March 31, 2016

Canara Rebeco. Mutual funds.

The last month of FY 16 saw some stability returning in global markets. Consequently, domestic markets performance also improved in March'16. Fixed income markets witnessed softening of yields while equity markets saw some positive momentum. The rally in crude oil prices and Fed scaling its rate hike forecast for 2016 to two from earlier prediction of four, boosted global markets. Month also witnessed government cutting rates (40-100 bps) on small saving schemes; this move might compel banks to reduce their deposit rates. Post centre's announcement coupled with easing inflation, eyes now shift to RBI view on interest rates.

Market Performance*

March'16 saw Indian Equity markets closing in green, with the domestic equity markets represented by the benchmarks Nifty 50 and S&P BSE Sensex gaining by 10.75% and 10.17% respectively. The recovery in crude oil & commodity prices, dovish stance by global central banks fuelled inflows in domestic markets & expectations of rate cut in coming monetary policy were major drivers boosting market sentiments.


Retail inflation represented by CPI (Consumer Price Index) for February'16 eased to 5.18% compared to previous month's 5.69%. The moderation in inflation was primarily due to decline in food inflation, which softened to 5.52% from 6.66% in January'16. Wholesale inflation denoted by WPI (Wholesale price index) came in at -0.91% in February'16 unchanged from January'16 print. With the inflation moderating coupled with the Centre's reduction in rates of small saving schemes & government maintaining its fiscal deficit target at 3.5% for FY 17, increases the probability of rate cut in coming Monetary policy.


India's industrial performance index came at -1.5% in January '16 compared to -1.2% in December'15. On sector classification, mining and electricity registered a moderate Y-o-Y growth of 1.2% and 6.6% respectively. While manufacturing printed a Y-o-Y degrowth of 2.08%. On use-based classification, capital goods contracted sharply by 20.4% (Y-o-Y) while basic & intermediate goods grew by 1.8% (Y-o-Y) & 2.7% (Y-o-Y) respectively. The Consumer durables and Consumer non-durables have recorded Y-o-Y growth of 5.8% and – 3.1% respectively.

Trade deficit$:

Trade deficit for the month of January’16 contracted to USD 7.64 billion from USD 11.66 billion in December’15. Imports contracted by 11.01% y-o-y to USD 28.71 billion due to decline in oil & non-oil imports. The month witnessed oil imports and non-oil imports shrinking by 39.01% (Y-o-Y) & 1.40% (Y-o-Y) respectively owing to continuous fall in crude oil price. The global slowdown in major economies continues to impact India’s export, leading to a decline of 13.60% (Y-o-Y) valuing USD 21.08 billion.

RBI’s Monetary Policy**:

RBI in its 6th Bi-monthly policy kept the key rates unchanged on the back of weakening of activities in major emerging economies. However, RBI maintained an accommodative stance hinting that with "inflation moving closer to the target" there could be more room for rate cut to support growth, however the adherence to fiscal targets will remain key input to further policy actions. The Reserve Bank also indicated that it will keep a close watch on government’s expenditure, before taking a call on interest rates.


India economy slowed in December’15, clocking a growth of 7.3% in Q3FY16 compared to 7.7% in Q2FY16. The growth was driven by consumption and stronger contraction in imports than exports leading to lower deficit, while investments grew at a slower pace. Manufacturing posted robust growth of 12.6%; financial services and mining activities saw a growth of 9.9% & 6.5% respectively. The deceleration in led by slow growth in investment activities, which grew at 4% in Q3FY16 against last quarter’s 8%.


The Union Budget 16-17 emphasized on tax reforms, infrastructure investments and improving rural & socio-economic conditions in the country. Budget was presented on 9 pillars viz. Agriculture and Farmers Welfare, Rural Sector, Social Sector including Healthcare, Education, Skills and Job Creation, Infrastructure and Investment, Financial Sector Reforms, Governance and Ease of Doing Business, Fiscal Discipline and Tax Reforms. Finance minister stated that the government has met its 2016 fiscal deficit target of 3.9% and has retained next year's target of 3.5%, which is in line with the fiscal consolidation roadmap set earlier. To strengthen the economy and sticking to the roadmap for fiscal consolidation, the government is focused on ensuring macro-economic stability and prudent fiscal management (fiscal deficit target at 3.5% for FY2016-17), boosting the consumption based domestic demand and continuing with the pace of economic reforms and policy initiatives.


  • Global headwinds continue to impact the domestic markets, thereby making the market sentiments weak. Domestically we are well positioned in terms of macro economic indicators, once the global tide turns; India is likely to do well. Market participants will continue to track global situation.

  • With the government staying committed to the fiscal deficit target of 3.5% for the coming financial year, the focus shifts to RBI and its stance on remaining accommodative even while maintaining a status quo on policy rates in its recent review. There are expectations of rate cuts by RBI; the timing of the same will be tracked keenly.

  • The continuous fall in crude oil prices has sent jitters across the global economies. The recent up-tick in oil prices has given some shift in market sentiments and the direction of oil price is likely to be critical going forward

  • Along with the above, market participants may keenly watch USD/INR movement

* Bloomberg
$ Ministry of commerce
** RBI
@ Edelweiss

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

Indian equity market continued to slide since the start of the calendar year 2016, reacting to the steep decline in global equities, continued low crude oil prices and apprehension over global economic growth. Indian indices were also strained by a weaker rupee. Global growth concerns have led to FII outflows in emerging markets which is keeping our markets also under pressure. On the earnings season front, results have been along expected lines across majority of the segments with disappointment over the PSU banks results. However, the growth of economy accelerated to 7.6% in 2015-16 as India was able to achieve robust growth despite unfavorable global conditions.

In the month of February’16, Indian economy witnessed a lot of attention on account of various key events from the centre. At the beginning of the month, RBI kept the rates unchanged in its monetary policy. Towards the end of the month, FY2016-17 Railway Budget focused on capacity creation, safety and amenities and the Union Budget reemphasized the government’s commitment towards rural transformation, investment and fiscal reforms. Budget 2016-17 however brought some respite to the weak Indian equities market. To strengthen the economy while sticking to the roadmap for fiscal consolidation, the government is focused on ensuring macro-economic stability and prudent fiscal management (fiscal deficit target at 3.5% for FY2016-17), boosting the consumption based domestic demand and continuing with the pace of economic reforms and policy initiatives.

Market Performance**

The Indian Equity markets fell in the month of February’16 as well. On net basis India’s bellwether indices viz. S&P BSE Sensex & Nifty 50 contracted by 7.34% & 7.53% respectively while S&P BSE Mid- cap index & S&P BSE Small-cap index declined by 8.61% & 12.41% respectively. All the sectoral indices were in red during the month except Metal and FMCG which were comparatively less impacted.


The seasonally adjusted Nikkei India Manufacturing Purchasing Managers’ Index (PMI) increased from 49.10 in December’15 to 51.10 January’16, pointing towards the improvement in the operating conditions with new orders, exports, output and purchasing activity all rising. Growth of new business across private sector impacted positively and attributed to an increase in the Nikkei Services Business Activity Index to 54.30 in January’16 from 53.60 in December’15, which was indicative of a solid expansion in output across the sector.


India's industrial output came at -1.3% in December’15, from the same month a year earlier, compared to -3.2% in November’15. In terms of industries, ten out of the twenty two industry groups in the manufacturing sector have shown negative growth during the month of December’15 as compared to the corresponding month of the previous year. Sector-wise, manufacturing, electricity and mining stood at –2.4%, 3.2% & 2.9% respectively during the last month. As per the use-based classification, capital goods recorded negative growth of 19.7% whereas, intermediate goods and basic goods stood at 0.9% and 0.5% respectively. Overall consumer goods expanded by 2.8%. The divergence in Consumer Durables and Consumer non –durables continued with Consumer durables moving at 16.5% (Y-o-Y) growth while Consumer non –durables recorded a negative growth of 3.2% (Y-o-Y).

FPI Outflows**

Global growth concerns and low commodity prices have accentuated outflows in emerging markets including India. The month of February’16 saw the net FPIs (Foreign Portfolio Investor) outflow of Rs.5, 521 Crs. The corrections in markets during the last month were viewed as an attractive investment opportunity by Mutual funds who increased their exposure to equities with a net purchase of Rs.4, 659 Crs.


Ongoing external headwinds and weak market conditions domestically indicate recovery to be at a more gradual pace. Low commodity prices, improving discretionary demand, consumption boost from the Seventh Pay Commission and expected normal monsoons are the triggers which may support growth in medium to long term. Even though the current recovery is slow, Indian economy seems to be showing signs of improvement and is likely to see momentum building up from the 2nd half of FY2017. As the macro economic growth picks up, we see operating and financial leveraging show its maximum impact in 2017-18.

Despite the recent market volatility, which may be short lived and recovery expected to gather momentum on a longer term, India’s improved economic indicators suggest that we are better placed than other emerging economies. Every correction should be seen as an opportunity and investors can adopt a staggered approach to investing in equities in order to even out market volatility.

' As on February 29, 2016
**ICRA MFI Explorer

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

Amidst uneven global recovery, increased volatility in the domestic markets, and uncertainty of timing of rise in interest rates by the US Fed, February 2016 was a seen to be a choppy month for the Indian Debt markets. The month started with the RBI keeping interest rates unchanged in consensus with market expectations. The action then shifted to the US Fed meet where the US FOMC held its key rates steady whilst adopting cautious stance on global developments. The move was broadly perceived as reduced possibility of near term rate hikes. However, depreciating Rupee outweighed these positive cues, as gilts continued to tread with a negative bias, with negative expectations on fiscal in the budget weighing on markets. Slowing GDP, hardening inflation and low IIP were a few reasons for the markets, already tight on liquidity, to experience extra volatility. Shifting the focus on the Union Budget, markets not only expected the government to show fiscal responsibility, but also eyed the gross borrowing number. Markets rallied post Budget on account of the figures which met expectations on fiscal number and exceeded on gross borrowing numbers

RBI Monetary Policy: ‘Accommodative’ policy stance to continue

Springing no surprise, in the last policy review of the Financial Year 2015-16, RBI held its key interest rates unchanged. RBI hit the pause button on policy rate in its Sixth Bi-Monthly review, waiting to react post the Union Budget announcement. Over all, RBI chose to adopt ‘wait and watch’ stance, whilst putting the onus of further rate cuts on the government adhering to continued fiscal prudence. Amidst the various factors discussed in the policy, RBI failed to address market liquidity concerns. Though the Governor indicated that the Central Bank was open to conduct more OMOs and actively manage liquidity via term repos, fewer OMOs conducted by RBI kept markets depressed. Overall the policy for the Fixed Income Markets was a sentiment dampener.

Slowing GDP – Showing Gradual Progress~

India’s GDP at constant prices for Q3 FY16 stood at 7.3%, lower than the revised estimate of 7.7% in Q2 FY16. In lieu of growing external weakness along with limited private investments growth, the latest print of GDP comes as a positive surprise to the Indian Debt Markets. While statistical base effect pushed the real growth numbers higher, unprecedented double digit rise (12.6%) in manufacturing sector growth further aided in domestic recovery. On sectoral basis, financial services and mining activities saw a growth of 9.9% & 6.5% respectively while Mining and Quarrying registered a growth of 6.5%. The data print suggested that the government would be able to achieve its fiscal target of 3.9% for the current fiscal.

CPI undershot RBI’s Target Level; WPI still a cause of worry*^

Retail inflation for Jan’16 stood at a 17-month high of 5.69%, but undershot RBI’s target level of 6% by around 30 basis points. Negating the impact of favourable statistical base, lower pace of deceleration in food price pressures along with persistent services inflation led to rise in the headline inflation. Slipping deeper into the negative zone, January wholesale inflation came in at -0.90% as against -0.73% in December. Along with the latest reading, WPI for November 2015 was revised downwards from -1.99% to -2.04%. Primary Articles fell by -1.75% after posting a rise of 0.62% in the previous month; Fuel inflation too, noted a sharp fall of -2.94% as compared to -0.73% a month ago.

IIP: Recovery still fragile~

The Index of Industrial Production (IIP) shrank to -1.3% in December’15, led by a decline in manufacturing activity. Production of consumer non-durables, representing daily essentials, shrank 3.2% in December’15, indicating the effect of rural distress, and output of capital goods, representing investment demand in the economy, contracted 19.7%. The capital goods contraction shows private investment is yet to pick up. On a sequential basis, December’15 IIP grew by a strong 10.1% as against 8% in the year ago period. Use-based classification suggests sharp pullback in the Capital Goods segment (13.8% M-o-M), followed by revival in Consumer durables (18.6% M-o-M).

Outlook ~*

  • On the global front, growth across economies has been showing signs of slowdown. The world’s large economies too, have been facing headwinds to growth on account of deflationary pressures being felt across the globe. While India continues to remain the bright spot in the current scenario, in light of evolving global conditions, Indian Fixed Income Markets are also prone to this global volatility. Though domestically we are well positioned in terms of macro-economic indicators, once the global tide turns, India is likely to do well.

  • With the government staying committed to the fiscal deficit target of 3.5% for the coming financial year, the focus shifts to RBI and its stance on remaining accommodative even while maintaining a status quo on policy rates in its recent review. We believe RBI would await further data on development of inflation until its next policy review, prior to acting on any rate cuts, unless global headwinds impacting domestic growth warrant an action sooner.

  • In short term markets are expected to remain volatile owing to global cues. Expectations of a normal monsoon could bring down inflation on back of lower food prices negating the effects of 7th pay commission payouts. In medium-to-long term we expect the global headwinds to settle and inflation to moderate which will provide an impetus to RBI to bring down the rates.

  • We expect the new 10 year Benchmark to remain range bound around 7.50-7.75% range.


Mutual Fund investments are subject to market risks, read all scheme related documents carefully.