade Deficit##

Trade deficit widened to $18.02 bn in July'18 as against $16.6 bn in June'18. The trade deficit widened in July'18 mainly on account of higher oil import bill. India's imports during the month were valued at $43.79 bn while exports rose by 14.32% to $25.77 bn in July'18. On the other hand oil imports surged 57.41% to $12.35 bn.

Triggers

  • Investments by the foreign and domestic investors would be a key point to watch out for, which could keep sentiments elevated.
  • With rising oil prices (crude), depreciation in the rupee and the outflow of foreign portfolio investments and higher trade deficits there are concerns that the current account deficit might rise in the current fiscal year.
  • The volatility in the INR currency due to strong demand for dollar and the ongoing emerging market currency crisis would be a key event for market participants domestically and globally.
  • Investors would closely track geo-political tensions especially between the two major economies US and China, the weakening movement of rupee against the dollar and volatile crude oil price which will remain a major concern for investors.
  • With the US and China having targeted each other in a fresh boom of a global trade war, India's exports, like that of many others, could come under pressure.

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

August'18 was a month that witnessed continuation of tug of war between challenging macros and improving micro-economic condition of the country. While most of Indian macro-economic factors slowly start moving towards the positive zone, the Indian Rupee depreciated against the US Dollar amidst worries over crude prices, geopolitical tensions between US & China and the Turkey Crisis (leading to currencies across Emerging Markets depreciating). The global troubles comes at a time when India's problem of higher inflation is reappearing due to rising oil prices and global monetary policy is shifting to a tightening bias. Despite those concerns and increasing uncertainty ahead of national elections next year, Indian stocks have scaled several fresh highs. The bellwether Indian Equity Indices Nifty 50 and S&P BSE Sensex saw newer highs largely driven by expectations of strong corporate earnings and supported by strong FII and DII inflows. The markets however were led by select frontline stocks; a trend that is seen in US markets also.
 
Tax growth, good monsoon rains, rising consumption in the core industries and recovering corporate earnings have supported the Indian economy in the recent past and this has led India to regain the top spot as amongst world's fastest-growing major economy. The markets were further fuelled by the inflows by FIIs and DIIs both. FIIs were net buyers of equities to the tune of 976 Crs while domestic institutions bought 3807 Crs of equities during the month.

Market Performance*

The bellwether indices viz. S&P BSE Sensex & Nifty 50 were up 2.76% and 2.85% respectively during the month. The broader market indices like S&P BSE Mid-cap index & S&P BSE Small-cap index were also positive, up 5.42% and 3.67% during the month. Primary all the sectoral indices were in the positive territory with S&P BSE Healthcare, S&P BSE India Metal and S&P BSE India Power were the top performing sectors during the month rising by 12.24%, 9.18% and 8.38% respectively

IIP^

Industrial production rose by an impressive 7.0% in June-18 as compared to 4.0% in May'18. Broad based upward momentum was observed across Mining at 6.6%, Manufacturing at 6.9% and Electricity at 8.5%. In all , 19 out of 23 industry groups witnessed positive momentum led by Manufacture of computer, electronic and optical products. On the usage front, capital goods, which is the gauge of private sector investments, saw sequential expansion of 2.6% in June-18 after posting 7.1% in the previous reading. Overall, even though the headline reading reflects strong momentum, this has been contributed partly by a low statistical base on yearly base.. Nonetheless, sustained expansion in private investment is a positive indicator reflecting improvement in business activity and compliance of GST after the initial teething problems.

Growth$

India's manufacturing activity moderated in August following a softer rise in output and new orders, with rising global oil prices, RBI's monetary policy tightening and depreciating rupee impacting sentiment which resulted in the Nikkei Purchasing Managers' Index (PMI) for manufacturing sector declining to 51.7 in Aug'18 from 52.3 in Jul'18. The PMI suggest some loss of momentum from the previous months. Operating conditions improved at the slowest pace since May, mainly reflecting slower gains in output and new orders. Similar sentiments were seen in the services index which expanded in Aug'18 at the slowest pace in three months, signalling that demand may be cooling in the country's dominant sector. The seasonally adjusted Nikkei India Services Index fell to 51.5 in Aug'18 from a 21-month peak of 54.2 in Jul'18, mirroring the weaker growth in both the manufacturing and services gauges. That was the lowest reading since May and showed both new orders as well as employment slowed from Jul'18 levels.

GDP rising at a faster pace^

India's economy grew at 8.2% in the first quarter of 2018-19 on the back of a strong core performance and a weaker base marking this as the fastest growth in two years and strongest since the first quarter of 2016. Sectors which registered growth of over 7% include 'manufacturing, 'electricity, gas, water supply & other utility services' 'construction' and 'public administration, defence and other services'. The world's second largest economy, China, reported a 6.7% growth for Jun'18 quarter compared with 6.8% in Mar'18 quarter.

FPI Inflows*

During the month of Aug'18, the Indian equity markets witnessed positive flows from FIIs and domestic participants alike. Domestic institution s invested in the equity market to the tune of Rs. 3,807 crores whereas FPI (Foreign Portfolio Investor) invested Rs. 976 crores.

Outlook

Indian equity markets continue to be influenced by host of global and domestic factors. India's growth outlook, remains bright and Indian economy seems set for a period of sustained growth phase over the medium term. The economy however faces biggest challenge of moving against higher crude prices and depreciating rupee (global phenomenon of rising dollar) as these can create troubles of rising fiscal and current account deficits.

The micro environment at economy as well as corporate level is quite resilient. The GST collections are on expected lines. The corporate earnings for Q1FY19 have been good and the earnings are likely to meet full year expectations for FY2019 unlike the case in last 2-3 years. The only concern on domestic front can be monsoon that has weakened in august month and now running below normal based on past trends. An inadequate rainfall can cause some pains in rural economy and strains on fiscal deficits especially in the election year.

While we remain positive on the overall long-term outlook for Indian economy and equities, the near term impact of global events and sentiments on equities as an asset class globally, may be volatile. The impact of crude prices on Indian rupee can also impact the near term moves for Indian equities.

We continue to believe that investors should ignore the near-term volatilities and continue to invest and increase allocations towards equities in a staggered manner and benefit from the opportunities that these volatilities offer.

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 debt markets continue to be driven both by global and local factors. Whilst CPI inflation has started coming down, volatile geo-political environment has been detrimental to external sector putting rupee under pressure. Globally, the US economy continues to grow well and the future hike of interest rate by the US Fed would largely depend on sustained expansion of US economic activity keeping in mind the 2% inflation target. Fed projects the policy rate at 3.1% at the end of 2019 as compared with 2.9% seen in March'18 and 3.4% in 2020, unchanged from the prior forecast. The US China tariff war continues, and the Turkey crisis is the latest to add to global angst.

 
On the domestic front, RBI hiked policy rates again by 25bps, though perplexing the market by keeping a neutral stance. The market seems to believe that the current rate hike cycle is likely to be short. This led to limited market sell off with the 10- years yield remaining sticky in the 7.85% -7.95% range. The rupee depreciated sharply to cross 70/$ as global dollar strength and general EM weakness on Turkey crisis impacted EM currencies. As a result of all these put together, as compared to the previous month, fixed income yields hardened by 18bps to 7.95% on 31st Aug'18 as against 7.77% on 31st Jul'18.

Inflation decelerated during Jul'18#:

Retail Inflation or India's consumer price inflation fell to 4.17% in Jul'18 from 4.92% in Jun'18. The growth in Consumer Food Price Index came in at 1.37% in Jul'18 compared with 2.91% in Jun'18 and -0.36% in the same month of the previous year. Among the key components, housing grew 8.30% in Jul'18 as against a growth of 8.45% in Jun'18. Inflation in clothing and footwear came in at 5.28% in Jul'18 compared to 5.67% in Jun'18. Fuel and light inflation grew 7.96% in Jul'18 from 7.14% in Jun'18.

With the prices of food articles, mainly fruits and vegetable coming down, the wholesale price index-based inflation (WPI) decreased to 5.09% in Jul'18 from 5.77% in Jun'18 as. For the month of Jul'18 price of vegetables decreased to 14.07% from a rise of 8.12% in Jun'18 with fruit inflation reducing to 8.81% from an increase of 3.87% in the previous month. Additionally, Inflation in food articles fell to 2.16% from an increase of 1.80% in Jun'18.

Outlook:

Geo-political factors like the ongoing US China trade war, Turkey crisis, further interest rate hikes by the Fed, movement of crude oil prices and currency movements are likely to impact the flow of funds to Indian markets which could thereby impact the yields in the fixed income space. Domestically, inflation print, expanse of monsoon, increase in MSPs by government, fiscal deficit and current account deficit prints are likely to impact the yields in the shorter time frame. State elections scheduled in end 2018 and national elections in 2019 is likely to dominate market sentiment in the near term.

In short to medium term, the Indian fixed income market could remain cautious over factors such as the distribution of a normal monsoon, domestic currency movement and the trend in global crude oil prices which could result in the market being volatile. Future RBI actions and uncertainty ahead of 2019 general actions is likely to keep markets on the edge.

While the central bank is cautious on inflation, its retail inflation prints are anchored around 5% - which is not a materially high inflation for the Indian economy. We see the two back to back hikes more of an interest rate defence mechanism for the depreciating rupee. Rupee's slide in 2018 can be explained primarily by rising crude import bill and FII outflows from the debt market. We expect the RBI to wait to see the impact on macro-economic parameters of the 2 rate hikes done.

Yields have already risen sharply in response to higher inflation prints, higher crude prices and expected fiscal slippage. RBI has already hiked rates by 50bps, though the market remained range-bound. Going forwards, we expect RBI to continue to remain data dependent with global factors taking a front seat as INR comes under pressure. While in short term, yields may remain volatile, markets have discounted about 50-75bps rate hike and any sustained upward movement in yields looks unlikely.

Source:
#MOSPI
*MFI Explorer
@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.