March 31, 2015

Canara Rebeco. Mutual funds.

The month of March 2015 witnessed several key developments. The central government successfully navigated three bills related to coal mining, insurance and mining through the parliament in the budget session. These constituted three of the five major bills that are due to be passed in the parliament. The US Federal Reserve has removed the word 'patient' from its communication but was more dovish in its stance on the interest rate cycle. Thus, the Fed has earned the flexibility to hike interest rates. As a fall out of SaudiArabia and its allies' military intervention in neighboring Yemen, crude oil prices surged. Saudi's move added to geopolitical concerns, especially in the Middle East. However there are no immediate signs of crude supply disruptions.

Trade deficit narrowed*

Throughout the month markets were on a roller coaster ride, taking cues from quarterly corporate earnings and budget expectations. Post the Union Budget, the domestic equity markets represented by the benchmarks CNX Nifty and S&P BSE Sensex closed on a positive note. CNX Nifty gained 1.06% & S&P BSE Sensex rose by 0.61% during the month.

Overall exports declined in February 2015 for the third consecutive month*

Exports (in dollar terms) declined by 15% YoY in February 2015 vs. a decline of 11.2% YoY in January 2015 – marking the third consecutive month of declines. On a seasonally adjusted sequential basis, exports declined by 6.7% MoM in February 2015 vs. a decline of 6.3% in January 2015. Oil exports declined for the fifth consecutive month in February 2015, and non-oil exports fell on a YoY basis for the second consecutive month.

Government borrowing front loaded^

RBI, in consultation with Government, announced the market borrowing calendar for H1FY16. Gross borrowing for April-September 2015 period stands at Rs 3.6 lac Cr (60% of FY16 total borrowing of Rs 6 lac Cr). In the press conference, the Finance Secretary indicated that Government would look to issue securities of non-standard maturities. Additionally, Government is also intends to issue long term bond of 40 Yr. Total borrowing via T-Bills is pegged at Rs 1.88 lac Cr for theApr-Jun 2015 period.

New Foreign Trade Policy - focusing on the long haul.^^

India's Foreign Trade Policy (FTP) 2015-2020 aims to increase merchandise and services export to US$900 bn by FY2020 from US$466 bn in FY2014 and increase India's share in world exports to 3.5% from 2%. The policy will be reviewed midway its five-year timeline instead of the traditional annual review, highlights: (1) SEZs may avail of incentives under several schemes that have now been streamlined and merged into: (i) Merchandise Exports from India Scheme (MEIS) and (ii) Service Exports from India Scheme (SEIS). (2) India would look to engage with regions that are major suppliers of critical inputs. (3) In traditional developed markets, India aims to (1) increase/retain market share, (2) move up the value chain, (3) optimize customs duties on manufacturing inputs, and (4) export high-quality inputs. The policy also promotes higher-value add manufacturing and employment creation in exportoriented sectors.

Key events to watch out in near term

In our view, the market's bout of volatility in 1Q2015 is unlikely to subside in the current quarter, which is likely to be news-heavy with global developments around Fed policy, global growth data, domestic news flow around legislation and government policy, RBI policy and the upcoming earnings season (expectations appear muted) as sources of potential market volatility.

  • Legislation: The Land bill and the GST bill will be up for approval in the Parliament in April 2015.
  • Executive action by the government: Apart from ongoing changes to make business easy to do, the most important action could be in project awards. The government is targeting a 30% increase in investment spending in F2016. This is the most crucial driver for India's growth in the coming months, in our view.
  • Export growth and the overvalued INR: The concurrent subject is that of the INR's overvaluation (about 7% on REER) and its ongoing impact on export growth.
  • Earnings: Earnings were very weak in the previous quarter. In the QE- December 2014, revenue growth slowed to its worst level since 2009 at 3% YoY. Sensex revenues and earnings were down 1% YoY and 8% YoY, respectively.
  • Equity supply: Government has budgeted a doubling of divestments. We also expect more IPOs and other follow-on offerings in the coming months. Abunching of supply is a risk to short-term equity prices.
  • US Fed moves and other global factors: These may continue to drive volatility in Indian equities, which we expect to be higher than in the past 12 months. Global growth, China growth, oil prices, EM news flow and US Fed moves as an indicator of global liquidity, among other things, are factors to watch.


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

March being the last month of FY 15 witnessed profit booking during the later part of the month. The passage of Insurance bill, Mines and Mineral Development and Regulation Bill by Rajya Sabha, surprise rate cut by RBI and US Fed's decision to maintain status quo on rate hike were cheered by market participants. IMF's GDP growth estimate** placed India's GDP at 7.5% for FY16 and 7.2% for current financial year placed India among the fastest growing economies in the world. However the unrest in Yemen, slight spike in retail inflation weighed on sentiments.

Market Performance*

In the month gone by India's benchmark indices S&P BSE Sensex & CNX Nifty fell by 4.78% & 4.62% respectively. Though Mid- and small-cap indices outperformed their larger peers, they still ended the month in red. The S&P BSE Mid-cap index and the S&P BSE Small-cap index fell by 2.02% and 3.34% respectively. Among the sectoral indices only S&P BSE Healthcare and S&P BSE Consumer Durables recorded positive performance during the month rising by 9.02%, 4% & 0.29% respectively.


India's manufacturing sector represented by HSBC Manufacturing PMI continued to improve in February 2015 although at a slow pace. The index fell from 52.9 in the previous month to 51.2 indicating a soft growth in output and new orders

HSBC India Services PMI Business Activity Index which tracks the changes in activity at Indian services companies on a month-bymonth basis came at an eight month high of 53.5 in February'15 reflecting a faster pace of expansion of services.

Expansion in IIP^

The Index of Industrial Production (IIP) expanded by 2.6% (y-o-y) in January'15 falling from 3.2% (y-o-y) (revised) growth in the previous month.

Sector-wise manufacturing & electricity recorded a rise of 3.3% & 2.7% respectively while mining contracted by 2.8%. On the usebased side basic goods & capital goods recorded a growth of 2.4%, 4.1% & 0.1% respectively while intermediate goods shrunk by 0.8%. The consumption basket contracted by 1.9% owing to de-growth in both Consumer Durables & Consumer non –durables.

Robust FII Inflows#

FPI's invested to the tune of INR 12,078 Crs. in the domestic equity markets during March 2015. We also saw huge FPI inflows of around INR 1,10,540 Crs. during the FY 15.


In the short term, the 4Q FY15 corporate results will dictate the trend of equity markets. We expect that the corporate earnings for FY15 are likely to be muted & the impact of operating & financial leverage on the company may come into play only in the next financial year.

The strong FPI flows in Indian Equity markets have made Equity markets more susceptible to global events, however as we believe India is heading towards a period of sustainable growth & conducive macroeconomic scenario and any market correction offers an excellent opportunity to increase allocation to strong companies with a medium to long term investment horizon.

We feel India is in a structural bull run & is likely to be amongst the best performers in the emerging markets. The settling of Crude Oil prices around USD 60 is a major positive for current account deficit. Further the likely rating upgrade for India in future & relatively less investment opportunities in other Emerging Market economies will keep India on radar of foreign investors.

*ICRA MFI Explorer
#IMF'Seizing India's Moment'
`HSBC Emerging markets PMI

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

Fed removes 'patient'

The Federal Reserve removed the term 'patient' from its communication and thereby introducing flexibility in timing the policy normalization, based on incoming data. The tone was much more dovish than anticipated and markets reacted positively to this, with dollar weakening post the FOMC meeting. Markets expect FED to lift-off in September 2015, with a very low probability of June 2015 hike in interest rates.

CAD dynamics stay comfortable

The current account deficit (CAD) narrowed to US$8.2bn (1.6% of GDP annualized) in QE December 2014 from US$10.1bn (2% of GDP) in QE September 2014. The narrowing in CAD compared to previous quarter was mainly due to an improvement in net exports of services led by improvement in software services exports and lower outflows of investment income.Alower oil import (on back of sharp drop in oil prices) continues to help keep a lid on import growth. Source : kotak Research

1HFY16 borrowing front-loaded; lower than 1HFY15 on net basis

The central government will borrow Rs 3.6 tn on a gross basis in 1HFY16, completing 60% of its gross borrowing program for FY2016BE as against 61.6% in 1HFY15. Like most years, 1HFY16 borrowing will remains front-loaded with the extent of gross borrowing being in line with 1HFY15. The net borrowing is placed at Rs2.23 tn, ~23% lower than 1HFY15, owing to higher redemption. Adjusted for debt repurchases and switches conducted in FYTD15, the redemption in FY2016 now stands at ~Rs1.44 tn out of which Rs1.37 tn is scheduled in 1HFY16. June 2015 bears the maximum redemption pressure. 1QFY16 would also see the short-term government borrowing (on a gross basis) through T-bills at Rs1.88 tn. Of this, 91-day, 182- day and 364-day would respectively account for Rs1.1 tn, Rs0.36 tn and Rs0.42 tn. As per the detailed borrowing calendar, the weekly dated securities auctions size is Rs140-160 bn. On the tenor side, the borrowings are concentrated in the 10-14-year bucket (~45% of gross borrowings in 1HFY16). This is in keeping with the requirement to reduce the heavy redemption pressures of the next few years. Source : kotak Research

CPI inflation marginally higher in Feb-15:

CPI inflation accelerated to 5.37%YoY in Feb15 vs. 5.19%YoY in Jan-15 (revised upwards from 5.11% earlier). The CPI data for Feb was marginally higher than previous month and also consensus estimate of 5.20%.

The Central Statistics Office (CSO) launched the new CPI series from Jan-15, revising the base year for CPI to 2012 from 2010 and including certain changes in methodology. Source : Central Statistics Office

Liquidity tightened towards financial year end

The liquidity deficit as measured by LAF, MSF and the Standing Liquidity Facility availed from RBI added together was at Rs.2,00,772 crores as on 31st March, 2015 compared to 51,543 crores as on 28th February, 2015. Source :


  • We expect the liquidity conditions to improve considerably in April-June 2015 quarter due to increased government expenditure, and on large front loaded maturities of government securities. This is likely positive for money markets and corporate bonds.
  • At the macro level, India's vulnerability to Fed tightening has diminished. The Current Account Deficit has reduced meaningfully. Improved inflation outlook has led to substantial capital flows, taking FX reserves at US$310 bn to historic highs.
  • The 1HFY16 borrowing calendar aims to complete 60% of the FY2016 budgeted gross borrowing while net issuances are ~23% lower than last year. We expect bond yields to maintain its gradual drift path lower as the RBI is likely to ease rates further by 25-50 bps in FY16.
  • The benchmark 10Y G-sec yield is likely to go towards 7%. Lower inflation and a relatively stronger INR are likely to keep RBI in a dovish mode in near term.

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