Market Outlook
December 2017
EQUITY MARKET
Global equity market snapshot: November 2017
Source: Bloomberg, SBIMF Research
• The US equity markets did well in November on strong earnings and economic data and positive sentiment ahead of theproposed tax cuts. S&P 500 was up 2.8%. In local currency terms, all European equity markets registered a sell off. EmergingMarket (MSCI-EM) was broadly flat during the month.
• NIFTY was down by -1% during the month. On YTD basis, NIFTY delivered 25% return- thus being amongst top 3 marketsand in line with overall emerging market performance. On a YTD basis, MSCI EM index has delivered 30% returns in localcurrency terms.u
Performance November 2017 (local currency returns) Performance YTD (local currency returns)
-3 -3-2 -2 -2 -2 -2
-2 -1 -1 -1
0 0
12
33 3
4
(4)
(3)
(2)
(1)
0
1
2
3
4
5
BRA
ZIL
SRI L
AN
KA
FRA
NCE
CHIN
A
UK
TAIW
AN
KORE
A
GER
MA
NY
PHIL
IPPI
NES
IND
IA N
IFTY
IND
ON
ESIA
MSC
I EM
- EU
ROPE
MSC
I EM
PAKI
STA
N
RUSS
IA
S&P
500
JAPA
N
HA
NG
SEN
G
DO
W JO
NES
% m-o-m
-16
-2
3 37
10 11 12 13 1418 19 19 21 22 23
25
3033
(20)
(10)
0
10
20
30
40
PAKI
STA
N
RUSS
IA UK
SRI L
AN
KA
CHIN
A
FRA
NCE
MSC
I EM
- EU
ROPE
IND
ON
ESIA
GER
MA
NY
TAIW
AN
S&P
500
JAPA
N
BRA
ZIL
PHIL
IPPI
NES
KORE
A
DO
W JO
NES
IND
IA N
IFTY
MSC
I EM
HA
NG
SEN
G
Local currency return (% tillNovember end)
Indian stock market snapshot: November 2017
Performance in November 2017
Source: Bloomberg, SBIMF Research
• Sensex was down by -0.2%, while Nifty ended the month 1% lower
• Small and mid-caps continued to outperform the broader market. BSE small cap index was up 3.6%, and the mid-cap indexwas up 2.0%.
• Sector-wise: Real Estate and IT were the sector out-performers during the month.
• YTD, Nifty and Sensex are up by 25% and 24% respectively. Sector-wise performance has been positive across all sectors ona YTD basis (barring Pharma). Real estate continued to out-perform significantly (up 93%).
Performance YTD
-5
5
1924 24 25 27 28 31 31 35 38 38 41
51
93
(20)
0
20
40
60
80
100
PHA
RMA IT
PSU
AU
TO
SEN
SEX
NIF
TY
FMCG
BSE
100
OIL
& G
AS
BSE
500
CAP
GO
OD
S
MET
ALS
BAN
KEX
MID
CA
P
SMA
LL C
AP
REA
L ES
TATE
-6
-4-2 -2
-1 -1 -1 0
0 0 11
2
4 4
6
(8)
(6)
(4)
(2)
0
2
4
6
8
MET
ALS
OIL
& G
AS
PSU
PHA
RMA
NIF
TY
AU
TO
BSE
100
SEN
SEX
BSE
500
CAP
GO
OD
S
FMCG
BAN
KEX
MID
CA
P IT
SMA
LL C
AP
REA
L ES
TATE
Source: CMIE economic outlook, SBIMF Research
• Q2 FY18 growth improved to 6.3% y-o-y (vs. 5.7% in Q1) majorly due to some mean reversal in investment and lower negativecontribution of net exports.
• Private consumption demand continued to moderate as consumer confidence took a knock post demonetization. We expect thesesentiment related wrinkles to iron out gradually and the consumption demand to improve on back of easier access to financingand three consecutive seasons of healthy agriculture output.
• Government consumption too moderated as the revenue weakness led the government to cut expenditure in Q2 relative to Q1.
• On the supply side, Q2 FY18 GVA growth improved majorly helped by sharp rise in industry sector. Improvement in the industrysector helped offset the moderation of services and agricultural sector.
• While the growth numbers show some improvement, a broad based strength is lacking. The higher private investment growth (indemand side) and manufacturing growth (in supply side) may more be a reflection of some mean-reversal post GST and earlyarrival of festivities.
% pt contribution to Real growth- Demand side
Q3 FY17 Q4 FY17 Q1 FY18 Q2 FY18GDP 7.0 6.1 5.7 6.3Pvt Consumption 6.3 4.2 3.6 3.5Govt Consumption 2.0 2.4 1.9 0.5Gross Capital Formation 0.4 -0.8 2.9 2.8
Investment 0.5 -0.6 0.5 1.4Change in Stocks 0.1 0.1 0.0 0.2Valuables -0.3 -0.2 2.4 1.3
Net Exports 0.4 -0.3 -2.6 -1.3Discrepancies -2.0 0.7 -0.2 0.8
% pt contribution to Real growth- Supply side
Q3 FY17 Q4 FY17 Q1 FY18 Q2 FY18GVA 6.7 5.6 5.6 6.1Agriculture 1.3 0.8 0.3 0.2Industry Total 1.9 1.0 0.5 1.8 Mining 0.1 0.2 0.0 0.1
Manufacturing 1.4 1.0 0.2 1.3
Utilities 0.2 0.1 0.2 0.2Construction 0.3 -0.3 0.2 0.2Services Total 3.5 3.7 4.7 4.1
Growth improved marginally in Q2 FY18
Both demand side and supply growth depicted improvement in Q2 FY18
Source: CMIE, pib.nic.in, SBIMF Research, NB:* 2016-17 data is the 4th Advance estimate and, 2017-18 is 1st Advance Estimate
Agriculture: Nascent signs of risks to Rabi Output in 2017-18
Rabi crop Sowing (in ‘000 hectare) as
of 8th December
Area sown in 2017-18
Area sown in 2016-17 %y-o-y
Rice 1,187 898 32.2
Wheat 19,087 20,356 -6.2
Coarse Cereals 4,413 4,405 0.2
Pulses 12,762 11,973 6.6
Oilseeds 6,779 7,253 -6.5
Total 44,229 44,886 -1.46
1st Advance estimate for Kharif production indicates fall in output
Shortfall in rabi crops sowing data than previous year
• Total Kharif production during FY18 (as per 1st Advance estimates) stands at 155 million tonnes vs. 161 million tonnes in FY17 –indicating a slight fall compared to last year.
• Area under Rabi crop sowing fell by -1.5% till December 8.
• Given that rabi contributes 50% of the total food grains production during the year, any shortfall in the sowing data posesdownside risks to the outlook for agriculture. Having said that, both Kharif output and Rabi sowing numbers are relatively betterthan the drought years of FY14 and FY15 and bodes well for overall agricultural revenue.
• On the positive side, we expect the rural demand to be healthy. Real rural wages too are depicting an improvement.
Source: CMIE, Bloomberg, Philip Capital, SBIMF Research,
Industry: gradually recovering but lacks broad-based strength
47
48
49
50
51
52
53
54
55
Apr
-12
Jul-1
2O
ct-1
2Ja
n-13
Apr
-13
Jul-1
3O
ct-1
3Ja
n-14
Apr
-14
Jul-1
4O
ct-1
4Ja
n-15
Apr
-15
Jul-1
5O
ct-1
5Ja
n-16
Apr
-16
Jul-1
6O
ct-1
6Ja
n-17
Apr
-17
Jul-1
7O
ct-1
7
PMI Mfg
above 50 indicates expansion
PMI Mfg. rose to 52.6 in November vs. 50.3 in October, indicating expansion in manufacturing activity
-20
-15
-10
-5
0
5
10
15
May
-11
Sep-
11
Jan-
12
May
-12
Sep-
12
Jan-
13
May
-13
Sep-
13
Jan-
14
May
-14
Sep-
14
Jan-
15
May
-15
Sep-
15
Jan-
16
May
-16
Sep-
16
Jan-
17
May
-17
Sep-
17
IIP: Manufacturing (%y-o-y)
IIP manufacturing depicting gradual improvement
Core industries index grew by 4.7% y-o-y in October
Eight core industries (% y-o-y) May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17Overall index 3.9 1.0 2.9 4.4 4.7 4.7Coal -3.1 -6.8 0.6 15.3 10.4 3.9Crude oil 0.7 0.6 -0.6 -1.6 0.1 -0.4Natural gas 4.5 6.5 6.6 4.4 6.3 2.9Refinery products 5.4 -0.2 -2.6 2.4 8.1 7.5Fertilizers -5.9 -2.7 0.2 -0.7 -7.7 3.0Steel 3.9 6.0 9.4 2.1 3.7 8.4Cement -1.4 -3.3 1.1 0.7 0.1 -2.7Electricity 8.2 2.1 6.6 8.3 3.4 2.1
Services paints a mixed picture
Source: Philip Capital, RBI, CMIE, SBIFM Research; NB: * Green: denotes improvement or unchanged; Pink: denotes deterioration
• November Services PMI contracted for the first time in last 3 months on account of sluggish demand and lower customerturnout. The input prices increased during the month on account of higher food and fuel prices. On the employment front,service providers continued to add to their workforce . That said, employment growth eased to a modest pace.
• Services related indicators reflect weakness in auto sales, tourist arrivals, total freight handled at rail, ports and railways,bank credit growth and AUM of MFs. On the other hand, credit to trade, domestic passengers handled at the airports,services exports and central government revenue expenditure posted a healthy growth.
Services PMI posted contraction in the month of November
Domestic sales of CV & MU vehicles decelerated while, domestic passengers handles at the airport expanded*
45.9
51.7
48.5
44
46
48
50
52
54
56
Sep-
14
Nov
-14
Jan-
15
Mar
-15
May
-15
Jul-1
5
Sep-
15
Nov
-15
Jan-
16
Mar
-16
May
-16
Jul-1
6
Sep-
16
Nov
-16
Jan-
17
Mar
-17
May
-17
Jul-1
7
Sep-
17
Services PMI% y-o-y
Domestic Sale of CV & Multi-utility vehicles
Real Credit to Trade
Tourist arrivals ('000)
Total freight handled at rail, ports & airways
Domestic Passengers handled at airport
Services Exports
Real Bank Credit growth
AUM of MFs
Real central govt revenue spending
Oct-16 16.6 8.2 8.6 1.0 23.6 -1.7 7.4 23.0 34.5Nov-16 -1.1 1.6 7.6 8.3 22.0 11.0 4.4 27.4 9.1Dec-16 10.4 2.2 11.9 3.4 23.9 -1.7 3.9 29.1 -2.1Jan-17 10.6 1.4 16.4 4.6 25.6 7.9 0.0 36.4 20.6Feb-17 14.1 -3.7 12.7 3.5 15.4 5.9 -2.4 41.7 8.6Mar-17 14.5 5.8 11.8 5.3 14.6 10.0 -3.2 42.3 -30.7Apr-17 -3.3 1.6 25.0 6.2 14.8 0.0 4.6 35.5 48.2
May-17 6.4 5.2 19.5 4.8 17.4 -4.1 2.5 39.4 53.9Jun-17 -4.9 8.4 22.5 3.6 20.0 -3.1 4.7 39.5 -12.6Jul-17 25.8 2.4 7.4 5.2 12.2 1.0 4.3 26.9 4.4
Aug-17 21.2 1.5 11.0 5.4 15.6 -3.6 3.7 23.2 -1.2Sep-17 25.8 4.7 18.9 3.7 16.3 -6.3 3.9 21.9 -14.5Oct-17 9.6 5.1 18.1 2.6 19.9 -1.6 3.6 18.3 -8.1
Source: Mint, SBIMF Research,
Reforms: GST council slashed tax rates on 177 items
• The 23rd GST Council meeting heldon 10 November 2017 drasticallypruned the list of goods and servicesin the highest slab of 28% (from ~230to 50)
• The meeting also reducedcompliance burden on the SMEsector (extended the filing dates andincreased the threshold of revenueon enterprises under the compositionscheme from Rs10mn to Rs15mnand lowered tax rate for thecompanies under such a scheme to1% from 2%).
• Some products and services in otherrate buckets also saw reducedincidence. The tax reduction cameinto effect from 15th November.
• The reduction in tax rate is likely toincrease demand in the longer-termbut may have a near-term adverseimpact on government revenue.
GST Council slashes tax rates on 177 items from 28% to 18% offering relief to consumers and businesses
Source: CMIE, SBIMF Research,
Growth is likely to fall in FY18, but improve in FY19
• India has seen a host of pertinent structural reforms in last couple of years such as wide-scale implementation of directbenefit transfer, GST, crack-down on black money, RERA, Insolvency and Bankruptcy Code and so forth.
• They were much needed reforms to bring in productive efficiency and ensure more efficient utilization of resources. But inthe interim, it has undeniably disrupted the operating template of the Indian businesses and led to a deeper growth shockthan anyone would have anticipated.
• At the same time, policy makers are still grappling to resolve the twin balance sheet issues of high corporate leverage andnon-performing assets.
• We expect India’s growth to weaken to 6.6% in FY18 owing to recent signs of weakness in consumer sentiments, lingeringchallenges in private investment, and limited fiscal space to stimulate the economy . However, hopefully by next year, initialwrinkles in reforms such as IBC, GST and RERA should iron out over the next year and place India on a higher productivepotential. Accordingly, we expect FY19 growth to revive to 7.4% as the system gains some bit of normalcy.
5.5
6.4
7.58.0
7.1
6.0
7.2 7.4
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
FY13 FY14 FY15 FY16 FY17 1H FY18 2H FY18e FY19e
Real GDP
% growthFY18: 6.6%
Earnings: Improved in 2Q FY18
Source: MOSL, Antique, SBIFM Research
Earnings for FY18 downgraded while markets continue to expect 20% EPS growth for FY19
• The earnings outcome for Q2 FY18 suggests somereversal in the profit growth (PAT improved by 13%) alongwith improved operating profit (10.2%% EBITDA growth).That said, few companies (Tata Steel, HDFC Bank, IOCL,and Reliance) accounted for most of the earnings growthand broad based recovery is yet to be seen.
• The results suggests that GST-related hiccups (de-stocking) have waned in Staples, but have persisted forDurables and Electricals. Higher NPA issues and sectorspecific challenges in IT and Pharmaceuticals are takinglonger to mend. Impact of hardening commodity costs isevident, with corporates hinting at ensuing price increasesto offset the input cost inflation in 2HFY18.
• On positive note, Consumer and Auto companies arerelatively positive on rural demand. In BFSI, private banksreported strong loan growth and largely stable margins,whereas NBFCs delivered strong results on most fronts.
• Corporate profits as percentage of GDP has hit anextremely low point and logically should mean revert.Earnings revival is absolutely critical for such richvaluations to sustain.
95128
175207
239283
247284
330 351385
427391 402
427475
580
-20%
-10%
0%
10%
20%
30%
40%
0
100
200
300
400
500
600
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
e
FY19
e
Nifty EPS YoY, RHS
3.0
4.75.4
6.27.3 7.8
5.56.5 6.2
4.9 4.6 4.33.8
3.1 2.9
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Average of 5.4%
Corporate profit as percentage of GDP
Valuations
Valuations across the capitalization curve are rich when compared to history
But looks reasonable when looked at other parameters
82 83
103
55
9588
7164 66
8169
80 78
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
EMkt Cap / GDP (%)
Source: Bloomberg, MOSL, SBIMF Research,
7
9
11
13
15
17
19
21
23
25
May
-06
Jan-
07Se
p-07
May
-08
Jan-
09Se
p-09
May
-10
Jan-
11Se
p-11
May
-12
Jan-
13Se
p-13
May
-14
Jan-
15Se
p-15
May
-16
Jan-
17Se
p-17
Sensex 1Y fwd PE
Mean: 16
+1 SD
-1 SD
13
14
15
16
17
18
19
20
21
22
23
May
-15
Jul-1
5Se
p-15
Nov
-15
Jan-
16M
ar-1
6M
ay-1
6Ju
l-16
Sep-
16N
ov-1
6Ja
n-17
Mar
-17
May
-17
Jul-1
7Se
p-17
Nov
-17
S&P Small Cap 1Y fwd PE
10
12
14
16
18
20
22
24
26
28
30
Sep-
11D
ec-1
1A
pr-1
2Ju
l-12
Oct
-12
Jan-
13M
ay-1
3A
ug-1
3N
ov-1
3M
ar-1
4Ju
n-14
Sep-
14D
ec-1
4A
pr-1
5Ju
l-15
Oct
-15
Feb-
16M
ay-1
6A
ug-1
6N
ov-1
6M
ar-1
7Ju
n-17
Sep-
17
S&P Mid Cap 1Y…
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Aug
-05
Jan-
06Ju
n-06
Nov
-06
Apr
-07
Sep-
07Fe
b-08
Jul-0
8D
ec-0
8M
ay-0
9O
ct-0
9M
ar-1
0A
ug-1
0Ja
n-11
Jun-
11N
ov-1
1A
pr-1
2Se
p-12
Feb-
13Ju
l-13
Dec
-13
May
-14
Oct
-14
Mar
-15
Aug
-15
Jan-
16Ju
n-16
Nov
-16
Apr
-17
Sep-
17
Sensex 1Y fwd P/B
Source: Morgan Stanley, SBIMF Research,
Indian Equity Valuations relative to emerging markets
India’s valuations relative to other EMs in line with historical 5 year average…
…and the relative RoE remains healthy
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
1.2
Dec
-00
Dec
-01
Dec
-02
Dec
-03
Dec
-04
Dec
-05
Dec
-06
Dec
-07
Dec
-08
Dec
-09
Dec
-10
Dec
-11
Dec
-12
Dec
-13
Dec
-14
Dec
-15
Dec
-16
MSCI India's P/E prem. wrt MSCI EM
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
01/O
ct/9
5
01/J
an/9
7
01/A
pr/9
8
01/J
ul/9
9
01/O
ct/0
0
01/J
an/0
2
01/A
pr/0
3
01/J
ul/0
4
01/O
ct/0
5
01/J
an/0
7
01/A
pr/0
8
01/J
ul/0
9
01/O
ct/1
0
01/J
an/1
2
01/A
pr/1
3
01/J
ul/1
4
01/O
ct/1
5
01/J
an/1
7
MSCI India ROE Relative to EM
Liquidity: Both FIIs and Domestic Mutual fund poured money
Source: MOSL, SBIMF Research
FIIs invested US$ 2.95 billion in November Domestic Mutual Funds, continue to witness robust inflow in the equity segment
Insurance companies were net seller after a brief span of inflow in last two months
0.9
0.1
2.3
-0.1
2.9
1.4
1.7
1.2
-0.1
-1.0
0.9
-2.6
-0.9
0.8
-1.1
0.0
-1.7 -1
.24.
10.
60.
4 0.8
1.7
1.5
1.4
-0.7
-2.6
-1.2
0.0
1.6
5.1
-0.3
1.5
0.6
0.4
-2.0 -1
.70.
33.
0
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
US$ billion
0.7 1.
00.
31.
10.
1 0.7
0.6
1.5
0.7 1.
60.
9 1.6
1.4
0.5 1.
00.
7 1.1
0.9
-1.5
-0.1
1.1
0.0 0.
00.
4 0.6
1.4
2.0
1.4
0.8
0.3 0.
71.
71.
51.
4 1.8
2.8
2.7
1.5 1.6
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
US$ billion
-0.9
-0.3
-1.5
-0.3
-1.4
-0.4
-0.6
0.4
0.7
0.3
-0.7
0.9
0.1
-0.7
0.3
0.3
0.8
0.7
-1.0
-0.3
0.0
-0.3
-0.9
-1.1
-0.3 -0.2
0.7
0.0
-0.1
-0.2
-1.3
-0.3
-0.8
-0.4
-1.1
-0.3
0.5
0.0
-0.2
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
US$ billion
Equity Market outlook
• Indian equity market fell in November. Sensex was down by -0.2%, while NIFTYreturns fell by 1% during the month. MSCI India (US$) was down 0.8% in November,while MSCI- EM was up 0.15%.
• Small and mid-caps continued to outperform the broader market. BSE small capindex was up 3.6%, and the mid-cap index was up 2.0%.
• November witnessed FPI flows to the tune of US$3.0bn into equities, the secondconsecutive month of inflows, and for the first time in seven months FPI inflows intoequity outpaced debt.
• Although sentiment remains largely positive, both in India and globally, Indian equitymarkets will closely watch the outcome of the Gujarat elections. Sustained domesticflows should continue to provide support.
• On the growth front, GDP growth reversed a five quarter declining trend and rose6.3% y-o-y in 2Q FY18. GVA growth rose 6.1% y-o-y in 2QFY18, up from 5.6% in theprevious quarter. But nominal GDP continued to stay sub-10% and will accordinglyhave its bearing on the corporate earnings performance. On the other hand, one canargue that corporate profitability at 2.9% of GDP (vs. the historical average of 5.4%)has hit its rock bottom and should only mean-revert from here on.
• Earnings recovery is absolutely critical for the rich valuations to sustain (Sensex at 21times 1 year fwd earnings). In the present scenario we remain cautious and wouldcontinue to focus on bottom-up stock picking.
• From a longer-term perspective, India growth story remains intact. Initial wrinkles inreforms such as IBC, GST and RERA should iron out over the next year and placeIndia on a higher productive potential. Higher growth on the back of the productivitygains resulting from structural reforms should be longer lasting.
Valuations are at 21 times on 1 year forward earnings
Source: Bloomberg, SBIMF Research
7
9
11
13
15
17
19
21
23
25
May
-06
Jan-
07Se
p-07
May
-08
Jan-
09Se
p-09
May
-10
Jan-
11Se
p-11
May
-12
Jan-
13Se
p-13
May
-14
Jan-
15Se
p-15
May
-16
Jan-
17Se
p-17
Sensex 1Y fwd PE
Mean: 16
+1 SD
-1 SD
FIXED INCOME MARKET
Global bond yields: November 2017
• Global economy has been depicting synchronized improvement in growth and gradual fall in unemployment rate.
• Global monetary policy normalisation continues as the Fed is poised to hike rates for the third time this year at its December meeting.US bond yields have inched up by 29bps in last three months.
• Bank of England raised interest rates by 25bp to 0.5% in November, the first time since November 2007, as pound depreciation onaccount of Brexit related uncertainties pushed up inflation beyond its 2% target. Within Asia, Korea stood to be the harbinger of rate hikecycle (increased policy rate by 25bps to 1.5% in November).
• Improving growth, tight labor markets and rising commodity prices may continue to take policy rates and global bond yields upward.
Source: Bloomberg, SBIMF Research
10 Year G-sec Yield (% mth end) 2015 end 2016 end Aug-17 Sep-17 Oct-17 Nov-17 3m Change
(in bps)% change in 2017 YTD
(in bps)
Developed market
US 2.27 2.44 2.12 2.33 2.38 2.41 29 -3
Germany 0.63 0.21 0.36 0.46 0.36 0.37 1 16
Italy 1.35 1.82 1.75 1.82 1.56 1.48 -27 -33
Japan 0.27 0.05 0.01 0.07 0.07 0.04 3 -1
Spain 1.77 1.38 1.56 1.60 1.46 1.45 -12 6
Switzerland -0.06 -0.19 -0.14 -0.02 -0.08 -0.12 2 7
UK 1.96 1.24 1.03 1.37 1.33 1.33 30 9
Emerging Market Bond yields: November 2017
Source: Bloomberg, SBIMF Research
Most emerging market are witnessing the rise in bond yields, particularly in last three months
10 Year G-sec Yield (% mth end) 2015 end 2016 end Aug-17 Sep-17 Oct-17 Nov-17 3m Change
(in bps)% change in 2017 YTD
(in bps)
Emerging Market
Brazil 16.5 11.4 10.0 9.7 9.9 10.4 39 -104
China 2.8 3.0 3.7 3.6 3.88 3.90 25 87
India 7.8 6.5 6.5 6.7 6.86 7.06 53 54
Indonesia 8.7 7.9 6.7 6.5 6.77 6.50 -17 -142
Korea 2.1 2.1 2.3 2.4 2.56 2.47 21 40
Malaysia 4.2 4.2 3.9 3.9 3.92 3.91 2 -28
Philippines 3.9 4.6 4.7 4.7 4.61 4.78 13 15
Russia 9.6 8.4 7.7 7.6 7.60 7.55 -20 -81
South Africa 9.8 8.9 8.6 8.6 9.09 9.32 76 41
Taiwan 1.0 1.2 1.0 1.0 1.04 1.03 0 -17
Thailand 2.5 2.6 2.3 2.3 2.32 2.36 4 -29
India Rates Snapshot : November 2017
• Indian bond yields rose in November as the market broadly builds the case of a long-pause on the rate front and remainfocused on rising crude prices and likely deterioration in government bond demand-supply dynamics.
• Money market, too inched up marginally as higher currency leakage starts to pull down the surplus liquidity.
• Crude oil prices rose sharply by 9.4% over the month.
• Rupee appreciated marginally (0.4%) during the month. YTD, the appreciation in rupee stands at 5.4%.
Source: Bloomberg, PPAC, CCIL, 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
Sep-17 Oct-17 Nov-17 m-o-m change (in bps) Change YTD (in bps)
1 Yr T-Bill 6.23 6.23 6.27 4 -6
3M T-Bill 6.08 6.10 6.12 2 -7
10 year Gsec 6.66 6.86 7.06 20 54
3M CD*** 6.15 6.20 6.22 1 -6
12M CD*** 6.56 6.58 6.63 5 0
3 Yr Corp Bond* 7.11 7.15 7.30 15 1
5 Yr Corp Bond* 7.25 7.32 7.45 13 8
10 Yr Corp Bond* 7.54 7.69 7.84 15 26
1 Yr IRS 6.09 6.17 6.30 13 12
5 Yr IRS 6.27 6.38 6.58 21 32
INR/USD 65.3 64.7 64.5 0.4# 5.4#
Crude Oil Indian Basket** 54.5 56.1 61.3 9.4# 16.4#
Source: Bloomberg, SBIMF Research; NB: *Data till 7 Dec 2017.
Global policy rates: End of monetary easing cycle
Policy rate (in %, end
period)2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017*
US6.50 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 1.25
China5.85 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
Japan0.25 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
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
Australia6.25 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
South Korea3.00 2.00 2.50 3.25 2.75 2.50 2.00 1.50 1.25 1.50
Taiwan4.63 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 1.63 1.38 1.38
Thailand1.50 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
Malaysia2.70 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
Hong Kong8.00 3.25 2.75 2.50 3.75 5.75 6.75 5.75 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.75 1.00 1.50
Philippines13.50 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
Eurozone4.75 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 - -
UK6.00 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
Russia5.50 17.00 11.00 10.00 8.25
Turkey6.50 5.75 5.50 4.50 8.25 7.50 8.00 8.00
Brazil15.75 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 7.50
US, UK and Korea have commenced the rate hike cycle. Barring Russia, Africa and some Latin American economies, most countries on a long pause or contemplating a rate hike (green denotes cut, red a hike)
Commodities prices inching upward
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CRB Cmdt index
85% rise
85% rise
14% rise
Commodity prices increased by 14% since Dec 2015
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61.22
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Brent (US$ per barrel)
Brent prices rose nearly 8% this year supported by OPEC production cuts and rising demand
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Ura
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Lead
Coal
Palla
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% change YTD in 2017
Global growth is pulling the commodity prices up, particularly in metals space. Agri-commodity prices are still soft
India growth: Q2 GDP lower than expected
8.7
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Sep-
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Dec
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Mar
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Jun-
17
Sep-
17
Real GVA at basic prices (%y-o-y) Real GDP (% y-o-y)
• Q2 FY18 growth improved on the back of investment recovery (demand side) and higher industry output (supply side). Theimprovement was weaker than expected.
• Higher oil prices and shortfalls in kharif production and rabi sowing pose downward risk, while likely credit recovery post bankrecapitalization and improved business conditions may provide the positive support.
• We expect FY18 growth to be at 6.6% (GDP) and 6.4% (GVA). This is lower than RBI’s expectation of 6.7% (GVA) for FY18.
Q2 FY18 GDP growth improved but lacks strength
CPI inflation has bottomed out
Source: CSO, SBIMF Research
• Higher vegetables and fuel prices drove the October CPI to 3.58% y-o-y.
• Looking ahead, fall in vegetables prices thus far is less than the usual seasonal pattern.
• While tax cuts by government kept the lid on petrol and diesel prices, the impact of higher crude coupled with phasing out ofgovernment subsidy is likely to drive up the LPG and kerosene prices.
• 7PC effect on Housing CPI is there to stay up until December , thus taking the Housing inflation higher.
• GST rate reductions during mid-November can lead to softening in the inflation prints of some goods and services in the near-term.
• We expect CPI inflation to average at 4.5% in 2H FY18 and 3.4% for the full year.
October CPI rose to 3.6% y-o-y vs. 3.3% in September Food (esp. veggies) and fuel driving up the prices
0
2
4
6
8
10
12
14
Apr
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Aug
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Apr
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Dec
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Apr
-14
Aug
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Dec
-14
Apr
-15
Aug
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Dec
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Apr
-16
Aug
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Dec
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Apr
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Aug
-17
CPI % y-o-y
CPI target range 4% + 2%
-4
-2
0
2
4
6
8
10
Apr
-14
Jul-1
4
Oct
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Jan-
15
Apr
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5
Oct
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Jan-
16
Apr
-16
Jul-1
6
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Jan-
17
Apr
-17
Jul-1
7
Oct
-17
Core CPI (CPI ex food ex fuel ) CPI Food CPI: Fuel and Light
% y-o-y
Source: CMIE, SBIMF Research,
Centre’s fiscal: Walking a tight rope
• Fiscal deficit climbed up in October owing to resumption of expenditure. Cumulative fiscal deficit reached 96% of BE (vs.91% up until September).
• In the receipts, direct tax collection and disinvestments receipts are holding up, while non-tax revenue is weak and indirecttax collection is cloudy (GST effects).
• Overall, centre is walking a tight-rope if it has to meet its 3.2% fiscal deficit target without any expenditure cut.
Key Fiscal Indicators - Central Government Finances
Actual (as % of BE)- April to October 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
1 Non-debt Receipts 44.2 42.1 41.3 38.5 50.0 50.4 48
a. Tax Revenue (Net) 43.9 43.3 40.3 37.7 46.6 50.3 48
b. Non-tax Revenue 54.4 42.8 57.8 52.3 73.0 52.0 33
c. Non-Debt Capital Receipts 24.8 17.4 12.2 8.5 24.5 43.7 46
2. Expenditure 54.1 52.3 55.4 53.6 57.5 58.2 60
a. Revenue Account 54.9 53.6 56.3 54.4 57.2 59.3 62
b. Capital Account 48.4 43.9 49.4 48.2 59.4 50.6 53
6. Fiscal Deficit 74.4 71.6 84.4 89.6 74.0 79.3 96
7. Revenue Deficit 79.1 81.4 92.9 98.5 72.9 92.6 125
8. Primary Deficit 112.2 109.5 159.2 259.0 196.9 477.0 49
9. Net Market Borrowing 90.3 78.6 76.8 71.8 69.0 74.1 121
Source: CEIC, State budgets, SBIMF Research,
States fiscal position is healthy
Cumulative Fiscal deficit (as % of BE)
Cumulative (as % of BE) Sep-13 Sep-14 Sep-15 Sep-16 Sep-17
Andhra Pradesh -4 52 67 102 141
Bihar 48 135 130 75 106
Chattisgarh 10 86 3 40 28
Gujarat 13 5 13 27 1
Haryana 14 0 20 30 32
Karnataka 20 21 6 -12 21
Madhya Pradesh 55 59 58 70 42
Maharashtra -7 13 -3 16 -9
Manipur -180 -148 -63 -2 -68
Meghalaya -17 170 -46 118 380
Mizoram 1463 184 229 724 700
Nagaland 169 655 116 384 NA
Odisha -23 8 -1 23 17
Punjab 25 37 47 103 20
Rajasthan 26 25 30 15 26
Sikkim -5 61 42 45 24
Telangana 17 64 63 68
Uttar Pradesh -45 -1 21 37 12
Uttarakhand 0 15 66 42 64
Agg 19 states 6 25 30 39 31
NB: Negative implies fiscal surplus; Calculated using the changed BE as per monthly documents
Data for Meghalaya and Nagaland are available till August
• 19 out of 29 states release the monthly data on their fiscalsituation.
• Aggregate States fiscal deficit for these 19 states istrending in line with assumptions made by the stateauthorities in their respective budget.
• Their cumulative fiscal deficit at 31% of the BE in 1HFY18, broadly in line with trend seen in last three years.
• Barring a few states, revenue receipts have been buoyantfor most states despite the delay in complete devolution ofIGST and compensation cess from the centre.
• Overall expenditure growth, at 9.1%, is marginally lowerthan the budgeted growth of 10.7% for these 19 states.While the revenue expenditure is in line with the budgetedgrowth, capex outlay has declined by -16% in 1H FY18compared to 1H FY17, with realizations merely 27% of theBE.
• Going forward, as the center starts to devolve states’complete share, overall tax collection for states shouldfurther improve. This may, in turn, lead the capitalexpenditure for states to improve in 2H FY18.
Source: RBI, SBIMF Research,
Government bond supply: risks overdoneTotal gross government borrowing by centre + state in FY18 (till Nov) stands at 7.2 trillion
• YTD (till November end), government’s (Centre and States combined) gross borrowing stands at Rs 7.2 trillion from themarket (5.7% higher than corresponding period last year) and net borrowings stands at R 5.6 trillion (2.3% higher thancorresponding period last year).
• Central government runs a risk of fiscal slippage owing to tepid non-tax revenue and uncertainty around GST collection. Thatsaid, as the disinvestment receipts are holding strong this year, we do not expect fiscal slippage to be greater than 30bps (ifany). We expect either higher T-bill or cancellation of buybacks to finance the possible fiscal slippage.
• SDL supply have reduced in last couple of months. Between August to November 2017, Gross SDL issuances have been Rs.1.45 trillion vs. Rs. 1.5 trillion in the corresponding period last year. Buoyant revenue collections is likely to have helped thestates.
• Going forward, SDL supply can increase in Q4 FY18 due to impending SDL maturities (Rs. 300 billion of SDL is due formaturity in Q4 FY18). Further, states like Bihar are yet to borrow from market this year. That, the healthy state financesalleviates the risk of sharp jump in SDL supply. We expect SDL issuances to total to Rs. 4.2-4.4 trillion in FY18 (vs. 3.7 trillionin FY17).
4,61
0
4,50
0
4,41
0
4,56
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4,60
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4,76
0
1,11
4
1,11
7
1,35
8
1,71
0
2,21
0
2,43
5
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 Nov-17
Gross Market Borrowings by GoI (in Rs. bn) Gross Market Borrowings by State Govts (in Rs bn)
Banking system liquidity: reduced sharply in November
Source: RBI, SBIMF Research
Banking system liquidity surplus averaged at Rs. 660 billion in November vs. 1.4 trillion in October as…
… CIC continues to approach the pre-demon levels (currently, ~92% of pre-demon level)…
…Central government starts to spend less relative to its receipts
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2000
4000
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-16
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17
Mar
-17
May
-17
Jul-1
7
Sep-
17
Nov
-17
Banking System Liquidity (Rs. Billion)
-100,000
-50,000
-
50,000
100,000
150,000
Apr
-17
May
-17
Jun-
17
Jul-1
7
Aug
-17
Sep-
17
Oct
-17
Nov
-17
Central Govt. Cash Balance with RBI (Rs. crore)
-6,000
-1,000
4,000
9,000
14,000
19,000
24,000
29,000
34,000
39,000
2005
2006
2007
2008
2010
2011
2012
2013
2014
2015
2016
2017
Currency leakage in Nov (Rs. Crore)
During Nov 2016, due to de-mon, currency leakage was Rs 589,117
Credit growth shows some signs of recovery
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Jul/
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/17
Bank Credit (% y-o-y)
Growth (% y-o-y) Last 3 yrsaverage
Last 3 mth average Sep growth Oct growth
Non-Food Credit 7.6 6.0 6.1 6.6
Agriculture & Allied Activities
12.0 5.9 5.8 5.5
Industry 1.9 -0.3 -0.4 -0.2
Services 8.3 7.1 7.0 9.4
Personal Loans 16.1 16.2 16.8 16.0
Priority Sector 8.7 3.9 3.7 3.5
Credit growth has started to picking up
• Non-food credit growth accelerated to 6.6%.
• Retail decelerated to 16% with mortgage growth falling to 11.4%.
• Industry contraction continued (-0.2%) while services growth inched up further to 9.4% and agri stable around 5.5%.
• Two of the fastest growing segments are credit cards and personal loans.
• The pace of credit recovery needs to be watched closely as this can limit banks’ appetite for government securities goingahead.
Source: RBI, SBIMF Research
Personal loans is driving the credit growth
Source: CMIE, SBIMF Research,
Current account deficit widened
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-30.0
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17
Current A/c Balance (US$ billion) (as % of GDP)
Trade deficit surged to US$ 14 billion in October FY18 CAD to likely be around 2% of GDP.
• Merchandise exports plunged to -1.1% y-o-y in October after a small recovery in the last two months. Imports, too, softenedto 7.6% y-o-y after recording a double digit growth in last nine months.
• October trade numbers are likely reflecting the delayed imprints of exporters struggle post GST. Industries were facing theworking capital crunch due to non-payment of input tax credit by the government. Given that the government has initiatedthe refund process for the export community starting October, we expect some restoration of export activities in the comingmonths.
• Looking at the imports, petroleum imports bill rose, likely reflecting the impact of rising crude prices. We expect it to risefurther in line with the higher crude prices.
• The trends in trade activity in the first seven months of the fiscal suggests the FY18 CAD to likely be around 2% of GDP.
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Apr
-14
Jul-1
4
Oct
-14
Jan-
15
Apr
-15
Jul-1
5
Oct
-15
Jan-
16
Apr
-16
Jul-1
6
Oct
-16
Jan-
17
Apr
-17
Jul-1
7
Oct
-17
Merchandise Exports (% y-o-y) Merchandise Imports (% y-o-y)
But overall external account stays healthy
Source: CMIE, RBI, SBIFM Research
FX reserves at US$ 401.9 bn as of 1st December and is sufficient to finance 11.1 months of import
FIIs increased to US$ 20.27 billion during Apr-Nov 2017 vs. US$ 1.17 billion during Apr-Nov 2016
Net FDI inflows during Apr-Oct 2017 stands at US$ 22.4 billion vs. US$ 25 billion in Apr-Oct 2016
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FX reserves (USD bn)- LHS Import Cover (in months)-RHS
-8000
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0
2000
4000
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10000
Oct
-13
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4
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15
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-15
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16
Apr
-16
Jul-1
6
Oct
-16
Jan-
17
Apr
-17
Jul-1
7
Oct
-17
Total (Equity + Debt) FII Investment
USD mn
-600.0
-500.0
-400.0
-300.0
-200.0
-100.0
0.0
100.0
200.0
300.0
400.0
-700
300
1,300
2,300
3,300
4,300
5,300
6,300
7,300
8,300
Oct
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Jan-
14
Apr
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Jul-1
4
Oct
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Jan-
15
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Jul-1
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Jan-
16
Apr
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Jul-1
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Oct
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Jan-
17
Apr
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Jul-1
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Oct
-17
Net FDI inflows (USDmn) Net FDI inflows (% y-o-y growth)
Most emerging market (EM) currencies appreciated against US$ in November (Rupee appreciated 0.4% in November)
Currency: Most EM currencies appreciated in 2017
Source: Bloomberg, SBIMF Research
US$ Dollar Index (DXY) depreciated by 2.1% in November Rupee continues to hover around 64-65 levels
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0.1 0.3 0.4 0.4 0.6 0.8 1.6 1.7 2.7 2.8 3.0 3.1 3.1 3.4
Turk
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renm
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% change YTD % change m-o-m
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94
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102
104
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Jun/
17
Jul/
17
Aug
/17
Sep/
17
Oct
/17
Nov
/17
Dec
/17
DXY Index
64.5
58
60
62
64
66
68
70
Feb-
14A
pr-1
4Ju
n-14
Aug
-14
Oct
-14
Dec
-14
Feb-
15A
pr-1
5Ju
n-15
Aug
-15
Oct
-15
Dec
-15
Feb-
16A
pr-1
6Ju
n-16
Aug
-16
Oct
-16
Dec
-16
Feb-
17A
pr-1
7Ju
n-17
Aug
-17
Oct
-17
INR/USD (mth end)
In line with our and market expectation, the MonetaryPolicy Committee (MPC) of RBI maintained status quo,keeping for the repo rate and the “neutral” stanceunchanged.
5 out of 6 members voted for in favor of the decision, whileone member (Dr. R. Dholakia) voted for a 25bps rate cut.
The MPC has noted that 2Q FY18 GDP growth was slightlylower than expected but it has kept its full year FY18growth projection unchanged at 6.7% on GVA basis.
The MPC has slightly revised upwards its inflationprojection by 10bps to 4.3% to 4.7% for 4Q. The MPC’sgrowth projection is higher than our GVA estimate (6.4%)while its inflation projection is in line with our estimate.
Bottoming out of Indian inflation, the rising crude and theglobal rates would make the central bank fidgety. That said,we do not expect the central bank to embark on a rate hikecycle anytime soon. India’s growth is yet not out of woodsand credit demand is still to see the desired pace of growth.Accordingly, we expect a long pause and the bond marketmovements to be dictated by other factors such asdomestic fiscal developments and global crude and ratecycle.
Policy Rate Outlook
Source: RBI, CSO, SBIFM Research
4
5
6
7
8
9
10
Nov
-05
Jul-0
6
Mar
-07
Nov
-07
Jul-0
8
Mar
-09
Nov
-09
Jul-1
0
Mar
-11
Nov
-11
Jul-1
2
Mar
-13
Nov
-13
Jul-1
4
Mar
-15
Nov
-15
Jul-1
6
Mar
-17
Repo Rate (mth end, %)
Indian bond yield (10 year G-sec) has inched up further in November to7.06% and stands at 7.17% as of 11th December as FIIs exhausted theirbuying limit, RBI continues its neutral stance, fiscal concerns have come tothe fore and crude prices inched higher.
RBI during its last monetary policy meeting in December left the repo rateunchanged and maintained its neutral stance. While the domestic growth-inflation mix warrants a continued monetary support, the rising crude and theglobal rates would make the central bank fidgety.
Crude prices have inched up in last two months and Brent stands at US$ 64per barrel. A country with nearly 1.5 billion barrel of annual crude import, andpetroleum related government revenues nearly at 1.5% of GDP, rising crudehas the potential to disturb both external and fiscal deficit. This, in turn, mayhave its additional bearing on the overall macro-stability..
Further, the rising risk of fiscal slippages (from Centre) and impending clarityon SDL supply is making the market concerned on the deterioration ofdemand-supply dynamics. We expect fiscal related pressures to graduallydominate market moves.
Purely from the valuation point of view G-Sec at around 7.25% looksattractive even if we price new 10 year 10-15bps lower.
We had tactically reduced the duration in our fixed income portfolios buthave been building the exposure now given that yields above 7% lookattractive.
Debt Market Outlook
Source: Bloomberg, SBIFM Research
4
5
6
7
8
9
10
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Sep-
12
Mar
-13
Sep-
13
Mar
-14
Sep-
14
Mar
-15
Sep-
15
Mar
-16
Sep-
16
Mar
-17
Sep-
17
10 year GSec 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 anymutual fund units/securities. These views alone are not sufficient and should not be used for thedevelopment or implementation of an investment strategy. It should not be construed as investmentadvice to any party. All opinions and estimates included here constitute our view as of this date and aresubject to change without notice. Neither SBI Funds Management Private Limited, nor any personconnected with it, accepts any liability arising from the use of this information. The recipient of thismaterial should rely on their investigations and take their own professional advice.
Mutual Funds investments are subject to market risks, read all scheme related documentscarefully.
Asset Management Company: SBI Funds Management Private Limited (A joint venture with SBI andAMUNDI). Trustee Company: SBI Mutual Fund Trustee Company Private Limited.
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