December 31, 2015

Canara Rebeco. Mutual funds.

2015 was a topsy-turvy year for the Indian economy, driven by global as well as domestic economic events. Mix economic data from the US, Europe's deflationary situation, Japan's public debt, slowdown in China and resultant devaluation of Yuan were some of the key events that affected economies across world. While domestic factors like lowering interest rates, better macro-economic numbers, pace of growth in demand across sectors directed market movements.

Market Performance*

The domestic equity markets represented by the benchmarks Nifty 50 and S&P BSE Sensex were range bound during the month, closing at 7946.35 and 26117.54 respectively on 31ST December 2015. The month saw US Fed hiking rates, indicating that US economy is strengthening. However, the impact of this event was already factored in by the market participants. The calendar year 2015 ended on a negative note with Nifty 50 falling by 4% and S&P BSE Sensex declining by 5%.


The latest retail inflation rose to a 14-month high of 5.4% from 5% in October'15. The spike in inflation was primarily due to uptick in food inflation. Even wholesale inflation moved up to -1.99% in November'15 compared to -3.81% in October'15. Despite the continuing slump in crude oil prices, the rise in food inflation and the impact of pay commission recommendations are likely threats to inflation. RBI is likely to track these factors before taking further call on easing.


India's industrial output saw a robust growth of 9.8% in Octber'15 compared to previous reading of 3.8% (revised). The sharp acceleration in IIP was mainly due to favourable base effect arising from shift in the festive calendar. The growth was led by 42.5% expansion in consumer durables followed by 16.1% expansion in capital goods. Sectoral trends show that improvement in growth is led by the manufacturing sector. Manufacturing sector grew by 10.6%, followed by 9% growth in Electricity and 4.7% growth in Mining sector.

Balance of Payments$(BoP)

India's 2nd quarter current account deficit (CAD) widened to 1.6% of GDP (USD 8.2 billion) as compared to 1.2% of GDP (USD 6.2 billion) in the previous quarter. Overall Balance of Payments registered a deficit of USD 0.9 billion owing to withdrawals from foreign exchange reserves resulting from foreign institutional investors outflows.

Trade deficit for the month of November'15 stood at USD 9.78 billion, slightly more than USD 9.77 billion in October'15. Imports shrunk by 30.26% y-o-y to USD 29.79 billion due to shrinking oil and non-oil imports.. The month witnessed oil imports declining by 44.99% (Y-o-Y) owing to falling crude oil prices, while non-oil imports also fell by 24.7% (Y-o-Y). Exports continued its declining trends, reducing by 24.33% to USD 20.01 billion in the month of November'15. The decline in India's oil bill is the biggest positive for BoP, however the constantly declining exports is a cause of concern.


  • Markets participants will keenly await the arrival of Q3FY16 earning season.

  • Union Budget will be critical to provide future cues for market movement.

  • On domestic front, market participants may keenly watch USD/INR movement, crude oil prices and inflation trajectory to determine RBI's next move.

  • Implementation of GST and other schemes like INDRADHANUSH (aims to revamp state-run banking sector), Ujjwal Discom Assurance Yojna (UDAYreform in power sector) etc. would help improving GDP in coming years.

* Bloomberg
$ Ministry of commerce

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

The year 2015 was marked by volatility driven by both domestic political and global macro-economic events. For the month of December'15 the Indian equities began on a cautious note and traded in a narrow range throughout the month. Indian macroeconomic fundamentals remained favourable with lower global commodity prices and healthy fiscal trends which provided some respite to market participants. Following the correction witnessed by the market in the last month, the mid & small cap segment saw decent growth and remained the major gainer in the month of December '15.

Market Performance**

The Indian Equity markets remained range bound throughout the month of December'15. On net basis India's bellwether indices viz. S&P BSE Sensex & Nifty 50 remained flat with -0.1% & 0.1% respectively while S&P BSE Mid- cap index & S&P BSE Small-cap index rose by 1.4% & 1.7% respectively.

S&P BSE Energy, S&P BSE Consumer Disc Goods & Services and S&P BSE IT were the top performing sectors during the month rising by 2.8%, 1.0% and 1.0% respectively. Consumer Durables was a major sector under pressure.


Manufacturing production given by Nikkei India Manufacturing PMI fell to a seven-month low of 50.30 in November'15 from 50.70 in October'15, as demand and output continued to soften. Input cost inflation accelerated to the strongest in six months during November'15, but remained below the long-run series average. Down from 53.20 in Oct'15 to 50.10 in Nov'15, the seasonally adjusted Nikkei Services Business Activity Index saw demand growth lose strength during November'15, leading to the slowest rise in incoming new work since July'15.


The Index of Industrial Production (IIP) clocked in a stellar growth of 9.8% (Y-o-Y) in October'15, in sharp contrast of previous month's 3.8% due to favourable base effect. Double digit growth in capital goods can largely be attributed to increase in government capex spending. Sector-wise, manufacturing, electricity and mining rose by 10.6%, 9.0% & 4.7% respectively during the last month. Based on Use-based classification, capital goods, intermediate goods and basic goods, recorded a growth of 16.1%, 6.7% and 4.1% respectively. Overall consumer goods expanded substantially by 18.4% vis-à-vis 1.2% in Sep-15. The divergence in Consumer Durables and Consumer non –durables continued with Consumer durables moving at 42.2% (Y-o-Y) growth while Consumer non –durables recorded a growth of 4.7% (Y-o-Y).

FPI Outflows**

The month of December'15 saw an outflow by FPIs (Foreign Portfolio Investor) on account of expected rate hike by US Fed. The net FPI outflow for the month was Rs.2817 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.4234Crs'.


India continues to remain a preferred investment destination as compared to most of the other emerging markets. Steady rise in GDP, lower fiscal deficit, reducing global commodities and crude prices, low inflation are the major macro indicators which could translate into the strengthening of the Economy as well as the Equity markets from medium to long term perspective.

Going ahead, the consumption and investment demand are likely to steer growth in the Indian Equity markets, due to the higher disposable income, weaker commodity prices, an improving labour market and low interest rates (once transmission of rate cuts happens) and wage hike as suggested by the 7th pay commission. In the medium term markets will keenely monitor the passage of the Goods & Services Tax and other reforms.

We believe that the long term growth story is still intact & as earning growth picks up there is a strong likelihood of PE expansion. With Indian economy seems to be showing sign of improvement, the year 2016 is likely to be a year of subdued growth and we may see momentum building up from the 2nd half of FY 2017. The interim corrections can be used as an opportunity to enter the market by investors having medium to long term investment horizon and should adopt a staggered approach to equity investments in order to even out the market volatility.

' As on 29 Dec 2015 ^MOSPI, ICRA
**ICRA MFI Explorer

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

The start of the month opened on a cautious footing as Debt Market participants keenly eyed the RBI's Monetary Policy. In the interim, India's growth and fiscal numbers helped reinforce confidence in the economic fundamentals of the country. While RBI was broadly expected to stay put on policy rates, its guidance was anticipated to impact bond market dynamics. In the second half of the month the focus shifted to Global Events like OPEC's meeting about capacity production and the much awaited outcome of the US FOMC Policy. December'15 saw rising US Treasury Yields, fairly stable currency movements, multi-year lows of crude oil prices and 10 Year Benchmark closing almost flat compared to the last month.

Fifth Bi-Monthly Monetary Policy: RBI hits the Pause Button~

As widely expected, RBI held steady its key policy rates in its Fifth policy review of the financial year. In the review, though RBI retained its inflation forecasts, it flagged concerns on services inflation momentum. Interestingly, RBI continued to maintain 'Accommodative' stance, assuring of further monetary easing as and when further room for monetary easing is available within the bounds of inflation target chalked earlier. RBI further clarified that US Fed actions were not central in policy making decisions. Instead, implementation of 7th Pay Commission & GST Bill and their effects could be the factors in focus. Encouragingly, RBI estimates the fiscal impact of 7th CPC implementation is likely to be offset by appropriate budgetary tightening.

Index of Industrial Production: Genuine recovery or Base Effect~

The Index of Industrial Production soared to 9.8% in Oct-15 vis-à-vis revised estimate of 3.8% in Sep-15. The massive unexpected rise can be attributed to the statistical base effect, courtesy which the growth number looks magnified. Sectoral trends indicate that a key reason for revival in growth in recent months is owing to Manufacturing sector (10.6% Y-o-Y). While Electricity sector has consistently remained in the green (9% Y-o-Y), limited weightage meant it had limited impact on the headline. On the other hand, Mining also showed signs of growth with the current reading being at 4.7% Y-o-Y. On the use-based classification, growth in Basic and Consumer Goods have contributed to stabilizing growth momentum in the economy.

CPI under RBI's Target Level; WPI still negative but improving*^

Retail inflation for Nov-15 came in at 5.41%, comfortably under RBI's immediate target of 6% by January 2016. Amidst deteriorating statistical base, the price surge broadly came in from the pulses component which continued to observe sequential and annual increase, though at a slower pace than in Oct-15. Food Inflation noted gradual sequential rise of 0.45% vis-à-vis 0.69% in the previous month.

Inflation in wholesale prices stood at -1.99% for Nov-15, marking its highest level in the last 10 months; increased pace of acceleration in food and fuel components led to this increase. Primary articles rose by 2.27% Y-o-Y, primarily owing to food price pressures. Food articles jumped to 5.20% vis-à-vis 2.44% in Oct-15. Sharp acceleration in vegetable prices (14.08% Y-o-Y) also pushed the overall headline print. Tracking similar inflationary trends, Protein inflation stood at 5.9% vs. 5% in Oct-15.

Balance of Payment: Deficit position comfortable~

India's CAD for Q2 FY16 stood at USD 8.2 Bn vis-à-vis USD 10.1 Bn in Q2 FY15. On a cumulative basis, India's CAD now stands at USD 14.3 Bn (1.4% of GDP) as compared to USD 18 Bn (1.8% of GDP) in H1 FY16. On the Capital Account front, significant portfolio outflows strongly weighed down the overall external account balance. Consequently, capital flows added a mere USD 7.2 Bn in Q2 FY16 as compared to USD 18.1 Bn in Q1 FY16. Overall, balance of payments registered a deficit of USD 0.9 Bn, a sharp decline from an addition of USD 11.4 Bn witnessed in the preceding quarter. Lower capital flows along with wider CAD pushed the BoP in the negative territory after a gap of seven quarters.

Outlook ~*

  • On the growth fundamentals, GDP Q2 FY16 of the economy staged a sharp pullback in growth, primarily led by rebound in manufacturing. While the broad measure suggests that the economy is in the early stages of recovery and the monetary policy accommodative, global headwinds continue to impact the local markets, thereby making the market sentiments weak.

  • As market had already adjusted to FED rate hike, post the move, markets actually turned positive.Sentiments are likely to improve in the coming months and local fundamentals should lead to softening of rates. While the bond market is expected to remain range bound in the near short term, the new set of FPI limits which open up on 01- Jan-16 likely to render support to market dynamics.

  • Even after 125 bps rate cut, 10 Year Benchmark Bond is still stagnant; expected to hover around 7.60-7.80% range. We expect the liquidity conditions to remain tight during the coming 2-3 months, as government may carry larger cash surplus to meet fiscal targets. Markets will keenly watch the Union Budget in Feb'16, looking at ways in which government manages the fiscal consolidation path. Inflation is likely to soften post Dec'15 and the path of inflation is likely to determines future rate actions by RBI


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