January 31, 2016

Canara Rebeco. Mutual funds.

The month of January’16 was more overshadowed by volatile global rather than domestic events. On global front, China’s market crash and its currency devaluation sent ripples across economies around the world. The continuous fall in crude oil prices still remains a cause of concern as it might slow the pace of growth of global economies. As widely expected, the US Fed maintained status quo on interest rates and hinted that further rate hikes would be gradual. The month even witnessed Bank of Japan announcing implementation of negative interest rate to kick start its economy. However, signals of more stimulus measures from the European Central Bank lifted global markets. Weak macro-economic data on domestic front viz. accelerating inflation, slackened IIP and uptick in trade deficit added to the dampening market sentiments.

Market Performance*

The start of 2016 wasn’t as per the expectations of equity market participants. This was the first time after September’15 that Sensex plunged below 25000 levels. Rising concerns over global slowdown heightened by volatility in Chinese Equity markets coupled with trimming of positions by FIIs were the major reasons for chaos in Indian equity markets. The domestic equity markets represented by the benchmarks Nifty 50 and S&P BSE Sensex fell by 4.82% and 4.77% respectively.


Retail inflation represented by CPI (Consumer Price Index) for December’15 rose to a 15-month high of 5.61% compared to previous month’s 5.41%. The spike in inflation was led by continued uptick in food inflation and mild rise in core inflation. Even wholesale inflation denoted by WPI (Wholesale price index) moved up to -0.73% in December’15 from -1.99% in November’15. RBI’s inflation (CPI) target for the month of January’16 is 6%**, the current reading is broadly in line with the intended trajectory. We believe that next month’s CPI is likely to undershoot RBI’s said target by 20-40 bps.


After a stellar performance of 9.9% (revised) in October’15, India's industrial output plummeted to -3.2% in the month of November’15. The sharp decline in IIP was mainly due to unfavourable base effect arising from shift in the festive calendar. Among the sub-sectors, manufacturing printed a Y-o-Y growth of -4.4% while mining and electricity registered a growth for 2.3% and 0.7% respectively. On use-based classification, capital goods contracted sharply by 24.4% (Y-o-Y) and basic & intermediate goods contracted moderately by 0.7% (Y-o-Y). The Consumer durables and Consumer non-durables have recorded Y-o-Y growth of 12.5% and - 4.7% respectively, with the overall growth in Consumer goods being 1.3% (Y-o-Y).

Trade deficit$:

Trade deficit for the month of December’15 expanded to USD 11.66 billion from USD 9.78 billion in November’15. Imports contracted by 3.88% y-o-y to USD 35.33 billion due to decline in oil import. The month witnessed oil imports shrinking by 33.19% (Y-o-Y) owing to continuous fall in crude oil price. However non-oil imports registered an uptick of 7.63% (Y-o-Y). The global slowdown in major economies continues to impact India’s export, leading to a decline of 14.75% (Y-o-Y) valuing USD 22.29 billion.

Fiscal deficit$:

India's fiscal deficit for April-Decmeber’15 stood at Rs. 4.88 lakh crore or 87.8% of the Budget estimate for the whole year. This is an improvement over the year-ago period as government had exhausted its full year’s target then. The improvement in deficit can be accorded to better tax collections on back of hikes in duty of petrol and diesel. The net tax revenue collection came in at Rs. 6.22 lakh crore i.e. 67.6% of the full year’s target. Non-tax revenue also marked an improvement by achieving 81.9% of the fiscal target. The deficit is considerably lower than year-ago levels, which is a positive sign indicating that the government is likely to meet its FY16 fiscal deficit target.


  • On global front, the dynamics of China’s economy would be critical to reducing volatility in world markets.

  • The quantum and pace of US fed rate hike would be key event in coming months, though current indicators point to slow pace.

  • The continuous fall in crude oil prices has sent jitters across the global economies. Any indication on bottoming of crude prices might be good for global markets.

  • The announcement of Union Budget might be critical to provide future cues for market movement, as this is likely to determine the future course of monetary policy as well.

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

* Bloomberg
^ mospi.nic.in
$ Ministry of commerce
** RBI

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

Indian equity markets have witnessed a sharp correction in the month of January’16 owing to massive sell-off in global equity markets. Continued weakness in Chinese equity market along with its sharp currency devaluation and the steep fall in crude oil prices triggered global decline. Global markets recovered a little towards the end of the month on receiving the indications of continued stimulus from the European Central Bank. In order to boost the economy, Japan’s reserve bank reduced its deposit rate in negative zone while the US Federal Reserve maintained status quo on interest rates hinting that further hike would be gradual. These helped reduce the losses, global indices had witnessed in the initial part of the month.

Global factors might still be a concern for our markets however, strong domestic fundamentals and a resilient currency exchange rate has helped reduce the impact of global turmoil on India. India’s macro-economic fundamentals, such as CAD and inflation, have improved and are expected to further improve, creating an environment conducive for the growth of the economy. IMF recently reaffirmed India’s growth at 7.3% and 7.5% for the current year and next year respectively.

Market Performance**

The Indian Equity markets saw a fall in the month of January’16. On net basis India’s bellwether indices viz. S&P BSE Sensex & Nifty 50 witnessed negative momentum with -4.77% & -4.81% respectively while S&P BSE Mid- cap index & S&P BSE Small-cap index declined by -6.51% & -8.17% respectively. S&P BSE Consumer Durables and S&P BSE IT were the top performing sectors during the month rising by 1.5% and 0.9% respectively. Telecom was a major sector under pressure.


The seasonally adjusted Nikkei India Manufacturing Purchasing Managers’ Index (PMI) dipped from 50.3 in November’15 to 49.1 in December’15, pointing towards the deteriorating operating conditions across the manufacturing sector. Growth of private sector output and rise in new business across private sector impacted positively and attributed to an increase in the seasonally adjusted Nikkei Services Business Activity Index to a ten-month high of 53.6 in December’15 from 50.10 in November’15, which was indicative of a solid expansion in output across the sector.


India's industrial output declined 3.2% in November’15, from the same month a year earlier, compared with 9.9%(revised) growth in October’15. The double digit fall in capital goods can largely be attributed to the decline in industrial output. Sector-wise, manufacturing, electricity and mining stood at -4.4%, 0.7% & 2.3% respectively during the last month. As per the Use-based classification, capital goods, intermediate goods and basic goods recorded negative growth of 24.4%, 0.7% and 0.7% respectively. Overall consumer goods expanded by 1.3%. The divergence in Consumer Durables and Consumer non –durables continued with Consumer durables moving at 12.5% (Y-o-Y) growth while Consumer non –durables recorded a negative growth of 4.7% (Y-o-Y).

FPI Outflows**

Global growth concerns have accentuated outflows in FPI keeping our markets under pressure. The month of January’16 saw the net FPIs (Foreign Portfolio Investor) outflow of Rs.11,126 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 the net purchase being Rs.6702Crs.


Indian economy seems to be showing signs of improvement and is likely to see momentum building up from the 2nd half of FY2017. Indian companies have done massive restructuring over the last five years. Almost every business has become leaner and focused on efficiency. As the macro economic growth momentum picks up, we see operating and financial leverage showing its maximum impact in 2017-18. Earnings pick-up in 2017-18 may trigger expansion of PE multiples.

We believe that the market’s volatility may be short lived and on a longer term, India's growth story is still intact as markets remain at a cusp of a structural bull run. 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 January 29, 2016
**ICRA MFI Explorer

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

The first month of the year 2016 saw the negative sentiments spilling over from 2015 as Chinese Currency devaluation and lowered growth story gripped global markets. Inspite of new FII limits opening, the Indian Debt Markets failed to show any marked improvement. The focus shifted to domestic events mid-week with the inflation and IIP print published, which were broadly in line with expectations. Additionally, as the month progressed, weak Chinese PMI numbers yet again reignited concerns of global slowdown triggering sharp selloff across asset classes. Continued weakening of Chinese yuan dampened sentiment about investments in EMEs. Its rippling effects majorly impacted domestic currency markets. Tracking such bearish sentiment, bond market too, treaded on a weak note. As such, announcement of new 10 year auction had limited positive impact on underlying market dynamics. Announcement of OMO by RBI briefly ignited sentiments, but absence of further RBI action added to the sell-off. January’16 was a month marked with global slowdown, currency depreciation, tight liquidity conditions and continued low global commodity prices.

Index of Industrial Production: Lowest reading in Four Years~

Defying market expectations, the country’s barometer of economic productivity, IIP plummeted to -3.2% in Nov’15 after posting a huge increase of 9.9% (revised) in Oct’15. Following this sharp decline, cumulative IIP fell to 3.9% for Apr-Nov’15 period. Reduced number of working days in the month coupled with an unfavorable statistical base pushed the headline IIP number in the negative region. Cyclical fall in manufacturing coupled with adverse base effect pushed the Nov reading in the negative territory. On sectoral basis, Manufacturing fell by 4.4% Y-o-Y, while Mining (2.3% Y-o-Y) and Electricity (0.7% Y-o-Y) noted marginal growth trends.

CPI still under RBI’s Target Level; WPI slowly improving*^

Annual consumer price inflation in India edged up for a fifth consecutive month to 5.61% in December’15. The upside negative surprise in food inflation was corrected by the reduction in global oil and commodity prices. While sequential momentum moderated considerably, its impact was more than offset by statistical base. For the 14th month in a row, wholesale prices fell in December’15, but the rate of decline at 0.73% was the slowest in last one year as food prices shot up, indicating return of inflationary pressures. The wholesale price index-based inflation, which has remained in the negative zone since November’14, has inched up in the last four months with the last number reported as -1.99% in November’15.

Fiscal Deficit – Well within Estimates~

Reflecting improvement in government finances, fiscal deficit in the nine months of 2015-16 worked out to 88% of the annual target. In value terms, the April-December’15 fiscal deficit stood at Rs 4.88 lakh crore, or 88%, of 2015-16 Budget estimates (BE). This is an improvement over the year-ago period as the deficit then stood at 100.2% of the 2014-15 BE. The improvement is mainly on account of buoyancy in tax collections, which have kept revenue deficit in check. For 2015-16, the government aims to restrict fiscal deficit to Rs 5.55 lakh crore, or 3.9% of GDP.

Tightened Liquidity Conditions*

January’16, statistically marked as a month with tight liquidity conditions, continued to be so with marked by single OMO by the central bank. On 29-Jan-2016, RBI infused liquidity to the tune of Rs 13,214 Cr (gross) under the LAF window as compared to Rs 25,018 Cr on 28-Jan-2016. Borrowing through MSF was Rs 565 Cr on 29-Jan-2016 as compared to Rs 135 Cr on 28-Jan-2016. Call rate hovered around 7.00% as compared to 6.80% previous month. CBLO was seen to be around 7.00% - 7.15% as compared to an average of around 6.75% previous month. On net basis, the system-wide liquidity slipped into deficit mode to the tune of ~Rs 155,000 Cr as on 29-Jan-2016.

Outlook ~*

  • Global headwinds continue to impact the local markets, thereby making the market sentiments weak. Fast depreciating currency and moderate uptick in inflation together with slowdown in growth has raised concerns for the Indian markets as well.

  • With Developed Economies like Japan reducing their Interest rates in the negative territories and signals of continued stimulus from the European Central Bank, the last quarter of FY2016 is expected to be the quarter of mixed global hints.

  • RBIs concern on monetary policy transmission remains unresolved with banks on an average reducing base rates by just 50-60 bps against 125bps of policy easing by the RBI. Considering the future disinflationary path, still incomplete policy transmission, and uncertainty around adherence to the fiscal consolidation roadmap in the forthcoming FY2017 budget, RBI will be cautious enough to chalk its future path.

  • We expect the new 10 year Benchmark to remain range bound around 7.60-7.80% range. We expect the liquidity conditions to remain tight during the coming months, as government may carry larger cash surplus to meet fiscal targets. Markets will keenly watch the forthcoming Union Budget in Feb’16, looking at ways in which government manages the fiscal consolidation path.


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