Annual Outlook on Economy and Market outlook on...Source: CMIE economic outlook, SBIMF Research, Oil...

Annual Outlook on Economy and Market

January 2019

Source: CMIE economic outlook, SBIMF Research,

Oil price movements dominated Indian macro in 2018

Oil rose by 36% till 3rd October, fell by 37% in last three months Rising oil import bill led merchandise trade deficit to widen

Weakening external account and rising Fed rate led to FII

outflow

Rupee fell by 14% up until October, recouped some of the

losses in last two months


Oil price movements dominated Indian macro in 2018 (contd…)

RBI’s reserves declined; the reserves have stabilized since

November as macro dynamics improved with crude oil fall

Fuel and core inflation inched higher, but soft food helped

to keep overall inflation low

Concerns on rupee depreciation prompted central bank to

do two pre-emptive rate hikes and change stance

Government was forced to cut excise duty on petrol/

diesel in an already stressed fiscal situation

Key Events/ Policy Actions in 2018

Source: SBIMF Research

Key state elections in 2018; market headed towards 2019 general election

NPA recognition by banks continued in 2018; but fresh slippages contained

GST saw plethora of rate rationalizations

Challenges in NBFC sector during the year triggered by default from select entity

Recapitalization of public sector banks continued

Brent prices rose & rupee depreciated till 1st week Oct ; mended in last three months

Budget brought Long term capital gains on equity market

The farm sector issues accentuated; higher MSP failed to yield desired impact


Growth improved in 1H FY19; moderation likely in 2H FY19

• India’s economic growth improved in 1HFY19 however, it is likely to moderate in 2H FY19.

• Growth in 1HFY9 increased on account of continued consumption demand and the pick-up in investments demand which was

partly offset by rising trade deficit.

• Looking ahead in the near-term, it appears that, growth is likely to moderate in 2H FY19 as gauged from various high frequency

indicators and on account of unfavorable base. We expect growth to start gradually recovering to 7.3% in FY20 after slowing to

6.7-7% in 2H FY19.

• Overall, helped by the robust 1H numbers, we expect GDP growth to improve to 7.3% in FY19 vs. 6.7% in FY18.

1HFY19 saw an improvement while 2HFY19 likely to see a

moderation

Overall FY19 growth is estimated at 7.3%

Source: CMIE economic outlook, SBIMF Research; NB: 1. Green denotes improvement in the growth and Pink indicates a

moderation. 2. We use some subjectivity in categorizing the data by looking at both the trends in the recent months as well as

trends relative to long term average. 3. We have shifted to steel consumption data from steel production data since Jan 2019.

Economic activity moderated in November

High frequency indicator points to some moderation in November activity data led by various consumption oriented indicators such

as auto sales and air travels. Some softening was also seen in CV sales but broadly most of the construction and industrial activity

indicators are either holding strong or improving. Growth has also improved for electricity generation, coal and overall mining output.

Bank industrial lending showing nascent signs of revival. On the other hand, AUM of MFs slowed down sharply in the last three

consecutive months and rural wage growth have now been depressed throughout 2018.

% growth Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 5yr average

Indicators that are Robust

Bank retail loans 17.9 16.7 18.2 15.1 16.8 17.2 16.4

Currency in circulation 27.7 25.1 22.7 21.2 20.0 21.1 11.3

Domestic capital goods production 9.7 2.3 9.3 6.5 16.8 N/A 2.7

Imports of capital goods 26.4 32.0 45.7 7.0 11.9 17.3 5.0

Services exports 26.0 33.2 20.6 19.3 18.8 N/A 6.0

Total freight handled 5.7 4.4 6.7 4.2 8.4 3.8 3.7

Cement production 14.2 11.2 14.6 11.8 18.4 8.8 5.3

Bitumen consumption 23.0 38.6 -0.6 34.5 42.8 -15.3 7.9

Steel consumption 10.2 6.1 6.8 7.7 8.1 12.6 5.6

Indicators that have recently turned positive

Domestic industrial production 7.0 6.5 4.7 4.5 8.1 N/A 4.3

Coal production 11.5 9.7 2.4 6.3 11.3 3.8 4.9

Electricity production 8.4 6.7 7.6 8.2 10.9 5.4 7.8

Merchandise exports 18.1 15.7 19.3 -2.2 17.9 0.6 1.7

Bank industrial credit 0.9 0.3 1.9 2.3 3.7 4.0 3.4

Tractor sales 34.7 16.9 12.7 -10.5 23.6 24.5 7.2

Mining production 6.5 3.4 -0.5 0.1 7.0 N/A 2.9

Domestic production of consumer durables 13.6 14.1 5.3 5.2 17.6 N/A 4.1

Domestic production of consumer non-durables 0.2 5.3 6.5 6.1 7.9 N/A 5.7

Indicators that have weakened in recent months

Domestic sale of two-wheelers 22.3 8.2 2.9 4.1 17.2 7.1 9.1

Domestic sale of passenger Cars 34.2 -0.4 -1.0 -5.6 0.4 -0.9 4.8

Fertilizers production 1.0 1.3 -5.3 2.5 -11.5 -8.1 1.9

Foreign tourist arrivals 2.7 3.5 9.1 -0.1 1.7 1.4 9.0

AUM of MFs 20.6 15.5 22.4 8.0 3.8 5.4 23.4

Domestic air traffic 17.8 21.6 16.9 18.0 13.1 10.4 17.5

Domestic sale of commercial vehicles 41.7 29.7 29.6 24.1 24.8 5.7 8.9

Indicators that are weak for long

Rural wage growth 3.5 3.0 3.6 3.5 3.8 N/A 5.6

Investment cycle to pick-up, Consumption faced with headwinds


Consumer sentiments deteriorated in 2018

Rural wage growth remained weak throughout 2018

Consumer confidence on current economic situation has been

deteriorating since 2015 due to weak income and employment

Depressed food prices are affecting the farm income

Consumption sentiments, which were holding strong up

until last year, weakened in 2H 2018


Consumption growth faced with headwinds in 2019

NBFCs have been lending out to households aggressively

Consumers have been spending more than income Household savings rate has been falling every year since 2010

• There are headwinds to the consumption growth in 2019.

• Rural farm income has been muted owing to depressed food

prices. And to that extent, much will depend on governments

policy actions in reviving the rural/farm income.

• Indian consumers have been consuming more than they were

earning for last five years by running down on the savings and

increasingly relying on the leverage.

• NBFCs have been lending out to households aggressively.

However, the current challenges in the NBFCs sector may dent

their ability to continue lending aggressively.

Source: RBI OBICUS Survey, FICCI, SBIMF Research,

Business capacity utilization has improved

• Government’s infrastructure orders, coupled with improved

exports growth since FY17 has led to better Capacity

utilization.

• RBI’s OBICUS survey puts capacity utilization at 76.1%,

highest since March 2013.

• FICCI publishes sector-wise details and shows relatively

good capacity utilization for Cap goods, chemicals, textiles

and metals. Utilizations have also increased for airports,

power, cement, oil refineries and autos.

• Bank credit to infrastructure sector is improving.

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Capacity utilisation in Manufacturing (%)

10 year average: 75% FICCI Sector-wise Capacity Utilizations (in %) Avg. in last 5 years Q2 FY19

Food Processing 70 60

Leather & Footwear 65 60

Textiles Machinery 59 60

Electronics & Electricals 68 69

Cement 75 70

Auto 75 73

Capital Goods 71 73

Chemicals & Fertilizers 80 82

Textiles 81 83

Paper 83 83

Metals 75 88

Capacity utilization are showing signs of improvement FICCI sector wise data shows improved capacity utilization

for textiles, capital goods, chemicals, and metals

Bank credit to Industrial sector is picking up

Source: Capitaline, SBIMF Research, NB: *Asset turnover has been measured as Net sales/ Net block

Private sector has higher need and ability to undertake capex

Capex to depreciation has fallen lower than long-term trends

indicating the rising need for maintenance capex

Asset Turnover higher than long-term average indicating

improved capacity utilization*

Debt to EBITDA has been falling since FY16, indicating

improved debt taking capability

Debt to Equity in line with long-term average; companies

have deleveraged since FY16

Source: CMIE economic outlook, SBIMF Research, NB: Export and Import Volume Index is constructed internally

Imports growth outpaced the exports growth in FY19 (till Nov)

Exports volume have picked up since FY17 Price and quantity break-up in exports value growth

Price and quantity break-up in imports value growth Imports volume has picked up since FY18

Export growth moderated in FY19

Source: CMIE economic outlook, SBIMF Research; NB: Items not mentioned in the graphs are contributing less than 1%

towards the growth and offsetting each other

Chemicals and Machinery were the key drivers of exports in

FY18

In FYTD (till Nov), textiles, transport equipment and plastics

were the additional export drivers

• Indian exports increased by 5.2% y-o-y FYTD (till Nov) vs.

10% y-o-y growth during the corresponding period last year

and 7% growth in entire FY18.

• Chemicals, Machinery and POL products are the prime

contributors to the exports volume growth (till Nov).

• Agriculture exports have increased helped by the rise in

domestic agriculture output.

• Exports of textile raw materials have increased while that of

ready-made garments fell. India is trying to increase its

exports of raw materials to the countries like Bangladesh and

Vietnam rather than competing with them in the ready-made

garment segment.

• On the other hand, exports of iron and steel, ferrous and non-

ferrous metals along with ready-made garments pulled down

the exports volume growth in FY19.

• Looking ahead, we expect export volume growth to remain

supported at current levels despite the expectation of some

moderation in the global growth in 2019. Any sharp

improvement in the outbound shipment is faced with structural

challenges in Indian manufacturing capacity and

competitiveness.

Source: CMIE economic outlook, SBIMF Research; NB: Items not mentioned in the graphs are

contributing less than 1% towards the growth and offsetting each other

Electronics, gold, pearls and stones were the key

items leading to import growth in FY18

Higher growth in FY19 import volume is led by pharmaceutical

products, machinery and electronic items

• Indian imports volume growth increased by 8% y-o-y in FYTD (till Nov) vs. 12% y-o-y growth seen during the corresponding

period last year and the entire FY18 too.

• In the current financial year, higher import of machinery is a reflection of buoyant domestic demand while, while imports of crude

and coal highlights the resource constraints.

• Higher imports of electronics are majorly due to rising penetration of telecom, digitalization and lack of adequate domestic

manufacturing capacity.

• Looking ahead, we expect some moderation in the import value growth mainly on account of higher base.

Import growth moderated too but was higher than exports


Challenges to trade deficit

Imports of electronic goods (in value terms) is 35-40 times

of what we produce domestically

• Imports of telecom instruments is nearly 5 times the domestic production.

• Imports of the rest of the electronic goods (in value terms) is 35-40 times of what we produce domestically.

• Thus, even if government were to impose higher duties on electronic items, the domestic manufacturing capacity is not there.

Given the India’s drive towards digitization and still no penetration of electronic products, Indians may continue to import despite

the higher price. While it may incentivize more numbers of domestic players to enter the market, the domestic capacity will take

the time to mushroom.


Growth momentum to sustain in FY20

• We expect growth to start gradually recovering to 7.3% in

FY20 after slowing to 6.7-7% in 2H FY19.

• We are positive on the capex outlook for next year. The

underlying trends are supportive. That said, we do not

expect the current capex cycle to be as exuberant as seen

during FY05-FY11 -- which saw aggressive investment from

power, telecom, metals and oil & gas. The thrust of housing

demand is still amiss.

• Our outlook on consumption is a tad weaker based on weak

farm income for long and possibility of moderation in retail

loan growth. And to that extent, much will depend on

government’s policy actions in reviving the rural/farm

income and keep the consumption growth afloat.

• We are sceptical of knee-jerk measures to boost agri-

income. The challenges in agri-income is much more

structural. So far, all the measures ranging from MSP, crop

insurance, e-NAM, soil health card has not yielded the

desired outcome.

• Exports growth in India has structural challenges, while

some pockets offer support.

• Import moderation is purely on account of high base which

results in net exports subtracting less from FY20 growth

Indian economic growth to sustain around 7.3%

Inflation stayed contained in 2018 helped by low food prices

Source: CMIE Economic Outlook, SBIMF Research

CPI inflation dropped significantly in last 4 months owing

to muted food prices

Fuel inflation softened in 2014-16 due to low crude; has been

rising there since due to higher crude & phasing out of subsidy

Food inflation has been moderating for four years now

Core inflation rose since mid 2017 owing to higher crude and

pay commission impact

Softening in crude prices will bring some cheer to fuel and core

Source: Bloomberg, CEIC, PPAC, SBIMF Research; NB: Average prices in Mumbai, Delhi, Chennai and Kolkata

Since its peak of US$ 85.8 per barrel (on Oct 3rd), crude

has corrected by nearly US$ 31/barrel

Average petrol and diesel prices have fallen by ~Rs 16 and

~Rs 13 respectively in last three months

Lower transportation cost should help to reduce core

price pressures

Some softening in fuel inflation can be expected

Commodity prices softened by 2018 end

Source: Bloomberg, SBIMF Research

Prices of most commodities softened by the end of 2018

Food inflation should mean revert in 2019

Source: CMIE Economic Outlook, CSO, SBIMF Research

Retail cereals prices has some catch-up to do Input cost has been rising for past two years without a

commensurate rise in output prices

• The case for mean-reversal in food prices gets stronger for 2019

• While the wholesale and retail food inflation is moving in tandem for most of the categories, retail cereals prices are depicting

deflation despite the sharp rise in wholesale markets. The paddy prices are key source of discrepancy in cereals category. Rice and

related products account for ~6% pt. weight in CPI basket

• For two years now, Input price inflation has been sharper than output price inflation leading to margin pressures for the businesses.

Going ahead, even if commodity prices were to soften, businesses may chose to improve their margins and continue with the

current momentum of price hikes for their final products.


Inflation: Outlook

• We expect FY19 inflation to average around 3.7% in FY19 and 4.7% in FY20.

• Our expectation of higher inflation in FY19 stems from mean-reversal of food prices. Food prices have remained

depressed for long and that is adversely affecting farm income and can affect the supply

• Upside risks to our projection:

• Turnaround in global food prices which are currently benign

• Indian policy action around election which could lift food higher than expected

• Weather (both El-Nino and S-W monsoon)

• If crude & commodity starts to rise again

• Downside risks:

• We expect the food prices to rise, particularly for cereals, pulses, vegetables and oilseeds. If this fails to materialize, we

could have yet another year of low inflation

CPI inflation likely to average around 3.7% in FY19 and at 4.7% in FY20

Central fiscal situation witnessing pressure in FY19

Source: CMIE economic outlook, pib.nic.in, SBIMF Research

Centre’s fiscal deficit is at 115% of BE as of November 2018 Major shortfall in revenue is led by lower GST collections,

followed by excise and income tax collection

GST collections of Rs 1.26 trillion per month required in Jan-

Mar 2019 to meet the budgeted target • Centre’s fiscal deficit up until November is 15% higher than full

year budget.

• Weakness in tax revenue collection (particularly GST) is the

prime reason for the stress in Centre's fiscal account. The

asking rate for GST has become huge and it is bound to miss

the budgeted collection (perhaps by Rs. 1 trillion).

• Disinvestment run-rate is low but is expected to catch up.

• The government is in talks to garner interim dividend from RBI.

• Apart from this, some traditional measures such as postponing

the payables to next fiscal may also be resorted to meet the

budgeted target of 3.3% (of GDP).

Key Fiscal Indicators - Central Government Finances

Actual (as % of BE)- April to Nov 2014 2015 2016 2017 2018

1 Non-debt Receipts 43 54 57 54 49

a. Tax Revenue (Net) 42 51 59 57 49

b. Non-tax Revenue 60 78 54 37 57

c. Non-Debt Capital Receipts 10 26 49 73 29

2. Expenditure 60 64 65 69 66

a. Revenue Account 61 64 66 70 66

b. Capital Account 54 66 58 59 64

6. Fiscal Deficit 99 87 86 112 115

7. Revenue Deficit 109 88 98 153 118

8. Primary Deficit 281 232 464 1289 624

Apr-Nov Cumulative

(% y-o-y) Budgeted Growth

(in %)

Gross Tax Revenue 7.1 18.3

Income Tax 16.4 26.9

Corporate Tax 16.6 8.7

Custom -15.6 -17.8

Excise duties -16.4 0.4

Total Direct Tax 16.5 16.3

Total Indirect Tax 1.9 22.2

Current account deficit deteriorated 1H FY19

Source: CMIE economic outlook, CSO, SBIMF Research

• The current account deficit (CAD) for 1H FY19 stood at

US$ 19.1 billion or 2.9% of GDP vs. 1.1% in 1H FY18.

• The widening of the CAD was primarily on account of a

rising import bill and unmatched export buoyancy leading

to higher trade deficit. There is an improvement in

services receipts and remittances transferred to India

which partially offsets the worsening merchandise trade

figures.

• Looking ahead, with recent fall in the crude oil prices, we

now estimate CAD at US$ 68 billion (~2.6% of GDP) in

FY19 and ~US$ 65 billion (2.0% of GDP) in FY20.

Current account deficit widened to 2.9% of GDP in 1H

FY19 vs. 1.1% of GDP in 1H FY18

Trade balance worsened sharply offsetting the rise in

invisible surpluses

Service Balance and Remittances are holding up

India’s external account is deteriorating

Source: CMIE economic outlook, RBI, SBIMF Research

India’s current account dynamics is deteriorating

Limited gains expected from lower oil import bill

If capex cycle improves it will lead to higher non-oil non gold

imports

Trade deficit is likely to see only a marginal gain of US$ 5-6

billion as higher goods import offsets the oil gain

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FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 E FY20 E

Trade Balance (US$ billion)

87 106 155 164 165 138 83 87 109 143 130

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115 110 108

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47 4958

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FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E

POL Import from Trade data (US$ billion)

Crude Prices (US$/barrel)- Europe Brent- RHS

CAD expected to narrow and BoP to return to surplus in FY20

Source: CMIE economic outlook, RBI, SBIMF Research

Balance of Payment is likely to return to surplus in FY20

• Contained crude helps in obviating the near-term current

account risk.

• Current account deficit is likely to narrow to 2.0% of GDP

and BoP to return to a surplus of US$ 15-20 billion in FY20

(contingent on crude and FIIs).

• Owing to rising oil import bill, sharp FII outflows and

depreciating rupee, RBI had run down its reserves by US$

30 billion in 1H FY19. The BoP surplus should help to

recoup some of these reserves.

Marginal improvement expected in basic balance (CAD-FDI) Current account deficit expected to narrow to 2.0% in FY20


Indian rupee depreciated by 8.5% against dollar in 2018

Rupee depreciated in 2018 in line with other emerging market

Rupee depreciation was in line with other emerging market

currencies

Rupee depreciated against major currencies in 2018

• Rupee has gained in the last two months of the year and

ended the year with 8.5% depreciation vs. running a 14%

depreciation up until Oct.

• Rupee had gained nearly 6% in last two months on account

of sharp fall in the crude oil prices.

• Rupee also depreciated against all the major currencies

during the year.

• However, rupee depreciation is in line with the other

emerging market currencies.

Rupee: Near fair value

Source: BIS, CMIE Economic Outlook, SBIMF Research; NB: if Actual REER is higher than Equilibrium REER, it implies

Rupee is over-valued and vice-a-versa.

REER is at 121 levels - similar to FY12 and FY15

• From an external point of view, we believe that the Rupee/US$ is fairly valued at 72.

• Looking ahead, the depreciation risks hold. Balance sheet contraction of global central banks and geo-political issues such as

Brexit and any volatility due to unfavorable outcomes from trade war between US and China are some of the events to watch.

• Overall, we expect Rupee to be stable at nearly 70-72/US$ levels from here-on barring any unexpected event shocks and then

gradually move towards 74 levels by FY20 end.

When Rebased to FY11=100, Rupee seems to be now fairly

valued

Global policy rate snapshot: 2018 was the year of rate hikes

Source: Bloomberg, SBIMF Research; NB: * Indonesia had announced to use new policy benchmark i.e. 7-day reverse

report rate as its benchmark policy rate in April 2016; Red highlighted cells indicates interest rate hike and green

denotes a rate cut.

Global policy rate rose across most key economies in 2018

Policy rate (in %), end period

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

US 1.75 1.25 1.00 2.25 4.25 5.25 4.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.50 0.75 1.50 2.50

China 5.85 5.31 5.31 5.58 5.58 6.12 7.47 5.31 5.31 5.81 6.56 6.00 6.00 5.60 4.35 4.35 4.35 4.35

Japan 0.15 0.15 0.15 0.15 0.15 0.25 0.50 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10

India 8.50 5.50 4.50 6.00 6.25 7.25 7.75 6.50 4.75 6.25 8.50 8.00 7.75 8.00 6.75 6.25 6.00 6.50

Australia 4.25 4.75 5.25 5.25 5.50 6.25 6.75 4.25 3.75 4.75 4.25 3.00 2.50 2.50 2.00 1.50 1.50 1.50

South Korea 3.00 2.00 2.50 3.25 2.75 2.50 2.00 1.50 1.25 1.50 1.75

Indonesia 4.75 4.25 6.00

Taiwan 2.13 1.63 1.38 1.75 2.25 2.75 3.38 2.00 1.25 1.63 1.88 1.88 1.88 1.88 1.625 1.375 1.375 1.375

Thailand 2.25 1.75 1.25 2.00 4.00 5.00 3.25 2.75 1.25 2.00 3.25 2.75 2.25 2.00 1.50 1.50 1.50 1.75

Malaysia 2.70 3.00 3.50 3.50 3.25 2.00 2.75 3.00 3.00 3.00 3.25 3.25 3.00 3.00 3.25

Phillippines 7.75 7.00 6.75 6.75 7.50 7.50 5.25 5.50 4.00 4.00 4.50 3.50 3.50 4.00 4.00 3.00 3.00 11.25

New Zealand 4.75 5.75 5.00 6.50 7.25 7.25 8.25 5.00 2.50 3.00 2.50 2.50 2.50 3.50 2.50 1.75 1.75 1.75

Eurozone 3.25 2.75 2.00 2.00 2.25 3.50 4.00 2.50 1.00 1.00 1.00 0.75 0.25 0.05 0.05 0.00 0.00 0.00

UK 4.00 4.00 3.75 4.75 4.50 5.00 5.50 2.00 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.25 0.50 0.75

Russia 5.50 17.00 11.00 10.00 7.75 7.75

Turkey 6.50 5.75 5.50 4.50 8.25 7.50 8.00 8.00 24.00

South Africa 9.50 13.50 8.00 7.50 7.00 9.00 11.00 11.50 7.00 5.50 5.50 5.00 5.00 5.75 6.25 7.00 6.75 6.75

Brazil 19.00 25.00 16.50 17.75 18.00 13.25 11.25 13.75 8.75 10.75 11.00 7.25 10.00 11.75 14.25 13.75 7.00 6.50

Mexico 8.25 4.50 4.50 4.50 4.50 3.50 3.00 3.25 5.75 7.25 8.25

Argentina 900.00 10.00 1.00 2.10 8.50 8.00 10.75 10.00 8.50 10.50 7.50 12.75 33.00 28.00 21.00 26.00 26.75 52.00

Colombia 8.50 5.25 7.25 6.50 6.00 7.50 9.50 9.50 3.50 3.00 4.75 4.25 3.25 4.50 5.75 7.50 4.75 4.25

Chile 6.50 3.00 2.25 2.25 4.50 5.25 6.00 8.25 0.50 3.25 5.25 5.00 4.50 3.00 3.50 3.50 2.50 2.75

Global rate outlook for 2019

Source: Bloomberg, SBIMF Research;

Rate hikes are expected to continue in 2019*…

2019 expected Policy rate change (in bps)

Comments

Argentina -1550 Sharp rate cut

Turkey -475 sharp rate cut

Mexico -25 1-2 rate cut

Russia -25 1-2 rate hikes

China -5 Monetary easing

Malaysia 0 Pause

Eurozone 0 0-1 rate hike

India 0 0-1 rate hike

Taiwan 7.5 0-1 rate hike

Japan 10 0-1 rate hike

Poland 25 0-1 rate hike

New Zealand 25 0-1 rate hike

Switzerland 25 0-1 rate hike

South Africa 25 0-1 rate hike

Phillippines 25 1 rate hike

South Korea 25 0-1 rate hike

Thailand 25 0-1 rate hike

Australia 50 2 rate hikes

Indonesia 50 1-2 rate hikes

UK 50 1-2 rate hikes

US 50 2-3 rate hikes

Canada 50 2-3 rate hikes

Colombia 75 2-3 rate hikes

Brazil 75 3-4 rate hikes

Chile 100 3-4 rate hike

… but the extent of rate hike is relatively weaker than 2018

(Bloomberg expectations)

Tightening Global Liquidity can impact the FII flows in EMs

Source: Bloomberg, IMF, Respective central banks, SBIMF Research

Balance Sheet by

Aug 2008 (US$ Bn) As % of GDP

Balance-sheet by

Dec 2017 (US$ bn) As % GDP Change

US Fed 911 6.2 4,449 23.0 3,538

ECB 2,126 15.1 5,368 42.6 3,242

BoE 139 4.8 766 29.9 627

BoJ 1,010 20.0 4,627 94.7 3,617

Total 4,186 11.4 15,210 38.6 11,024

Asset Purchase Programs contributed to US$ 11 billion increase in Central Banks’ balance-

sheet between 2008-2017

Balance-sheet by

Dec 2017 (US$ bn) Expected Balance-

Sheet by 2018 end 2018 minus 2017

Expected Balance-

sheet by 2019 2019 minus 2018

US Fed 4,449 4,028 -421 3,428 -600

ECB 5,368 5,391 23 5,031 -360

BoE 766 779 13 779 -

BoJ 4,627 5,080 453 5,265 185

Total 15,210 15,279 68 14,503 -776

2019 will see reduction in balance-sheet

India Policy Rate Outlook: Rising probability of rate cut

Source: RBI, SBIFM Research

RBI delivered two rate hikes in 1H FY19

• We have always believed that the 50bps rate hike in 1H FY19 and then

subsequent adoption of the ‘calibrated tightening’ stance had more to

do with external dynamics than the inflation outlook. Agreed though that

higher crude and depreciating rupee did entail inflationary risks.

• Inflation had persistently under-shot the RBI’s expectation throughout

FY19 on back of the ultra-low food inflation even as fuel and core

prices inched higher.

• Looking ahead, global environment still dictates a pause. Globally,

market still expects most economies to hike rates and the financial

condition to tighten.

• On domestic front though, sharp fall in oil which should translate into

moderation of core and fuel inflation, stabilization of rupee and

continued moderation in food prices should help ease the concerns on

inflation. As per our own projection, we see inflation prints below or

around 4% up-until June, post which it is likely to move higher.

• These factors opens up the possibility of change in policy stance and

rate cut in the February policy itself.

• The uncertainty over fiscal stimulus appears to one hurdle in front of

monetary easing. Real interest rates are quite high, though the

structural issue of lower household financial savings might warrant

slightly elevated real rates.

Summary

Growth We expect GDP growth to improve to ~7.3% in FY19. In FY20, growth is likely to sustain around 7.3%.

Inflation Indian inflation has surprised on the downside throughout FY19 primarily on account of ultra-low food

inflation. We believe CPI inflation is likely to average around 3.7% in FY19 and at 4.7% in FY20 led by

mean-reversal of food prices.

Consumer spending

Ultra-low food inflation has adversely affected the farmers’ income. Higher MSP failed to yield the desired

outcome. On a more structural basis, we find that the consumers have been consuming more than they

were earning by running down on the savings rate and increasingly relying on the leveraged consumption.

The wages and employment prospects are weak. The current challenges in the NBFC may dent their ability

to continue lending aggressively. And to that extent, much will depend on government’s policy actions in

reviving the rural/farm income and keep the consumption growth afloat.

Investment We expect investment cycle to pick up in 2019. Capacity utilizations have also increased. Banks are in a

better shape to lend to the corporates. Select sectors such as automobiles, cement, chemicals, hotels, oil

& gas (particularly gas) and steel should lead the cycle. Unlike the last cycle, power generation may not be

the big driver. Additionally, the thrust for housing demand still seems amiss and the challenges in the NBFC sector may impact SMEs.

Trade Export growth may moderate on account of likelihood of softer global demand and trade activity in 2019.

Import growth should moderate helped by a favorable base and delayed impact of rupee depreciation and

import duty rise. As a result, trade balance should see a marginal improvement.

External account

Current account deficit is likely to narrow to 2.0% of GDP and BoP to return to a surplus of US$ 15-20

billion in FY20 (contingent on crude and FIIs). Contained crude helps in obviating the near-term current

account risk.

Rupee We believe that the Rupee/US$ is fairly valued at 72. Overall, keeping in mind the global environment,

crude and BoP expectations, we expect rupee to be stable around 70-72/ US$ in the near-term and then

gradually gyrate towards 74 levels by FY20 end.


Summary (contd…)


OMO purchases We expect nearly Rs 1.5-2 trillion worth of total OMO purchases in FY20.

Banks demand of G-Sec

At 77%, credit to deposit Ratio has scaled to multi year highs. In FY20, for the credit growth to sustain at

the current levels, bank will have to incentivize deposits perhaps by taking the deposit rates higher. The

systematic cuts in SLR planned for next year (25bps each quarter) and the pick-up in credit demand is

likely to lead to reduced demand of government securities by banks.

Fiscal Government is bound to miss the budgeted GST collection. It is exploring buybacks from CPSEs, stake

takeover and ETFs to meet its disinvestment target and aims to garner interim dividend from RBI. Some

traditional measures such as expenditure cuts and postponing various payments to next fiscal may be

resorted to meet the budgeted 3.3% (of GDP).

Policy Rate Current inflation and external account dynamics opens the possibility of change in policy stance and rate

cut in the February policy itself.

India Macro Snapshot

Green: denotes improvement or unchanged

Pink: denotes deterioration

Source: CMIE, SBIMF Research; NB: * FY18 is RE by government, FY19 is BE and FY20 is our estimate; ** Repo rate is

period end

FY15 FY16 FY17 FY18 FY19F FY20F

Real GDP growth (%) 7.5 8.0 7.1 6.7 7.3 7.3

Nominal GDP growth (%) 10.8 9.9 11.0 10.0 12.1 12.0

CPI Inflation (%) 5.9 4.9 4.5 3.6 3.7 4.7

Centre Fiscal deficit (% GDP)* 4.1 3.9 3.5 3.5 3.3 3.3

Current Account Deficit (% GDP) 1.4 1.1 0.7 1.9 2.6 2.0

Balance of Payments (US$ billion) 61.4 17.9 21.6 43.6 -15.0 15.0

Repo Rate (%)** 7.5 6.75 6.25 6.00 6.50 6.00

INR/US$ (average) 61.2 65.5 67.1 64.3 70.0 73.0

INR/US$ (period end) 62.6 66.3 64.8 65.2 72.0 74.0

EQUITY MARKET

India outperformed developed and emerging markets in 2018


During the year, MSCI India was flat while MSCI Developed markets and MSCI Emerging

markets fell. As a result, India outperformed on a relative basis in 2018.

Global equity market returns: 2018


Performance in 2018 - local currency returns Performance in 2018 - US$ returns

• Equity market was subdued globally in 2018.

• Barring Brazil and India, all the global equity market gave negative returns in terms of their local currencies.

• In US$ terms, equity market delivered negative returns in all the key markets.

• China and Germany led the decline, losing 29% and 22% respectively.

• The US was the best performing market amongst developed markets with S&P 500 posting a modest decline of 6%.

Indian stock market returns: 2018


Stock-wise performance in 2018 - local currency returns

• Sensex and Nifty were up by 6% and 3% respectively during the year.

• Large caps outperformed mid cap and small cap in 2018. BSE Mid-cap index fell -13% and small cap by -24%.

• Indian equity market delivered negative returns across most of the sectors in 2018.

• IT and FMCG emerged as the top performer (up 25% and 11% respectively).

• Real Estate and Auto were the sector laggards.

Snapshot of Indian equity market

2018 FII flows in the emerging markets

Emerging markets witnessed a broad-based outflow from the equity market in

2018. India’s performance was in the middle


After US$ 75 billion of FII inflow in Indian equities for six consecutive years, a marginal outflow of US$ 4.4 billion in 2018

should be looked at rather positively, especially when emerging markets witnessed a generalized sell-off pressure

-12,182

-8,913

-5,676 -4,414 -3,656 -3,415 -3,054

-1,080 -48

0

-15,000

-10,000

-5,000

0

5,000

10,000

Taiw

an

Thai

lan

d

S K

ore

a

Ind

ia

Ind

on

esi

a

Sou

th A

fric

a

Bra

zil

Phi

lipp

ines

Sri L

anka

Mex

ico

2018

Net FII inflows in Equity (USD mn)

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Taiwan -15,484 15,680 9,364 -9,066 4,913 9,188 13,190 3,344 10,956 5,736 -12,182

Thailand -4,805 1,136 2,689 -164 2,503 -6,211 -1,091 -4,372 2,240 -796 -8,913

S Korea -36,641 24,682 19,823 -8,542 15,084 4,875 5,684 -3,626 10,480 8,268 -5,676

India -12,918 17,639 29,321 -512 24,548 19,754 16,162 3,274 2,903 8,014 -4,414

Indonesia 1,753 1,384 2,396 2,956 1,712 -1,806 3,766 -1,580 1,259 -2,960 -3,656

South Africa -6,114 9,067 4,851 -2,580 -407 91 1,480 696 -8,604 -2,579 -3,415

Brazil -13,332 11,887 990 -64 2,369 4,858 8,995 5,711 3,949 4,223 -3,054

Philippines -1,138 424 1,225 1,331 2,558 678 1,256 -1,194 83 1,095 -1,080

Sri Lanka 129 -14 -231 -172 303 166 159 -29 13 118 -48

Mexico -3,503 4,155 373 -6,566 9,877 -943 4,833 3,601 9,518 0 0

Russia 15,561 -3,006 5,953 10,588 -335 6,747 13,809 7,877 7,878 7,879 NA

Liquidity: FIIs sold while DIIs were net investors in 2018

Domestic liquidity has outpaced foreign liquidity since 2015


Mutual funds continue to invest in Indian equities Insurance companies were net sellers during the year

17.5

-10

-5

0

5

10

15

20

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Net Domestic MF Investment (US$ billion)

-1.6

-15

-10

-5

0

5

10

15

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Net Domestic Insurance Investment (US$ billion)

-4.3

15.9

-20

-10

0

10

20

30

40

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Net FII Investment (US$ billion)

Net DII Investment (US$ billion)

Primary Market issuances absorbed the liquidity

The domestic liquidity was just enough to absorb the fresh supply


7

15

10 12

19

12

33

11

-

5

10

15

20

25

30

35

2011 2012 2013 2014 2015 2016 2017 2018

IPO+Additional Issuances+Rights (in US$ billion)

Valuations have corrected in 2018 relative to history

Valuations have corrected across the capitalization curve

Source: Bloomberg, SBIMF Research,

Nifty is trading at ~17 times forward earnings Valuations relative to bond market have also corrected to

~24% premium compared to 31% last year

Source: Bloomberg, SBIMF Research,

Indian Equity Valuations relative to EM inched higher

India MSCI P/E compared to MSCI EM index reached to record

high in 2018…

…while the relative return on equity (RoE) is almost

at similar levels

4

6

8

10

12

14

16

18

Sep

-14

Dec

-14

Mar

-15

Jun

-15

Sep

-15

Dec

-15

Mar

-16

Jun

-16

Sep

-16

Dec

-16

Mar

-17

Jun

-17

Sep

-17

Dec

-17

Mar

-18

Jun

-18

Sep

-18

Dec

-18

MSCI India- forward RoE (%) MSCI EM- forward RoE (%)

0

10

20

30

40

50

60

70

80

Dec

-05

Jun

-06

Dec

-06

Jun

-07

Dec

-07

Jun

-08

Dec

-08

Jun

-09

Dec

-09

Jun

-10

Dec

-10

Jun

-11

Dec

-11

Jun

-12

Dec

-12

Jun

-13

Dec

-13

Jun

-14

Dec

-14

Jun

-15

Dec

-15

Jun

-16

Dec

-16

Jun

-17

Dec

-17

Jun

-18

Dec

-18

MSCI India's 1 year Fwd P/E prem. wrt MSCI EM

Source: Capitaline ,SBIMF Research,

FY19 Earnings Review: Improvement in top-line

2Q FY19 sales growth was at multi year high…

Profit growth remained unchanged at 10% y-o-y marginally

lower than market expectations

…but EBITDA growth moderated on account of high

input cost but still healthy

• 2Q FY19 reported a robust growth in sales for NIFTY 50

(26% y-o-y). The growth was primarily driven by Oil& Gas

and metals sector, while most of the constituents reported a

positive sales growth (except for 3 companies).

• However, it failed to translate into concomitant EBITDA

growth, underscoring the erosion in pricing power in an

inflationary input cost environment up until Q2 FY19.

• NIFTY PAT growth of 10% was marginally below market

expectations. The growth driven by Capital goods, Metals

and Healthcare.

Source: Bloomberg, SBIFM Research;

NIFTY EPS have been downgraded 7% FTYD…

Earnings downgrade continued for seventh straight year

3% additional downgrade seen post Q2 FY19 earnings

season

• As anticipated the challenges in the NBFC fructified into further downgrades in NIFTY estimates

597

585

560 554

390

440

490

540

590

640

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

FY15 FY16 FY17 FY18 FY19

NIFTY EPS expectation for the respective year

-6.6

-8.1

-14.8

-9.2

-5.9

-7.1

-16.0 -14.0 -12.0 -10.0 -8.0 -6.0 -4.0 -2.0 0.0

2013

2014

2015

2016

2017

2018Earnings upgradedowngrade (from Apr tillDec)- % chg

Source: MOSL, Capitaline, SBIFM Research;

FY19 NIFTY EPS is expected to grow by 15-16% vs.

6% in FY18

Corporate profit as percentage of GDP is likely to

have bottomed out

FY19 earnings outlook

• Earnings outcome underscores improvement in overall corporate

profitability. Revenue growth is at multi-year high. EBITDA growth

moderated but continues to be healthy. The recent softness in

commodity prices and containing of rupee depreciation should help to

sustain the EBITDA growth/margin going ahead.

• PAT growth was marginally below expectation. This coupled with

NBFC sector issues had led to further downgrade in earnings

estimate by markets. FYTD the downgrades stand at ~7%.

• Key sectoral trends of 2QFY19:

• Auto volumes have moderated, with the near-term demand

trajectory also appearing slightly uncertain due to the rising cost of

ownership.

• Global Cyclical (metals and Oil & Gas) continue driving earnings.

• Information Technology posted multi-quarter-high profit growth,

with stable commentary around the demand trends.

• Capital Goods sector delivered a healthy performance, with

commentary suggesting incipient signs of capex revival.

• FMCG posted a steady quarter, albeit signs of margin pressures

are now evident.

• Asset quality for corporate banks are improving. This is important

as corporate banks were driving weak earnings in last few years

• Therefore, while the underlying earnings story is improving (better

revenue growth trends, corporate banks’ asset quality turning around,

etc.), new risks to earnings are also emerging (Autos, NBFC).

• That said, our expectations continues to hold at 15-16% EPS growth

for NIFTY 50. Corporate profit as percentage of GDP has hit an

extremely low point and should logically mean revert.

3.0

4.7

5.4

6.2

7.37.8

5.5

6.5 6.2

4.9 4.6 4.33.8

3.13.5

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

Average of 5.1%

Equity Market outlook

Nifty is trading at ~17 times forward earnings


• Global equities fell 10.4% (MSCI World) in 2018 – the worst annual return

since 2008. Emerging markets underperformed, falling by 16.6% likely due to

concerns on impact of trade war on economies linked closely to Chinese

growth. Brazil and India outperformed on a relative basis.

• Indian NIFTY rose by 3.2% in local currency terms but fell by -5% in US$

terms. The index was volatile through the year as investors adjusted to the

gyrations in oil and rupee, global developments and eruption of challenges in

domestic NBFC sector, but continued strength in retail equity participations.

• FIIs pulled out US$ 4.4 billion after six consecutive years of inflow. Domestic

institutional investors continued to pump in money for the fourth straight year

(US$ 16 billion). The overall liquidity, however, was just enough to meet the

fresh supply (US$ 11 billion).

• Looking ahead, global factors and noise around general election will be a drag

on the market performance, particularly in 1H 2019. Nevertheless, 2018 had

seen some de-rating in the Indian equities. And hence, the positive turn of

macro, continued earnings recovery, coupled with sustained liquidity should

help equities to deliver double digit returns this year. Hasten to add, this will be

a roller-coaster ride as intra-year volatility is likely to be substantially high.

• The improving prospect for private sector investment augurs well for the

industrials sector which has underperformed the overall market so far. Capex

recovery along with NPA resolutions should help corporate banks to continue

to out-perform. Barring select players, NBFC’s will face pressure on margins

and growth. Given the rich valuations and the ebbing tailwinds, consumer

stocks may lose sheen. Barring any unexpected event shocks, we expect

rupee to be stable around 70-72/ US$ in the near-term and then gradually

gyrate towards 74 levels by FY20 end. Tailwinds of rupee deprecation may be

ebbing for exporters.

Fixed Income Market

Movement in India 10 year G-sec yields in 2018


7.8

6.2 6.5

7.7

7.4

8.0

7.4

6.00

6.50

7.00

7.50

8.00

8.50

Dec

-15

Jan

-16

Feb

-16

Mar

-16

Ap

r-16

May

-16

Jun

-16

Jul-

16A

ug-

16Se

p-1

6O

ct-1

6N

ov-

16

Dec

-16

Jan

-17

Feb

-17

Mar

-17

Ap

r-17

May

-17

Jun

-17

Jul-

17A

ug-

17Se

p-1

7O

ct-1

7N

ov-

17

Dec

-17

Jan

-18

Feb

-18

Mar

-18

Ap

r-18

May

-18

Jun

-18

Jul-

18

Au

g-18

Sep

-18

Oct

-18

No

v-1

8D

ec-1

8

10 year G-Sec yield (mth end, %)

Demonetization effect: Market priced in sharp rate cuts by RBI

Bond yields moved higher till September and then moderated in last three months

Factors driving the yields movement up until

September

• Rate hike by the RBI and change of stance to calibrated

tightening.

• Crude touching nearly US$ 85/bbl.

• Rupee depreciated by nearly 14% till October

• Weak FIIs sentiments and relatively sharp FII outflows

• Global factors: Fed tightening

Factors led to softening in last three months

• A sharp fall in crude oil prices – nearly a fall of US$

31/bbl.

• Rupee corrected and stabilized around 70/US$ levels

• Inflation surprised on downwards led by ultra-low food

inflation and by the end MSP concerns were allayed

• Demand-Supply turned favourable (OMO purchases)

Developed Market Bond Yields: 2018


• During the year, US bond yields increased by 28 bps owing to robust US GDP data, higher inflation expectations, Fed’s

rate hikes and hawkish stance of the Fed for most part of the year.

• Bond yields in Italy surged by 73 bps in 2018 amidst concern on fiscal development. European Commission rejected

Italy’s 2019 draft budget proposal, Moody cut the Italy’s sovereign debt rating by a notch – from Baa2 to Baa3 (which is

just one notch above junk status) – citing material weakening in Italy’s fiscal strength, with the government targeting higher

budget deficits for the coming years, as well as debt holding near the current 130% of GDP.

• Bond yields changes in other key markets were flat to negative.

10 Year Gsec Yield (% mth end)

2016 end 2017 end 2018 end Change in 2018

(in bps)

US 2.44 2.41 2.68 28

Germany 0.21 0.43 0.24 -19

Italy 1.82 2.02 2.74 73

Japan 0.05 0.05 0.00 -5

Spain 1.38 1.57 1.42 -15

Switzerland -0.19 -0.15 -0.25 -10

UK 1.24 1.19 1.28 9

Emerging market bond yields: 2018


• Bond yields have risen across most of the key emerging markets (except Brazil, China, South Korea and Taiwan) in 2018 as

these economies felt the impact of Fed tightening.

• Turkish bond yields inched up sharply by 475 bps during the year as the country witnessed soaring inflation, widening of current

account deficit and sharp fall in the Lira. Additionally, US doubled the import tariffs on Turkish steel and aluminum.

• Bond yields in Philippines increased by 209 bps as inflation concerns jittered in the country.

• Russian bond yields inched up by 121 bps amidst political challenges. Bond yields increased in the other markets dictated by

country specific factors.

10 Year Gsec Yield (% mth end)

2016 end 2017 end 2018 end Change in 2018

(in bps)

Brazil 11.40 10.26 9.24 -102

China 3.06 3.90 3.31 -59

India 6.52 7.33 7.37 4

Indonesia 7.91 6.29 7.98 169

South Korea 2.09 2.47 1.96 -51

Malaysia 4.23 3.91 4.08 17

Phillippines 4.64 4.93 7.01 209

Russia 8.36 7.49 8.70 121

Taiwan 1.22 0.98 0.83 -15

Thailand 2.65 2.32 2.48 16

Turkey 11.39 11.67 16.42 475

India Rates Snapshot: 2018

Source: Bloomberg, PPAC, RBI, SBIMF Research; NB: **Crude oil price is average $/barrel for the month, rest of the

data are % month end; *Corporate bond rate is for AAA rated bonds ,*** Refers to PSU Banks CD rate; # INR and Oil price

changes are % change

• Indian bond yields inched up marginally by 4 bps in 2018. In 2018, Indian bond yields gyrated sharply and crossed 8%

before falling back to nearly 2017 end prints. During the year, crude oil prices and rupee deprecation remained the key

factors of the bond rally however, the dynamics changed in the last two months of 2018. Crude prices softened and fell

below US$ 60/bbl. leading to a revival of FII sentiments towards Indian debt market and hence some appreciation in rupee.

Further, aggressive OMO purchases by the RBI since September also aided the bond rally.

• Money market rates, too, inched up as liquidity turned from surplus at eth start of the year to deficit.

• Looking at the Indian crude basket, average prices fell by 7% during the year.

• Rupee depreciated by 8% in 2018.

2016 end 2017 end 2018 end 2018 (change in bps)

1 Yr T-Bill 6.33 6.40 6.94 54

3M T-Bill 6.20 6.20 6.65 45

10 year GSec 6.52 7.33 7.37 4

3M CD*** 6.28 6.38 7.05 68

12M CD*** 6.63 6.75 8.08 133

3 Yr Corp Bond* 7.29 7.66 8.50 84

5 Yr Corp Bond* 7.37 7.68 8.43 75

10 Yr Corp Bond* 7.58 7.90 8.51 61

1 Yr IRS 6.19 6.44 6.56 12

5 Yr IRS 6.26 6.75 6.62 -13

Overnight MIBOR Rate 6.25 6.20 6.73 53

INR/USD 67.93 63.87 69.77 8#

Crude Oil Indian Basket** 52.7 62.3 57.8 -7#


Growth-Inflation dynamics are turning favorable

CPI inflation likely to be around 3.7% in FY19 and at 4.7% in

FY20

GDP growth to improve in FY19 and sustain in FY20

Bank liquidity is tightening and credit to deposit ratio increasing

Source: RBI, SBIMF Research

Banking system liquidity is gradually tightening Bank credit growth outpaced deposit growth

At 77%, credit to deposit ratio has scaled to multi year highs in 2018

Debt Market Valuations


Inflation adjusted returns at 5.0% in India are attractive Differential between 10-year yield and Repo rate is near to its

long period average

G-sec yield relative to equity earnings yield higher than

long-term trend

Real rates 10 Year Gsec

Yield (% Dec end)

CPI Inflation -

Nov

Real Rate (in %)

Sovereign Credit

Rating by S&P

Emerging Market

Brazil 9.24 4.1 5.2 BB-

India 7.37 2.3 5.0 BBB-

Russia 8.70 3.8 4.9 BBB-

Indonesia 7.98 3.2 4.7 BBB-

Mexico 8.66 4.7 3.9 BBB+

Malaysia 4.08 0.2 3.9 A-

South Africa 8.72 5.2 3.5 BB

Colombia 6.75 3.3 3.5 BBB-

Thailand 2.48 0.9 1.5 BBB+

Poland 2.83 1.3 1.5 BBB+

China 3.31 2.2 1.1 A+

Phillippines 7.01 6.0 1.0 BBB

Taiwan 0.83 0.3 0.5 AA-

South Korea 1.96 2.0 0.0 AA

Hungary 3.01 3.1 -0.1 BBB-

Turkey 16.42 21.6 -5.2 BB-

Debt Market Outlook

Source: Bloomberg, SBIFM Research

Valuations look attractive at G-sec vs. Repo rate

• India 10 year G-sec ended the year flat at 7.4%. The yields rose higher

in the first nine months catalysed by the oil price rise which translated

into weakening FII sentiments and external account, depreciating rupee,

and 50bps hike in policy rate. Fuel and core inflation ticked up but ultra-

low food prices kept the overall inflation under check. At the same time,

GST collections didn’t witness the desired buoyancy which concerned

the market over the probability of fiscal slippage and hence higher

supply. The banking system liquidity turned from surplus to deficit. .

• Bond market had rallied by ~60-70bps since September as crude prices

fell, rupee appreciated and RBI started conducting OMO purchases.

• Recent global developments have also turned favourable. The market

has toned down their expectation of rate hikes by US Fed in 2019 (taking

the cues from recent Fed communication). This has led to revival of FII

sentiments towards EM debt market. India received US$ 1.6 billion in the

debt market between November-December.

• Looking ahead, sharp fall in oil, stabilization of rupee and near-term

inflation trajectory are supportive of rates. While there are challenges in

central fiscal, the government has time and again assured of meeting the

target and hence no surprise in central bonds supply. This, coupled with

aggressive OMO purchases makes the demand supply dynamics

extremely favourable, particularly in the current quarter. Further, real

rates are attractive. Hence, in the near-term, bond yields can go lower.

• Over a slightly longer-term, while the institutionalization of monetary

policy in India coupled with structurally contained inflation is a positive,

the rural distress opening the possibility of increased revenue spending

and deteriorating fiscal dynamics will keep the yields under check.

5.756.256.757.257.758.258.759.25

May

-11

Oct

-11

Mar

-12

Au

g-12

Jan

-13

Jun

-13

No

v-1

3

Ap

r-14

Sep

-14

Feb

-15

Jul-

15

Dec

-15

May

-16

Oct

-16

Mar

-17

Au

g-17

Jan

-18

Jun

-18

No

v-1

8

10 year G-Sec yield (mth end, %)

Repo Rate (mth end, %)

Thank you

Disclaimer

This presentation is for information purposes only and is not an offer to sell or a solicitation to buy any mutual fund units/securities. These views alone are not sufficient and should not be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. All opinions and estimates included here constitute our view as of this date and are subject to change without notice. Neither SBI Funds Management Private Limited, nor any person connected with it, accepts any liability arising from the use of this information. The recipient of this material should rely on their investigations and take their own professional advice.

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

Asset Management Company: SBI Funds Management Private Limited (A joint venture with SBI and AMUNDI). Trustee Company: SBI Mutual Fund Trustee Company Private Limited.

Contact Details

SBI Funds Management Private Limited

(A joint venture between SBI and AMUNDI)

Corporate Office:

9th Floor, Crescenzo, C-38 & 39, G Block, Bandra Kurla Complex, Bandra (East), Mumbai - 400 051 Tel: +91 22 6179 3000 Fax: +91 22 6742 5687/88/89/90/91

Website: www.sbimf.com

Call: 1800 425 5425

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Email: [email protected]

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http://www.sbimf.com/

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