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The month of August'16 was driven by a confluence of domestic and global events. The month started with RBI's neutral policy announcement wherein there was no change in any of the key rates, though the policy continued to remain “accommodative”. The governor mentioned that RBI will monitor the progress of monsoon, inflation figures and US's Fed rate stance before taking any call on the interest rates. This August'16 RBI monetary policy was the last monetary policy presented by the existing governor Dr. Raghuram Rajan. The announcement of his successor as Dr. Urjit Patel has coincided with the consolidation of yields after a steady run-up in the past few months primarily backed by the recent Fed hawkishness. As the month progressed, markets saw India's Wholesale price inflation rising to 3.55% in July'16, a 23-month high; doubling from 1.62% in June'16. July'16 CPI rose to 6.07% v/s 5.77% in Jun'16 while Jun'16 IIP came at 2.1%. Towards the end of the month, US Federal Reserve Chairperson Janet Yellen's comments on the US economy being in better shape, making a good case for increasing the rates has dampened investors' moods. Indian Q1FY17 GDP growth slowed to 7.1%; however the Indian Economy still remained the fastest growing economy in the world despite the moderation in growth.

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 8786.20 and 28452.17 respectively on 31st August 2016. The Nifty 50 gained 1.71% while the BSE Sensex rose 1.43% in the month of August'16.

IIP^

The Index of Industrial Production (IIP) clocked in a robust growth rate of 2.1% (Y-o-Y) in June'16 compared to 1.13% in May'16 (revised). The improvement in growth was predominantly due to 5.6% growth in consumer durables & 8.3% growth in electricity production while the manufacturing sector grew marginally by 0.9%. The tepid but broad-based recovery was evident in 18 out of the 22 industry groups in the manufacturing sector in June'16. On the Sector front mining output grew by 4.7%. On Use-based classification Basic goods and Intermediate goods grew by 5.9% and 6.1% respectively while Capital goods fell by 16.5%. The Consumer durables and Consumer non-durables recorded a growth of 5.6% and 1.0% respectively, with the overall growth in Consumer goods being 2.8%.

Inflation^^

Soaring food prices in July'16 kept India's headline inflation – CPI above RBI's near-term target of 4%, with a band of 2% on either side. Consumer prices rose at a faster-than-expected pace to 6.07% last month from a year ago, up from June's 5.77%; marking July'16 the fourth straight month in which the inflation has surged above RBI's target. Wholesale inflation climbed to a 23-month high of 3.55% in July'16 as vegetables, pulses and sugar turned costlier. The wholesale price-based inflation, in June'16 stood at 1.62%. The increase in the inflation numbers may have made the RBI hit the pause button making it focus on domestic as well as global factors.

Trade Deficit##

Steep decline in imports along with a moderate reduction in exports led to a contraction in trade deficit in July'16; narrowing to $7.75 billion from $13.1 billion in June'16. India's imports fell sharply by 19% to $29.5 billion in July'16 while Exports fell by 6.8% Y-o-Y to $21.7 billion. The slowdown in the globe could be seen as one of the prime reasons for the reduction in the Trade deficit; making it the lowest level in the past six months.

GDP^

India's Q1FY17 Gross domestic product (GDP) rose to 7.1%; reaffirming India's position as the world's fastest-growing major economy, but sharply lower than 7.9% in the January-March 2016 period. This was as a result of the moderation in key sectors such as agriculture, construction and mining. The farm sector grew 1.8%, mining sector contracted 0.4% and the manufacturing sector rose to 9.1% against 7.3% Y-o-Y.

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. The outlook for core inflation remains uncertain due to a shrinking output gap and an expected pickup in demand-driven price pressures, following full implementation of a major hike in government salaries and pensions. This could make it difficult for the government to achieve the fiscal deficit target of 3.5 percent of GDP in the current fiscal year, though in the past the government has shown its astuteness in managing expenditure to meet fiscal aim.
  • In absence of any major domestic market triggers, a key event to watch out will be the stance of the US Fed in the coming month, which will govern the direction of FII flows to India. Market expectations at the start of the year were for at least three rate hikes by the Fed in calendar 2016. So far, there have been no rate hike and the probability of a rate hike, if at all, has narrowed down to one for the remainder of the year. However, the US Fed would want to consider all the domestic and global factors around the policy meet before deciding the trajectory of interest rates. These may result in the markets being volatile in the near term.
  • 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 deflation to restore market confidence.
  • Though the growth of the country has slowed down, FY17 growth is expected to be led mainly by recovery in consumption, on the back of improved prospects for revival in rural economy led by satisfactory performance of monsoon and higher incomes for government employees following the 7th Pay Commission payouts. The effects of several reform measures unleashed by the government like the implementation of GST are also expected to
    add to growth.

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'16 started with the announcement of third bi-monthly monetary policy, which was also the last policy announcement by Dr Rajan. As expected, RBI decided to keep the key rates unchanged while maintaining an accommodating stance. The earnings season has been a mix bag so far. Equity markets reacted positively to Bank of England's (BoE) larger-than-expected stimulus package announcement of 435 billion pound. However sentiments were deterred towards the fag end of the month with Fed's comment on the US economy being in better shape indicating a possibility of rate hike in near future

Market Performance*

The benchmark indices s viz. S&P BSE Sensex & Nifty 50 gained 1.43% and 1.71% respectively on last day of August'16. The month even saw S&P BSE Mid-cap index & S&P BSE Small-cap index rising by 4.39% & 2.751% respectively.

S&P BSE India Metal, S&P BSE India Bankex and S&P BSE India Oil & Gas were the top performing sectors during the month rising by 5.67%, 4.51% and 4.51 respectively while S&P India Realty was the worst performing sector.

IIP^

India's industrial production growth improved to 2.1% in June'16 from 1.1% (revised) in May'16. On sectoral side, growth was driven by electricity and mining which was partly led by favourable base effect. Electricity and mining clocked in a growth of 8.3% and 4.7% respectively, while manufacturing by 0.9%. On used based classification Basic goods and Intermediate goods registered a growth of 5.9% and 6.1% respectively while capital goods registered a growth of -16.5% during June'16. The Consumer durable and Consumer non-durables recorded growth of 5.6% and 1% respectively, with overall growth in consumer goods being 2.8%.

Growth$

India's manufacturing sector represented by Nikkei India Manufacturing PMI rose marginally to 51.8 in July'16 from 51.7 in June'16. The main contributing factor to the upward movement in the PMI was the softening of input cost inflation and increase in the output prices.

Nikkei India Services Business Activity Index which tracks changes in activity at service companies on a monthly basis rose to a three month high of 51.9 in July'16 from 50.3 in June'16 indicating a modest rate of expansion.

GDP Growth rate slows down in Q1 Fy2017^

The Central Statistics Office has released the estimates of GDP for Q1 FY2016-17. India's economic growth came in at 7.1% in the first quarter ending June'16, down from 7.9% in Q4 FY2016. The growth was driven by a strong manufacturing sector, which grew at 9.1%. Under the manufacturing sector, the private corporate sector grew at 11.9% at current prices as against 5.55% the year before. However, the GDP slowdown was majorly impacted by the sectors such as agriculture, mining & quarrying and construction which were largely impacted and remained at 1.8%, -0.4% and 1.5% respectively. On account of better monsoon after two consecutive drought years market expects agriculture production to be much better compared to previous years and may contribute significantly to GDP. Also, a push to urban consumption from the pay hike to central government employees is expected to significantly drive economic growth in the remaining quarters of FY2016-17.

FPI Inflows*

The month saw FPI (Foreign Portfolio Investors) inflows reducing to the tune of Rs. 9071.34 crs in August'16 from an inflow of Rs. 9192.97 crores in the previous month. Equity markets saw outflows from Domestic Institutional investors (DII) to the tune of Rs. 4406 crs from previous month's outflow of Rs. 6055 crores

Outlook

On domestic front, the inflation data released showed that CPI inflation inched up to 6.07% in July'16. The progress of monsoon has shown a positive development this year; which might help to ease the inflation. However, the passing of GST and 7th Pay commission might have an upward pressure on inflation

Indian Equity market participants continue to remain vigilant and track the development in global markets. The stimulus by Bank of England and Fed's decision on rate hike is likely to have an impact on FPI flows. So far, Euro area growth and financial conditions seems unaffected by the UK Brexit vote and they are likely to maintain current policy for some time. The trajectory of crude oil price is another factor that will be keenly tracked by market participant.

We believe that markets are likely to remain volatile in short term. Any corrections should be seen as an opportunity to increase exposure to Equity markets.

Source:
^ MOSPI
$ Markit Economics
* Bloomberg/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.

The month of Aug'16 witnessed range bound movement in bond prices (post sharp increase in the previous month); where the yields which were seen at 7.14% towards the start of the month, softened to 7.08% by the mid of the month and further rose to 7.11% by the month end. The expectation of a hike in the US Fed rate resulted in the heightened volatility in the Indian bond markets. The intermittent hardening of yield could also be attributed to the rise in the global crude prices, and the fears of tightened liquidity condition due to FCNR (B) settlements in the next month. In its Third bi-monthly policy, RBI made no changes in the key rates though acknowledging the government's efforts on the progress of reforms & improvements in rate transmission. In a bid to deepen the corporate bond market in India, RBI in the month of Aug'16, released a report suggesting standardization of corporate bond issuance by allowing investments by foreign portfolio investors in unlisted securities, creation of a bond index, encouraging corporates to tap the market among others. It also allowed lenders to issue 'masala bonds' and acceptance of corporate bonds under the liquidity adjustment facility (LAF). These measures by the central bank may enhance participation and facilitate greater market liquidity.

On the global front, the statement from the US Federal Reserve Chief strengthened the possibility of an increase in the interest rates on the back of improving U.S. labor market and other key indicators. This resulted in the foreign investors withdrawing funds from riskier emerging markets and investing in safer developed market economies thereby resulting in the outflow of funds from the Indian bond markets to the tune of approximately Rs.2500Cr*.

Third Bi-monthly policy 2016-17- the last monetary policy by RBI Governor Dr. Raghuram Rajan^

In the month of Aug'16, the RBI announced its 3rd bi-monthly monetary policy. On the basis of an assessment of the evolving macroeconomic situation, the central bank maintained status quo keeping the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.50%. However, as announced in the Fourth Bi-monthly Monetary Policy Statement, 2015-16, the SLR was reduced by 25bps from 21.25% to 21.00% of NDTL (w.e.f July 09, 2016). The easing of liquidity on the back of increased spending by the government to counter the higher-than-usual currency demand proved beneficial to the short term interest rates. RBI retained the Gross Value Added (GVA) growth projection for 2016-17 at 7.6% in view of global risks and moderately improving domestic economic growth.

July'16 retail inflation stays above RBI's target~:

Consumer prices rose at a fast pace to 6.07% during July'16 as against 5.77% in the previous month. The corresponding provisional Inflation rate for rural and urban area was 6.66% and 5.39% respectively as against 6.29% and 5.26% in June'16. Food and beverages component inched up to 7.96% in July'16 as against 7.46% in June'16. The soaring food prices has been the primary contributor to the elevated CPI inflation and kept the headline inflation above the RBI's near-term target.

India's headline annual rate of inflation, based on the monthly wholesale price index (WPI), accelerated to a two-year high of 3.55% in July'16 as compared to 1.62% for the previous month and -4.00% during the same month of the previous year. Rise in prices of manufactured products including the food item also added significantly to the overall rise in WPI inflation.

Outlook:

Going forward, the monetary policy stance would largely depend on major policy implementation such as GST, increase in capacity utilization, movement in commodity price and monetary policy adjustments by major central banks, especially the US Fed. The momentum of growth is expected to be quickened by the normal monsoon raising agricultural growth and rural demand as well as by the stimulus to consumption spending following the implementation of the Seventh Central Pay Commission (7CPC).

Inflation target of 5% for March 2017 continues to be the focus of the RBI; though better than normal monsoons are likely to have a salutary impact on inflation, there could be some upside pressures from 7CPC payment. The passage of the Goods and Services Tax (GST) Bill augurs well for the growing political consensus for economic reforms. Timely implementation of GST will be challenging but it will raise returns to investment across much of the economy. It is expected to result in strengthening the government revenue over the medium-term. This could in turn boost business's sentiments and eventually trigger investments in various sectors.

Seasonally, inflation picks up in the summer months driven by higher food inflation as prices of fresh fruits and vegetables tend to spike. However, a relatively better monsoon this year is likely to cause inflation to reverse its course over the next few months. The impact of monsoons coupled with the demand driven price pressures due to the increase in the government salaries and pensions are likely to be observed before any decision on the interest rates is taken by the newly appointed RBI Governor – Dr. Urjit Patel.

While near term policy rate cuts are likely limited, better transmission and liquidity stance, might lead to lowering of rates in medium term period. In short term, markets are expected to remain volatile due to global headwinds. We expect 10Y G-Sec to remain in the range of 7.00-7.25% range in the near term.

Source:
~MOSPI, STCI PD
^RBI
*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.