August 31, 2015

Canara Rebeco. Mutual funds.

The month of August’15 was driven by confluence of domestic and global factors. The month started with RBI’s neutral policy announcement wherein there was no change in any of the key rates. The governor mentioned that RBI will monitor the progress of monsoon, inflation figures and US’s Fed rate stance before taking any call on the interest rates. The major force driving the market volatility globally, in the current month, was China’s move to devalue its currency. This resulted in the Indian Rupee breaching its two-year low. However, positive data on the domestic front viz. softening of inflation and improvement in IIP bolstered investor sentiments.

Market Performance*

China’s decision to devalue Yuan sent ripples across global currency markets, and India was no exception. Against the Dollar, the Indian Rupee slid down to 66.48 compared to its previous month's close of 63.65. Worries about China's economic slowdown, Rupee depreciation and deficit monsoon led to a sell-off in Indian markets. The benchmark indices, CNX Nifty and S&P BSE Sensex - tumbled by 6.58% & 6.51% respectively.


The Index of Industrial Production (IIP) clocked in a robust growth rate of 3.8% (Y-o-Y) in June'15 compared to 2.5% in May'15 (revised). The improvement in growth was predominantly due to 4.6% growth in manufacturing sector. On Sector front electricity registered a growth of 1.3%, while mining output contracted by 0.3%. On Use-based classification Consumer Goods recorded a strong growth of 6.6% owing to 16% rise in production of Consumer durables. However Capital goods contracted by 3.6%.


July,15 wholesale price inflation (WPI) plunged deeper into the negative territory recording -4.05% compared to previous month’s -2.4%. Consumer Price Index (CPI) fell sharply to an eight month low of 3.78% in July’15 compared to 5.4% in the previous month. Core inflation (excluding food & beverages and fuel & light) moderated to 4.3% in July’15 from 4.8% in June’15. Positive development on inflation bolstered the possibility of a rate cut in RBI’s September,15 monetary policy.

Trade Deficit##:

Trade deficit expanded to $12.81 billion in July’15 from $10.83 billion in June’15. Imports contracted by 10.28% (Y-o-Y) helped by sharp decline in crude oil prices. There was an uptick of 3.8% in non-oil imports (Y-o-Y). Continuing the recent worrisome trend, exports declined for the eight consecutive months by 10.30% Y-o-Y in July’15 to US$23.14 billion. The recent depreciation in INR may be positive for exports. However, the slowdown in major global economies may negate the impact to some extent.


India's Q1FY16 recorded a growth of 7% as against 6.7% in the same period last year. Despite the Y-o-Y increase, it was tad lower than market expectations. India's manufacturing growth slowed down to 7.2% from 8.4% Y-o-Y and agricultural growth also slowed down to 1.9% from 2.6% Y-o-Y. With softening of inflation and slow pace of growth, RBI may adopt an accommodative stance in the coming monetary policy review.


  • Global markets are likely to be driven by events in China and how the authorities tackle the slowdown and restore market confidence.

  • Another key event to watch out will be US rate hike, which is likely in 4QCY15, for global markets and liquidity flow. It is expected that US rate hike may be delayed due to recent global volatility.

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

  • Government’s efforts to pass some key legislations viz. GST bill through the Parliament is likely to be another important driver for markets.

  • Though there has been no official news regarding FPI limit, global players are keenly awaiting Government’s stance on increasing FPI limit. RBI has indicated that the limits may be revised twice a year, going forward, and is in consultation with the government on the same. It is likely that there could be a revision in September,15.

* Bloomberg
## Ministry of commerce

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

Last month was marked by a sharp devaluation of Yuan by Chinese Central Bank. The move jolted global currency markets & raised concerns that other export oriented economies may seek to weaken their exchange rate to keep their exports competitive. The Indian equity markets which had ended last month on a marginally positive note plunged in wake of the ensuing global turmoil. The softening of inflation & improvement in manufacturing growth characterized by IIP provided some respite to market participants.

Market Performance**

In sync with the global markets Indian equities experienced selling pressure during August’15. India’s bellwether indices viz. S&P BSE Sensex & CNX Nifty dropped sharply by 6.51% & 6.58% respectively while S&P BSE Mid- cap index & S&P BSE Small-cap index fell by 4.78% & 7.27% respectively.

The market correction was broad based & all major sectoral indices except S&P BSE Healthcare and S&P BSE IT ended the month in red. Weak INR contributed to the positive sentiment in both the export driven sectors.


During the 1Q FY16, Indian economy grew by 7%, below market expectations and slower than the preceding quarter. The quarter saw sluggish growth in agricultural output which grew by 1.9% (Y-o-Y) compared to 2.6% in Q1 2014-15. The lower agricultural growth combined with rainfall deficit have raised concerns regarding rural demand in coming months. There was also a small dip in Manufacturing & Services activity. Only two sectors viz. Construction & trade, transport, communications, etc recorded a higher growth rate in Q1 this year vis-à-vis Q1 in 2014-15.

India’s manufacturing sector represented by Nikkei India Manufacturing PMI came at 52.7 for July’15 accelerating from 51.3 in the previous month. Expansion in new overseas orders & output growth were instrumental in improving the business conditions during the month.

Nikkei India Services Business Activity Index which tracks changes in activity at service companies on a monthly basis rose to 50.8 in July’15 from 47.7 in June’15. Services activity rose mainly due to a renewed increase in new business & strengthening demand conditions.


Beating market expectations, the Index of Industrial Production (IIP) rose by 3.8% (Y-o-Y) during June’15 compared to 2.5% (revised) in May’15. The consumption basket which had been the Achilles heel in the recent past grew at a robust pace during the month. Sector-wise mining contracted marginally by 0.3% while manufacturing & electricity rose by 4.6% & 1.3% respectively. Based on Use-based classification, basic goods & intermediate goods recorded a growth of 5.1% & 0.8% respectively while capital goods recorded a contraction of 3.6%. Overall consumer goods expanded by a healthy 6.6% owing to sharp growth in Consumer Durables 16.0% & 1.3% expansion in Consumer non - durables.

FPI Outflows**

FPIs (Foreign Portfolio Investor) had started re-entering the Indian equity markets during July’15 after reducing exposure to India in the previous month. However, the unrest in global markets post devaluation in Yuan & resultant depreciation in INR led to foreign investors exiting their positions in Indian equities. Further the uncertainty in Europe and concerns that the US recovery may not be as strong as expected hastened the sell-off. The month saw net FPI outflows in equities to the tune of Rs. 16,877 Crs.


In the month gone by, weak Chinese macroeconomic data & decline in value of Yuan against USD send jitters across global markets. However, on a positive note, the recent turmoil coupled with slower pace of economic recovery in USA increased possibility of delay in rate hike by US Fed. In the near term, markets are keenly awaiting US policy announcement & action by Chinese regulators.

On domestic front with the lackluster growth numbers combined with lower retail inflation & strong possibility of delay in rate hike by US Fed may induce the central bank to cut rates in the coming monetary policy. However, the deficit in rainfall raises concern regarding uptick in food prices & will be considered carefully by RBI while determining policy action.

India is amongst the best performing emerging economies. China a close contender for this title is experiencing a structural slowdown. Additionally despite the recent devaluation, Chinese equity markets slumped in the last week of August’15. We believe that as currency markets globally settles down, foreign investors would start increasing their weightage to India, given India’s relative economic strength and stable currency.

We believe that in the near term markets are likely to remain volatile. However, with India slowly heading towards a period of sustainable growth; the pick –up in corporate earnings growth is likely to follow resulting in PE expansion. We expect the earnings revival to show some signs of turnaround starting 2HFY16 & the capex cycle to revive in the time to come. Investors can adopt a staggered approach to investing in equities in order to even out market volatility.

`MOSPI, Crisil, Business Standard
**ICRA MFI Explorer

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

August, 15 saw Indian markets buffeted by global headwinds, with more external events affecting markets than the domestic ones. After successfully being able to tackle the whole Greece fiasco, the action shifted to the Emerging Markets with China’s Equities crashing and PBoC (People's Bank of China) devaluing its currency (Renminbi) against the US Dollar citing growth to be one of the reasons for their actions. Subsequent knee jerk reactions followed with the Rupee falling to below two year lows. However, the positive Inflation figures cheered the markets as this paves a way for the central bank to look at the reduction of the interest rates sooner rather than later.

Third Bi Monthly Policy – A policy in line with the Expectations *

The Third Bi Monthly Policy by the Central Bank did not get cheers to the markets as the policy rates were kept constant, with RBI adapting a data depending stance, suggesting that the future monitory policy action will be dependent on upcoming events of July, 15 CPI numbers, US Fed’s actions and the impact of monsoons.

Sharp fall in CPI – A Welcome Surprise ~

Ahead of release of inflation data, the debt market continued to stayed range bound in absence of any market triggers. While everyone in the Financial Markets expected Inflation to be sticky, however, defying seasonality and aided by the base effect, CPI inflation for July grew at mere 3.78%. Ongoing slump in global commodity cycle- especially crude oil and metal prices has effected this correction in domestic retail prices. With WPI standing lower than expected at -4.05%, there was a turnaround seen in the bond market sentiments, with most participants now expecting a rate cut in RBI’s Sept-15 Monetary Policy Review. This led to yield curve drifting lower by 5-8 bps compared to the weeks before the print.

China Devaluing Renminbi

China’s devaluation of its currency for three consecutive days led to overall EM FX depreciation, which led to INR depreciation as well. . The PBoC implemented a new methodology for fixing the currency on August 11, 2015, affecting how the "reference rate" is set. The Yuan - also known as the Renminbi, was devalued after a series of stock market falls since June, 15 and lower export print. This has a cascading effect on the Rupee with negative sentiments of the foreign investors on the other Emerging Markets including India. Volatile swings in rupee were seen which kept bond market sentiments under check, though the underlying sentiments on the Bond Markets remained robust. Further INR had been a stronger currency vis-à-vis other EM currencies and as such this depreciation is likely to correct the relative over-valuation of INR.

Outlook ~*

  • Global headwinds continue to impact the local markets in spite of improving local macro conditions. The liquidity in the system remained plush with Call rates and CBLO hovering at a weighted average yield of 7.13% and 7.16% as on 28th August 2015. The lower print was witnessed as the system-wide liquidity was in surplus mode to the tune of Rs ~15,000 Cr as on 28th August 2015 (On net basis).

  • The global slowdown in growth also affected India where the Indian Economy grew at a slower pace in the first quarter of 2015-16 compared with the previous three months – GDP for growth slowed to 7% in the April-June 15 quarter from 7.5% in the January-March 15 quarter. With global growth becoming a concern there is a possibility of delay in rate hike by US Fed. We expect the hike to get postponed to either end of this year or the beginning of the next.

  • Credit growth continues to be in single digits. RBI expects credit growth to improve gradually over the next quarter as banks manage their margins and pass on the benefit of rate cuts. The chances of an Interest Rate cut by Reserve Bank of India in the upcoming policy of September, 15 has increased owing to a 25 basis point Interest Rate cut by China and to the more than comfortable inflation numbers. Further delay in FED rate hike may embolden RBI to go ahead with policy easing.

  • While the 10Y G-Sec bond yield closed at around 7.80% on 31st August 2015, it did not see much change from the previous month. The next print of CPI is expected to be similar to July 2015 number, though the base effect is likely to dissipate thereon. While deficient rainfall may impact agri-inflation, the strong deflation in commodities is likely to offset the same. USD/INR has fallen sharply in the last few weeks, on back of move by China; however its Year Till Date performance is one of best in EM space. Also the Foreign exchange reserve accumulation by RBI in last 2 years could be used to battle any further contagion. We expect that the central bank may move sooner rather than later, with some dependence on the timing of US FED rate hike.


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