February 28, 2015

Canara Rebeco. Mutual funds.

The month of February 2015 witnessed several key announcements. Market sentiments were driven by two major events viz. the Railway Budget and Union Budget. This month saw WPI entering the negative zone, while there was moderate uptick in CPI. Overall the month saw several positive as well as negative news flow influencing market movement.

Market Performance*

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.


The index of industrial production (IIP) slowed to 1.7% in December'14 from 3.9% in November 2014 owing to contraction in consumer durable goods and mining output.


The Wholesale Price Index (WPI) slumped into negative territory; coming at -0.39% in January 2015 compared to 0.11% in December 2014 The decline in fuel and power were the main reason for the decline in WPI. However, increase in food inflation is a cause for concern. The base for Consumer Price Index (CPI) inflation series was changed from 2010 to 2012. CPI for January 2015 stood at 5.11% (new series), a marginal uptick from previous month's 5% (old series). At 5.11% CPI is well below RBI's target of 6% by Jan'16, building a case for rate cuts in the coming months.

Trade Deficit#

India's trade deficit narrowed to 11 month low of $8.3 billion as compared to last month's $9.4 billion deficit, driven by lower oil prices. The April-January, 14-15 period trade deficit increased from $ 118.37 billion as compared to previous year's $116.53 billion. As a sign of weak economic scenario in Eurozone, the exports fell in January, contracting by 11.19% to $23.8 billion over the same month a year ago. Compared to January 2014, non oil imports rose by 3.45% but overall there was a contraction in imports of 11.39% led by low crude oil prices.


Both Railway Budget and Union Budget announced recently were forward looking and long term reform oriented. One key point worth highlighting is the Railway minister's usage of the term “customers” instead of “passengers”, indicating that focus has moved towards providing better service to travellers. In this regard capital investment in railways has been proposed.

In the Union Budget, the Finance Minister tried to maintain a balance between fiscal consolidation and need to increase capital expenditure to facilitate economic growth, promoting him to defer the fiscal target of 3% by another year. The targeted ratios are now at 3.9%, 3.5%, 3.0% in FY 16, FY17 and FY18 respectively. On the growth front, the FM proposed to increase the public infrastructure spending over the next year to 0.9% of GDP.

Tackling the issue of subsidies, the government has slashed the total major subsidies by 10% to Rs. 2.27 lakh crores. In a move welcomed by FII's, GAAR implementation has been deferred by 2 years and further the FM announced that it will only be implemented on a prospective basis. Overall the Budget had several positive steps, however certain unexpected news like hike in excise duty and service tax were considered unfavourable by market participants.

Other key highlights of budget are as follows:

  • Reduced Custom Duty on 22 Items
  • GST to be put in place by April 1, 2016
  • GAAR to be resolved in 2 Years- Implementation of GAAR deferred by 2 Years. To be applied from April 2017
  • FM to Reduce Corporate tax rate from 30 to 25% over next 4 years.


On the domestic front the RBI Monetary Policy Review in April 2015 will be an eagerly awaited event. We believe that RBI is likely to follow a slow & steady approach while decreasing interest rates.

On global front the start of Quantitative Easing by ECB in March will inject liquidity in the market, India is likely to be a beneficiary of these increased foreign flows.

The resolution to Greece Debt deal will be actively tracked by the international markets. Any negative news flows is likely to impact market adversely.

There has been some uptick in crude oil prices. If this trend continues raising the crude oil prices above US$ 70, it could raise concern for India's current account deficit, inflation expectations and fiscal deficit.

^http://mospi.nic.in/Mospi_New/site/PressRelease.aspx; Bloomberg
#http://commerce.nic.in/tradestats/filedisplay.aspx?id=1, http://in.reuters.com/article/2015/02/13/india-economy-tradeidINKBN0LH1H720150213

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

Markets remained nearly flat during February 2015. The apprehensions over Delhi election's outcome, cautious tone of S&P dampened market enthusiasm a bit. However optimism about Greece debt deal, dovish tone of US Fed regarding interest rate hike & a pragmatic budget which spelled out the Government's long term plan helped recoup the loses.

Market Performance*

In the month gone by India's benchmark indices S&P BSE Sensex & CNX Nifty rose by 0.61% & 1.06% respectively. Mid- and smallcap indices marginally underperformed their larger peers. The S&P BSE Mid-cap index gained 0.67% and the S&P BSE Small-cap index fell by 0.55%.

S&P BSE IT, S&P BSE Consumer Goods & S&P BSE Metals were the top performing sectoral indices during the month rising by 7.07%, 4% & 3.72% respectively.


India's manufacturing sector represented by HSBC Manufacturing PMI came at 52.9 for January 2015. Despite falling from the high of 54.5 in December 2014 it continued to reflect a strong growth in business in the manufacturing sector. Sectoral data indicated that consumer goods was the best performing among three namely consumer goods, intermediate goods & capital goods.

HSBC India Services PMI Business Activity Index which tracks the changes in activity at Indian services companies on a month-bymonth basis – was indicative of a strong expansion in business activity in January 2015. The index came at 52.4 in January's rising from 51.1 in December'14, as activity and new business expanded at fast pace.

Expansion in IIP^

The Index of Industrial Production (IIP) expanded by 1.7% (y-o-y) in December'14 falling from 3.9% (y-o-y) (revised) growth in the previous month.

Sector-wise manufacturing & electricity recorded a rise of 2.1% & 4.8% respectively while mining contracted by 3.2%. On the usebased side basic goods, capital goods & intermediate goods recorded a growth of 2.4%, 4.1% & 0.1% respectively. The consumption basket on the whole grew marginally by 0.7% dragged by 9.0% contraction in Consumer Durables, Consumer non –durables on the other hand grew by 5.7%.

Robust FII Inflows#

The month saw some sell off by FPIs in the equity markets. However on the whole FPI's invested to the tune of INR 11,476 Crs. in the domestic equity markets during February 2015. We also saw huge FPI inflows of INR 102486 Crs. (YTD) during the current financial year.


The recently concluded Railway Budget & Union Budget saw the Railway Minister putting forth a broad roadmap for transformation of railways. The Union Budget too was equally forward looking, focusing more on structural improvement rather than big bang reform announcements. The government highlighted (1) a credible fiscal consolidation plan with implementation of GST and Direct Benefit Transfers schemes over the next 1-2 years and (2) increased allocation towards capital expenditure. This signals the government's intent to support the investment –cycle recovery. Further the Finance Minister also announced intention to systematically reduce Corporate Tax to 25% over the next 4 years. This move is likely to be positive for Small & Medium Sized Enterprises. The clarification on GAAR, was another positive from Foreign investor's perspective. However, the increase in Service Tax was an unexpected negative move for the companies in the service sector.

The 3Q corporate earnings were slightly below market expectations. We expect the impact of operating & financial leverage on the company may come into play only in the next financial year & overall corporate earnings for FY15 are likely to be muted.

On a long term horizon we believe India is heading towards a period of sustainable growth & conducive macroeconomic scenario. We feel India is in a structural bull run & is likely to be amongst the best performers in the emerging markets. 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
^http://mospi.nic.in/Mospi_New/site/PressRelease.aspx; ICRA
`HSBC Emerging markets PMI

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

The Union Budget for FY16E provided a big public investment push, but slowed the pace of fiscal consolidation

The government has budgeted FY2016 Gross Fiscal Deficit-to-GDP ratio at 3.9% (central government only), modestly lower than 4.1% in FY2015, but higher than previous fiscal roadmap target of 3.6% of GDP. The Government, however, reaffirmed its commitment to fiscal consolidation over the future and set the FY17E target at 3.5% of GDP and FY18E target at 3% of GDP. Finance Minister indicated that total increase in public infrastructure spend over the next year will be Rs1.25 trillion or 0.9% of GDP.

Government Borrowing: Lower Gsec supply than expected despite a higher deficit

The government has announced gross borrowing of INR 6tn for FY16 to finance 3.9% fiscal deficit. Though the fiscal deficit target has been set higher than most people expected the Gsec supply is surprisingly lower. The government is looking to finance just 82% of the fiscal deficit with Gsecs vs. 87% last year. This is despite a lower plan for short term borrowing in FY16 INR300bn vs. INR512bn this year. However, a draw down of cash balances of INR120bn, other capital receipts of INR 136bn and a buyback/switch of INR 320bn is aiding a lower supply.

Monetary policy framework

The RBI and the government finalized the monetary policy framework, which incorporates the Urjit Patel Committee recommendations. The CPI inflation target has been set at 4% (+/-) 2% for FY2017 and beyond after aiming to bring inflation below 6% by January 2016. Once every six months, the RBI shall publish documents explaining (1) sources of inflation and (2) inflation forecasts for a period of 6-18 months from publication of the document. The RBI will have failed to meet the inflation target either (1) if inflation is more than 6%, or (2) if inflation is less than 2% for three consecutive quarters in FY2016 and subsequent years. If the RBI fails to meet the target, it shall set out in a report to the central government the (1) reasons for failure to achieve target, (2) remedial action proposed to be taken by the RBI and (3) estimate of time period within which the target would be achieved pursuant to timely implementation of the proposed remedial actions. However, the agreement did not outline any features of the proposed Monetary Policy Committee.

New base CPI inflation rose less than expected in Jan-15:

CPI inflation as measured by the new series accelerated to 5.1% YoY in Jan-15. According the CSO, the comparable reading for Dec-14 is 4.28% YoY, lower than the reported inflation of 5% under the old series for December.

The unwinding of favorable base effect was expected to lead to a pick up in YoY levels, but the rise has been much lower than expected, mainly because of lower inflation in non-food non-fuel categories.

Liquidity eased remained easy on RBI's variable rate repos

The liquidity deficit as measured by LAF, MSF and the Standing Liquidity Facility availed from RBI added together was at Rs.51,543 as on 28th February, 2015 compared to 67,409 crores as on 31st January, 2015, Liquidity situation remained easy on RBI's regular injection of liquidity through variable rate repo auctions


The relaxation of the fiscal deficit target – from 3.6% of GDP under the old roadmap to 3.9% of GDP – is most likely to push out monetary easing in the scheduled April 2015 review. We expect a 25 bps of easing at the April 7th review, barring an unanticipated upside surprise to the February 2015 CPI.

Bond markets were expecting a gross borrowing program of Rs 6 trillion, which the government delivered. Net government borrowing would cover 82.1% of fiscal deficit of Rs 5.56 trillion, which works out to Rs 4.56 trillion bonds worth Rs 1.44 tn are to be redeemed this year. Bond market will view the borrowing as easily absorbable and given expectations of rate cuts, yields will trend down

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