October 31, 2015

Canara Rebeco. Mutual funds.

October'15 was a steady month for the markets post the volley of chaotic months. The month saw advent of Q2FY16 corporate results, and as expected the reported earnings were subdued. Going ahead, we expect a muted Q3FY16 as well and earnings are likely to start showing improvement in FY17. On the macro-economic front, Industrial Production witnessed a robust growth and there was an uptick in consumer price index (CPI), however Wholesale Price Index (WPI) continued to languish in negative territory.

Market Performance*

Market sentiments were boosted during the beginning of the month owing to weak economic data in US, lowering a possibility of rake hike by Fed. However, Fed's direct reference about possibility of rate hike in December'15 changed opinions of market participants. The month saw key indices viz. S&P BSE Sensex and CNX Nifty closing in green, rising by 1.92% & 1.47% respectively.


The Index of Industrial Production (IIP) registered a 34 month high of 6.4% (Y-o-Y) in August'15 compared to 4.1% in July'15 (revised) signalling signs of economic recovery. The stout growth in IIP was substantially due to double digit growth in capital goods (21.8%) and consumer durables (17.0%) output on account of base effect. Additionally, basic goods and intermediate goods registered a reasonable growth of 3.4% and 2.6% respectively. On sector front, manufacturing output clocked in a robust growth rate of 6.9% followed by 5.6% and 3.8% expansion in electricity and mining sectors.


Wholesale price inflation (WPI) continued to be in negative territory for the 11th straight month, easing marginally to -4.54% in September'15 from -4.94% in August'15. Consumer Price Index (CPI) rose to 4.4% in September'15 compared to previous month's 3.7% (revised) on account of higher food prices and waning base effect. Core inflation (excluding food & beverages and fuel & light) rose marginally to 4.3% in September'15 from 4.1% in August'15.

Trade deficit$:

Trade deficit continued its narrowing trend, registering a deficit of US$10.48 billion in September'15 from $12.48 billion in August'15. Imports shrunk by 25.42% (Y-o-Y) to US$ 43.34 billion, helped by contraction in oil and non-oil imports. The month saw oil imports declining by 54.53% (Y-o-Y) due to fall in crude oil prices, while non-oil imports fell by 10.68% (Y-o-Y). While this is a positive sign for overall deficit, the continuous decline in exports is not very encouraging. Exports declined by 24.33% (Y-o-Y) to US$ 21.84 billion predominantly due to slowdown in major global economies.

Fiscal deficit$$:

India's half yearly fiscal deficit stood at Rs. 3.78 lakh crore or 68.1% of the Budget estimate for the whole year as revenue receipts have picked up and nonplan expenditure remained within target. Planned expenditure stood at 54.6% of full year target which was higher than last year's 42.8%, reflecting Government's attempt to boost growth through investments.


  • The outcome of Bihar elections and corporate results will be keenly followed by market participants.

  • On other data, USD/INR movement, crude oil prices and GDP for Q2FY16 will be monitored by investors.

  • Another important trigger would be the government's ability to pass of key legislations viz. GST bill.

  • Markets have already factored in, to a large extent, the impact of US rate hike; however post announcement of rate hike markets are likely to be volatile due to temporary liquidity outflow. The guidance on pace of future rate hikes is likely the key on driving market sentiment.

* Bloomberg
^ mospi.nic.in
$ Ministry of commerce
$$ Business Standard

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

Indian equity markets were guided by 2QFY16 corporate results and announcements from global central banks viz. US Fed, ECB & Chinese Central Bank. Key domestic economic indicators provided a cautiously optimistic picture. Though the retail inflation recorded an uptick last month it is still within RBI's comfort zone. Sustained negative wholesale inflation on the other hand is a cause for concern. On growth front India appears to be on the right track indicated by improving industrial production. Indian equity markets which had ended the last month in red rose marginally during the month.

Market Performance**

Equity markets were volatile during last month. On net basis India's bellwether indices viz. S&P BSE Sensex & CNX Nifty witnessed positive momentum rising by 1.92% & 1.47% respectively while S&P BSE Mid- cap index & S&P BSE Small-cap index rose by 1.62% & 2.67% respectively.

S&P BSE Consumer Durables, S&P BSE Metal and S&P BSE Energy were the top performing sectors during the month rising by 9.83%, 6.94% and 5.97% respectively. IT, consumer goods & realty were major sectors under pressure.


Manufacturing production indicated by Nikkei India Manufacturing PMI fell to a seven-month low of 51.20 in September'15 from 52.30 in August'15, weighing on the PMI were, slower increases in new orders and output. September'15 data pointed to the weakest rise in production since May last year.

Down from 51.80 in August'15 to 51.30 in September'15, the seasonally adjusted Nikkei Services Business Activity Index pointed to a slight and softer expansion of services output across the country. Though, increase in new business was a positive the tough economic conditions weighed on growth.


Beating market expectations, the Index of Industrial Production (IIP) rose to 34-month high of 6.4% (Y-o-Y) during August'15 compared to 4.1% (revised) in July'15. Double-digit growth in consumer durables and capital goods is instrumental for the growth in IIP. Sector-wise mining, manufacturing and electricity rose by 3.8%, 6.9% & 5.6% respectively. Based on Use-based classification, basic goods, capital goods and intermediate goods recorded a growth of 3.4%, 21.8% and 2.6% respectively. Overall consumer goods expanded by 6.8%. The divergence in Consumer Durables and Consumer non –durables continued with Consumer durables galloping ahead at 17.0% (Y-o-Y) growth while Consumer non–durables grew marginally by 0.4% (Y-o-Y).

FPI Outflows**

The month saw reversal in FPI (Foreign Portfolio Investor) flows. From pulling out close to Rs. 6,500 Crs from Indian equities in September'15; FPIs invested around Rs. 6,650 Crs. in Indian equities in the month gone by. The expectation of delay in US Fed rate hike at the start of the month, likely extension of stimulus by ECB & lowering of interest rates by China were the key triggers directing foreign funds to India.


On global front, all eyes are now on US Fed after they indicated the possibility of rate hike in December'15. We believe that, the start of rate hike cycle by Fed poses limited threat to India's capital account. While there may be some knee-jerk reaction post the announcement, India is unlikely to see huge foreign outflows as the country stands tall; among other economies in terms of fundamentals and growth potential.

In the near term, the results of the ongoing elections in the state of Bihar would be a key trigger for Equity markets. Going forward, any reforms related announcement such an update on passage of Goods & Services Tax (GST) or Land Acquisition Bill would be positive for market sentiment. Though investors are in consensus with the proposed reforms the pace of implementation of reforms needs to be accelerated.

The earnings season so far has been in line with our expectations with no major negative surprises. We expect the earnings in the coming few quarters to be subdued and corporate profits and margins are likely to start responding to the improving economy in the next financial year. We expect support for domestic cyclicals and capex industries from declining interest rates while exporters and defensive sectors are likely to face some pressure due to slowdown in global growth & weak growth in rural demand.

We expect markets to remain volatile in the near term owing to Bihar elections & US Fed stance. Investors may adopt a staggered approach to equity to even out the market volatility.

**ICRA MFI Explorer

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

October'15, in comparison to other months, was a month which had no fresh triggers leading to lack luster trading. Markets remained relatively steady in face of uncertainty on timing of US rate hike and global volatility. No expectation of an Interest rate hike by the US in the FOMC meeting held near the end of October’15, owing to weak US Data, made markets largely rangebound.

CPI in lines with the expectations~

Headline CPI for Sep'15 stood at 4.41% as compared to the revised Aug'15 reading of 3.74%. This surge of 67 bps in the headline reading can partly be attributed to receding base effects, which aided in disinflation for past six readings, contributing ~17 bps to the overall reading. The remainder of the inflationary impulses came in from sequential uptick of ~50 bps in all its major subgroups. In food inflation, sequential momentum noted modest price pressures of 0.69% vis-à-vis 1.64% recorded in previous month.

Granular analysis of its sub-components highlight that while fruits and contained vegetable price rises aided in curbing overall food price pressures, pulses continue to be a cause of worry. While the overall food basket contributed to ~45 bps to the headline, of this ~36% was specifically contributed by the pulse component. Going forward, measures taken by the government to control pulse prices should put a cap on any further increase.

Steady Trade Deficit~

For the month of Sep'15, India's trade deficit stood to USD 10.48 Billion, narrowing from USD 12.48 Billion in Aug'15. During the month, India's exports contracted to USD 21.84 Billion (down by ~24% YoY) owing to subdued global growth, while imports came in at USD 32.32 Billion (down by ~25% YoY) owing to 54.53% decline in crude – oil imports and 10.68% fall in non-oil imports. Consequently, the trade deficit for the current fiscal year stood at USD 67.99 Billion vs. USD 72.69 Billion in year ago period.

Fiscal Deficit slips down to a 3 Year Low~

The government has succeeded in keeping its fiscal deficit at a three-year low of 68.1% of its full-year target of Rs.5.6 trillion in the first six months of the fiscal year (Apr'15-Sept'15) as revenue receipts have picked up and non-Plan expenditure remained within target. While the Plan expenditure stood at 54.6% of the full-year target, higher than 42.8% during the same period last year, while non-Plan expenditure remained at 50% of the target till September, against 50.5% during the same period a year ago.

Credit ratio improves but high debt companies continue to struggle ^

Credit ratio or number of firms upgraded versus those downgraded improved to 2.13 times in the first half against 1.68 times at the end of the last fiscal year. In all, there were 981 upgrades to 460 downgrades, during this period. However, credit pressures intensified for highly leveraged firms particularly in the metals, real estate and infrastructure sectors as these companies continued to grapple with high debt, low product prices and could not make much headway in asset sales.

Outlook ~*

  • We expect the liquidity conditions to tighten on account of oncoming festive season and slow government expenditure. On global front, the downbeat inflation & labour data coupled with decrease in interest rate by China build a strong case for delay in rate hike by US Fed.

  • While retail prices inflation inched up in the current reading, these inflationary pressures do not raise caution on RBI's Jan'16 targets. With the RBI itself displaying comfort on the Jan-end target, concerns on the same seem largely addressed. Furthermore, in its policy release, RBI sought to shift its goalposts to its medium term target of 5% by Jan'17. The recently announced Medium Term Framework for FPI investments which came into effect from 12-Oct-15 is viewed to further uplift the domestic bond market sentiment significantly.

  • Domestically, high deposit growth and low credit offtake are positive triggers for a slow downward movement in 10Yr yield. Further, lower G-sec issuances & increased PF & insurance demand in 2HFY15 may drive up G-sec prices.

  • Even after the 50 bps rate cut by RBI the spread between repo and 10 Year Benchmark Bond is still around 85 basis points, as global/local sentiment continued to remain weak. We continue to expect further easing in future, as we expect inflation to undershoot Jan'16 target of 5.8%. Thereafter inflation is likely to slow down as government efforts to control food prices show effect. FII limits will further be revised in Jan'16 and coupled with expectation of fresh allocation from FIIs in 2016, bond markets should receive fresh impetus. Near term 10 Year Benchmark Bond is likely to trade between 7.50%-7.65% levels.

  • We believe that we are at the start of a cycle and there would be further rate cuts in a measured way. We expect RBI to cut rates up to 75 – 100 basis points in next 12-18 months.


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