49
Economy and Markets May 2019
Economy and Markets
May 2019
EQUITY MARKET
Global equity market snapshot: April 2019
Source: Bloomberg, SBIMF Research
Performance in April 2019 (local currency returns) Performance Year-to-Date (local currency returns)
Performance in April 2019 (US$ returns) Performance Year-to-Date (US$ returns)
Indian stock market sector-wise returns: April 2019
Source: Bloomberg, SBIMF Research
• Nifty and Sensex were up nearly 1% each during the month. On YTD basis, both Nifty and Sensex were up 8%.
• Large caps outperformed the small caps and mid caps during the month. Large cap index was up 0.8% while mid cap index
and small cap index were down 3.8% and 2.7% respectively during the month. On YTD basis, large caps outperformed the mid
caps and small caps by giving 7.1% returns while mid caps and small caps were down 3.6% and 0.6% respectively.
• IT and metals were the sector outperformers while telecom and real estate were the sectoral laggards during the month. On
YTD basis, IT and consumer durables were the sector outperformers while auto and capital goods were the sectoral laggards.
Performance in April 2019 (local currency returns) Performance Year-to-Date (local currency returns)
Narrow rally in the Indian equity market
Source: Capitaline, SBIMF Research
1 year return: Apr 2018-Apr 2019; return distribution of top 2000 stocks by M-Cap
19.1
37.6
26.4
0
5
10
15
20
25
30
35
40
<-50 -25 to -50 -25 to 0
83% stocks delivered negative returns
9.6
3.5 3.9
0
2
4
6
8
10
12
0 to +25 +25 to +50 >+50
17% stocks delivered positive returns
83% of the top 2000 stocks delivered negative return
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.
High frequency indicators have moderated during Jan-Mar 2019
• Growth in high frequency indicators have moderated during Q1 2019.
• Most recent is moderation in consumption demand (2-wheelers and
car sales, FMCG products or sale of discretionary products).
Consequently, domestic production and imports of consumer goods
have moderated. Weakness in wage growth, depressed farm prices,
moderation in NBFC loan disbursement (particularly in wholesale
segment), and challenges in SMEs has affected consumer’s demand.
• Investment related indicators and overall industry activity softened
during the quarter. We will wait for election to tide over before reading
into investment signals. Capacity utilization has improved and
companies have deleveraged their balance-sheet in last three years
indicating both need and ability to undertake physical investment.
• However, even as bank lending to industrial sector is improving, signs
of stress in non- Bank segment needs to be watched. Liquidity crunch
in NBFCs and solvency challenges of certain non-bank financial
entities may dampen overall commercial credit growth.
• Infrastructure (production, bitumen, steel and cement) activities are
holding strong.
• March witnessed pick-up in goods exports and overall freight activity,
but would wait for couple of months to ascertain the sustainability.
• Services indicator depict mixed signals. While PMI services
moderated, survey portrays positive outlook. Services exports growth
have moderated. AUM growth of mutual fund has slowed down.
Growth is supported by relatively better inflow in equity oriented
schemes.
Consumption demand is weakening
Source: CMIE Economic Outlook, Capitalline, SBIMF Research
Domestic sales of two-wheelers and cars, which act as a good
gauge for rural and urban demand, have been moderating
Domestic air traffic growth has moderated recently; partly also
due to supply side shocks (cancelling of the flights).
FMCG Sales growth grew moderated to 6.2% y-o-y in
Q4FY19 vs. 12.5% y-o-y in Q3 FY19
Domestic production growth of both consumer durables
and non-durables have softened
7
15
19
44
17
710
3
14
19
9
2
8
0
5
10
15
20
25
30
35
40
45
50
FY0
5
FY0
6
FY0
7
FY0
8
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
BSE 500: Avg cost per Employee (% change)
Factors weighing on consumption demand
Source: CMIE Economic Outlook, Capitalline, SBIMF Research
Depressed farm prices: agri output (real GDP) is growing at 3.4%
but agri income (nominal agri GDP) moderated to sub ~2%
Even urban wage growth has softened
Rural wage growth has been depressed for long
• Other factors affecting the consumption demand:
o Moderation in NBFC loan disbursement (particularly
in the wholesale segment)
o GST impact on informal segment
o Sand mining ban in select states
o Weakness in real estate prices for long
o Weak labor participation in recent years
Risks skewed towards weak monsoon in 2019
Source: CMIE Economic Outlook, Skymet, IMD, SBIMF Research;
• Indian Meteorological Department (IMD), the government weather-forecasting agency, predicts 2019 S-W monsoon to be normal
(96% of the LPA). On the other hand, according to the Skymet, the private weather forecasting agency, 2019 monsoon is likely to
be ‘below normal’ to the tune of 93%. Skymet is relatively more concerned of El-Nino risk than the IMD and hence the difference.
• Both these agencies see the error margin in their forecasts at +/- 5%. Spatial and temporal distribution of monsoons will be
available in the second update in June.
• The IMD had been over-estimating the monsoon outcome in last five years. And this keeps the risk of the final monsoon outcome
being weaker than originally penciled. Even as IMD calls for a normal monsoon, the probabilities are more skewed on the weaker
side. Only 39% of probability is assigned to normal monsoon. There are 32% chances of monsoon being below normal and 17%
chance of deficiency in 2019 summer rains.
• Skymet is calling for 55% chances of below normal monsoon and 15% chances of drought in 2019
• The weakness in monsoon can adversely affect the summer crop cultivation and can be an added challenge to the weak farm
income and consequently rural consumption demand. In parallel, it may also lead to some rise in food prices, but given the ample
food stock of key grains, the price increase may be a bit gradual and later in the cycle.
IMD predicts ‘normal’ rainfall in its base case while Skymet
anticipates ‘below normal’ rainfall
Monsoon has been below the first predictions for the last
five years
Monsoon probability distribution for 2019
IMD Skymet Criteria
Excess 2% 0% Rainfall that is more than 110% of LPA
Above normal
10% 0% Rainfall that is between 105 to 110% of LPA
Normal 39% 30% Rainfall that is between 96 to 104% of LPA
Below normal
32% 55% Rainfall that is between 90 to 95% of LPA
Deficient 17% 15% Rainfall that is less than 90% of LPA
IMD first predictions vs actuals (% deviation)
Year First prediction Actual rainfall
2013 Normal (-2%) Normal (5%)
2014 Below Normal (-5%) Deficient (-13%)
2015 Below Normal (-7%) Deficient (-15%)
2016 Above Normal (+6%) Normal (-3%)
2017 Normal (-4%) Below Normal (-5%)
2018 Normal (-3%) Deficient (-10%)
2019 Normal (-4%)
Domestic industrial activity moderated in recent months
Source: CMIE Economic Outlook, SBIMF Research
Domestic industrial production has moderated primarily
due to softer manufacturing sector growth
Construction related indicators are holding healthy as
evidenced in cement production and steel consumption
Investment related indicators (such as capital goods
production and imports) showing signs of softness• The overall industrial activity has moderated in the recent
months.
• While the construction related indicators are holding healthy
as evidenced in cement production and steel consumption,
investment related indicators (such as capital goods
production and imports) showing signs of softness.
• We will wait for the election to get over before reading much
into the investment signals. The capacity utilization has
improved and companies have deleveraged their balance-
sheet in last three years indicating both the need and ability
to undertake physical investment.
PMI softened due to domestic factors; exports outlook positive
Source: CMIE Economic Outlook, Markiteconomics, SBIMF Research
• Manufacturing PMI has moderated to 51.8 in April vs. 52.6 in
March led by softness in new orders which is creating a domino
effect and restricting growth of output, employment, input buying
and business sentiment. The slowdown is reportedly curbed by the
elections and firms have adopted wait-and-see approach until
public policies become clearer post the elections.
• Amidst weakness in domestic demand, exports offer some
optimism. Respondents to PMI survey expect export growth to
provide support. In fact, recent export data suggests an
improvement in growth to 11% y-o-y in Mar vs. 3% y-o-y in Feb.
• PMI services fell to 51 in April vs. 52 in March due to weaker rise
in new business and output growth. However, the services sector
is optimistic about pick-up in activity post election and has ramped
up employment in April.
Manufacturing PMI moderated in April due to softness in
production but exports prospects have brightened recently
Services sector activity, too, moderated in April 2019
Export growth improved to 11% y-o-y in March 2019 vs.
3% y-o-y in Feb 2019;
Capacity utilization improving; bodes well for investment
Source: RBI, FICCI, SBIMF Research: *NB: Green indicates capacity utilization is higher than long term average
(LTA), yellow indicates similar to long term average (+/- 2 LTA) and red indicates lower than LTA
Capacity utilization improved to 75.9% by Q3 FY19 end; higher
than its long period average
FICCI survey suggests improved capacity utilization in
Auto, Capital goods, and Metals*
• There are signs of softness in investment related activity in the recent months which tests our expectation of pick-up in investment
activity.
• One should wait for election to get over to get a better clarity on the investment outlook. The government orders, as well as
private investors typically tend to be on sidelines just one or two quarters ahead of election.
• Some other key investment related indicators are encouraging. Capacity utilization (CU) has improved (75.9% in Q3 FY19, higher
than its LPA of 75% and highest since March 20012). As per the FICCI, capacity utilization in sectors like auto, capital goods and
metals have increased notably and could translate into capacity addition.
• The deleveraging exercise undertaken for last three years (FY16-FY18) has put the corporate balance-sheet in a relatively better
place to undertake capacity expansion. Now, it all hinges on improvement in the economic cycle.
FDI inflows can improve going ahead
Source: CMIE economic outlook, Various media reports, SBIMF Research
India has witnessed net FDI inflows of US$ 30 billion in FY19
(till Feb) vs. US$ 28 million during the same period last year
• India has witnessed net FDI inflows of US$ 30 billion during Apr-Feb 2019 which is marginally higher than US$ 28 billion
seen during the corresponding period last year. That said, it is still lower than what was seen during FY15-FY17.
• As per recent media reports, FDI inflows can improve going ahead. A couple of large-ticket deals have been announced
(Brookfield Asset Management, likely capital infusion of Arcelor Mittal in Essar Steel etc…) and can lead to higher FDI inflow
going ahead.
Bank industrial credit growth is picking up…
Source: RBI, SBIMF Research
Bank Industrial credit growth has started to pick-up, but
still lower than the growth in the personal loan segment
In FY19, 20% of incremental credit disbursement went to the
industrial sector vs. 3.2% in FY18
• Bank non-food credit improved to 13.3% in FY19 (10.2% in
FY18). On a positive note, bank credit to industry bottomed out
and accelerated to 6.9% by end FY19 (vs. 0.7% by end FY18
and -1.9% by end FY17, 5 year avg. of 2.9%). Incrementally,
20% of credit disbursed by banks went to industrial sector
(mainly to large enterprises). While this is much better than last
several year trends, credit growth to industry still remains well
behind banks’ overall (non-food) credit growth. Personal loans to
households still makes a lion’s share of banks’ incremental credit
disbursement (trend being observed since FY15).
• Credit growth remain particularly unfavorable for small and
medium enterprises (0.7% and 2.6%, respectively, by end FY19).
The situation for the SMEs gets further exacerbated by the stress
in the non-banking financial entities (NBFEs).
Within the industrial sector, credit disbursal to small and
medium enterprises extremely muted
…but credit growth from non-bank segment moderating
Source: CMIE Economic Outlook, CRISIL, SBIMF Research
Corporate bonds issuances have moderated
Debt oriented mutual fund schemes seeing growth moderation • Since the IL&FS default in Sep’18, Rs ~7 trillion of debt has
been downgraded by various rating agencies. Handful of them
have seen steep downgrades in a very short span of time. A part
of corporate India, particularly promoter entities with higher
leverage, is also facing the stress. These challenges are
showing nascent signs of risk-aversion amongst lenders across
financial market. Corporate bonds issuances have moderated.
AUM growth in the fixed income oriented mutual fund schemes
have slowed down sharply.
• Hence, while gradual withering away of NPA issues in banks
offers scope to see continued expansion in banks’ credit book,
challenges in non-bank segment needs to be addressed swiftly,
lest could translate into weaker credit disbursal from capital
market and overall reduced risk appetite of lending fraternity.
After being >1 since 2H FY16, debt weighted credit ratio
(upgrades/downgrades) fell to 0.89 in 2H FY19
Source: CMIE economic outlook, SBIMF Research,
Growth momentum unlikely to see any sharp recovery in FY20
Indian economic growth to hover around 7.0%
• India’s economic activity has moderated and may remain so in
1H 2019.
• In recent months, the negativity around India’s growth outlook
has stepped-up. It stems from
a) Signs of slowdown in global growth,
b) Strains in government’s finance and the rising clamour around
social and income support measures which inhibits
government’s ability to continue with the infrastructure
support,
c) Evidences of weaker sale in various consumption items (such
as auto sales, domestic air travels, FMCG, textiles and other
discretionary),
d) Weakening non-oil non gold imports which is closely linked to
domestic industrial/ investment activity and,
e) Challenges in the NBFCs which has affected the fund
availability in the wholesale loans and real estate segment.
• India’s growth may remain below potential in the near term, but
some pick-up is likely by the year-end helped by:
a) We expect investment activities to pick up post election.
b) Mainstream banks have stepped up to offset some of the
growth drag from the NBFCs.
c) The reforms, regulation and time correction in real estate
prices over last five years have now created a favourable
base for some pick-up in demand.
• As such, growth momentum is unlikely to see any sharp
recovery in FY20. We expect annual FY20 GDP growth rate
to hover around 7.0%. Economic activity post election needs
to be closely watched.
India to comply with US sanctions on Iran
Source: CMIE Economic Outlook, Various media reports, SBIMF Research;
• In May 2018, US withdrew from 2015 nuclear deal between
Iran and brought back the sanctions. Accordingly, all countries
had been asked to cut oil imports from Iran to nil by Nov’14.
However, six month waiver (till 2 May 2019) was granted to
eight countries (China, India, Japan, South Korea, Taiwan,
Turkey, Italy and Greece) on the condition to reduce the oil
purchases from Iran. India agreed to restrict the monthly
purchase to 1.25 million tonnes to get the waiver.
• India imported ~2.6 million tonnes of crude and products per
month between Apr-Oct’18, which was brought down to an
average of 1.26 million tonnes during Nov’18 to Mar’19.
• India is the second largest purchaser of Iranian oil after China
and imports ~9% of its annual oil import need from the nation.
• While China has cited to not abide by US restriction, Indian
government has indicated to discontinue its oil purchase from
Iran and garner supplies from alternate sources.
• During Nov’18-Mar’19, India imported only 5.3% of its oil import
need from Iran vs.11% during Apr-Oct’18. To make for this
shortfall, oil imports increased from countries such as Kuwait,
Mexico, UAE and Saudi Arabia. The imports from these
alternate nations is likely to increase further in FY20.
• Few of the key oil companies have already signed up for
optional volumes (over and above the term contracts) from a
number of suppliers from the above mentioned alternate
countries. This can be exercised to make up for the shortfall
from Iran.
India’s import from Iran has been cut down by nearly 50%
in the last six months to comply with US import criteria
Lower imports from Iran has been substituted by higher
imports from Saudi Arabia, UAE, Mexico and Kuwait
Source: Capitaline ,SBIMF Research,
NIFTY: 4Q FY19 Earnings Interim Review
• 20 companies in NIFTY 50 and 33 companies in BSE
100 reported their results for Q4 FY19.
• The interim study indicates some moderation in the top-
line. Sales growth moderated to 13.6% for BSE 100
and 12.6% for NIFTY vs. +20% growth for the
preceding three quarters in both the indexes.
• EBITDA margin and PAT has improved marginally in
Q4 FY19 for the results declared thus far.
4Q FY19 sales growth moderated to 13%...
Profit growth is weak but in line with previous quarter
…but EBITDA margin improved to 22%
Source: Capitaline, SBIFM Research;
Trend in earnings revision remains that of downgrades
Earnings downgrade continued for eighth straight year
NIFTY 50 is expected to post an EPS growth of ~7% in
FY19 but pick-up to ~30% in FY20
• The interim review of the results point towards:
o Weakness in rural demand going ahead, in line with
the high frequency economic data
o Weakness in auto sales for at least 1-2 next
quarters
o Rising cost of funds for NBFCs. Demand for auto
loan has slowed while home loan demand stays
healthy
o Weakness in the refining and petrochemical margin
o Improvement top-line for cement companies helped
by the volume growth, hence leading to improved
capacity utilization. The price hike taken in April will
help to sustain the improvement in top-line for
coming quarters.
o Healthy top-line growth in IT services but
challenges ahead
o Improvement in asset quality for corporate banks
and hence improvement in their profitability
• The trend in earnings revision remains that of
downgrades. NIFTY is expected to post an EPS growth
of ~7% in FY19 but pick-up to ~30% in FY20.
Liquidity: FIIs invested, offsetting the DIIs outflow in April
FIIs invested for the third consecutive month in April 2019
Source: Bloomberg, SBIMF Research
Domestic institutional investors were net sellers owing to
the selling by the mutual fund
FII equity inflow in India has been the highest among key EMs
Source: CEIC, Bloomberg, SBIMF Research
FII inflows in the equity market India’s is amongst the top key emerging market
economies in terms of FII inflows
2018 2019 (till Apr)
India -4,557 9,754
South Korea -5,676 6,787
Taiwan -12,182 5,989
Indonesia -3,656 4,584
Philippines -1,080 817
Brazil -3,408 98
Sri Lanka -48 -24
Thailand -8,913 -301
South Africa -3,954 -2,533
Mutual fund equity inflows have moderated
Source: CMIE Economic Outlook, MF Dex, SBIMF Research
Mutual Fund AUM growth moderated to 6.6% in April 2019 Equity AUM growth weakened to 2%
Monthly SIP inflow hovers around Rs. 80-82 billion per
month
5.1 4.26.1 5.9 5.9
7.08.3
10.812.3
17.5
21.423.8 24.8
-20
-10
0
10
20
30
40
50
60
0
5
10
15
20
25
30
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
Apr-
19
Mutual fund AUM (Rs. Trillion) % growth in mutual fund AUM- RHS
1.81.1
2.0 2.0 1.8 1.7 2.0
3.54.0
5.9
8.2
10.3
8.93
1.8
-40
-20
0
20
40
60
80
100
0
2
4
6
8
10
12
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
Apr
-19
Equity AUM (ex arbitrage)-Rs. Trillion % growth in equity AUM- RHS
-50
0
50
100
150
200
250
300
350
Jan
-15
Ap
r-1
5
Jul-
15
Oct
-15
Jan
-16
Ap
r-1
6
Jul-
16
Oct
-16
Jan
-17
Ap
r-1
7
Jul-
17
Oct
-17
Jan
-18
Ap
r-1
8
Jul-
18
Oct
-18
Jan
-19
Ap
r-1
9
Mutual Fund: equity related inflows (Equity Fund+ELSS+ETF)
Rs. Billion
Equity oriented mutual funds witnessed an outflow in April
2019 (first monthly outflow in last five years)
Valuations across the capitalization curve
Valuations across the capitalization curve
Source: Bloomberg, SBIMF Research,
Nifty is trading at ~18 times forward earnings NIFTY 12m Fwd. P/E is trading at 35% premium to 10 year
G-sec (vs. the long term average premium of 16%)
Source: Bloomberg, SBIMF Research,
MSCI India valuation corrected vis-à-vis MSCI EM
Valuation of MSCI India saw sharp corrections vis-à-vis MSCI
EM since January 2019; getting closer to the long-term average
The RoE differentials is improving at the margin
Equity Market outlook
Nifty is trading at ~18 times forward earnings
Source: Bloomberg, SBIMF Research
• NIFTY rose 1.1% in April and Rupee gained 0.6% against the US dollar
helped by strong FII inflows during the month. FIIs invested US$ 3.03
billion in equity during the month offsetting the US$ 0.6 billion of outflows
by the domestic institutional investors.
• However, these gains have been completely undone in the first fort-night of
May largely due to weak participation by the domestic mutual funds.
• The recent foreign inflows (during February to April) are more a reflection
of India catching up with the other emerging markets. The global narratives
around emerging markets had begun to change favorably since the start of
the year, helped by increased dovish bias by the US Fed.
• While the market sentiments have improved, economic activity has
moderated and may remain so in 1H 2019. Consumption indicators have
softened sharply while investment appears to be on the side-lines just
ahead of election. India’s growth may remain below potential in the near
term and require significant easing in the domestic financial conditions.
• 20 companies in NIFTY 50 and 33 companies in BSE 100 reported their
results for Q4 FY19. The interim study indicates some moderation in the
top-line. EBITDA margin and PAT has improved marginally in Q4 FY19 for
the results declared thus far. The trend in earnings revision remains that of
downgrades. NIFTY is expected to post an EPS growth of ~7% in FY19
but pick-up to ~30% in FY20.
• In the near-term, election related news flow will keep the markets volatile
and a clear trend will only emerge post the election.
Fixed Income Market
Bond yields in the key developed markets
Source: Bloomberg, SBIMF Research
• 10-year bond yields across the key developed markets (barring Spain) inched higher during the month of April as global
growth concerns were marginally assuaged by better than expected growth prints. While the m-o-m movement saw a
marginal up-tick, the year-to-date movement is still that of fall in 10-year bond yields across the developed markets.
• US 10-year bond yields inched up by 10 bps in April 2019 on account of better than expected Q1 2019 GDP growth and labor
market data. However, the bond yield once again softened in the first week of May post the US indication to increase the
tariffs on US$ 200 billion worth of Chinese goods thus re-kindling the strength of future demand concerns in US.
• 10-year bond yields in UK increased by 19 bps led by relatively hawkish BoE. BoE kept the policy rate unchanged at 0.75%
but signaled for a rate hike over the next three years with evolution of favorable growth & inflation dynamics and resolution of
Brexit impasse.
• On the other hand, 10-year bond yields in Spain eased by 10 bps during April led by some stabilization on the political front.
10 Year Gsec Yield (% mth end)
2015 end 2016 end 2017 end 2018 end Feb-19 Mar-19 Apr-19m-o-m
change (in bps)
3m Change (in
bps)
Change in 2019 (in
bps)
Developed market
US 2.27 2.44 2.41 2.68 2.72 2.41 2.50 10 21 -18
Germany 0.63 0.21 0.43 0.24 0.18 -0.07 0.01 8 17 -23
Italy 1.60 1.82 2.02 2.74 2.75 2.49 2.56 7 20 -19
Japan 0.27 0.05 0.05 0.00 -0.02 -0.08 -0.04 4 2 -4
Spain 1.77 1.38 1.57 1.42 1.17 1.10 1.00 -10 17 -42
Switzerland -0.06 -0.19 -0.15 -0.25 -0.24 -0.38 -0.30 9 6 -5
UK 1.96 1.24 1.19 1.28 1.30 1.00 1.19 19 12 -9
Bond yields in the key emerging markets
Source: Bloomberg, SBIMF Research
• Barring Russia and South Africa, 10-year bond yields in the key emerging markets inched higher during the month of April, in
tandem with the advance economies.
• China 10-year bond yield increased by 33 bps in April led by better-than-expected economic data (like industrial output and
retail sales). However, on the back of increase in the US-China trade spat, Chinese 10-year bond yields eased to 3.36% (as
on 6th May).
• Turkish 10-year bond yields increased by 203 bps during the month due to a sharp fall in the Lira (6.6%) in April.
• On the other hand, bond yields in Russia eased by 25 bps in April as the Central Bank of Russia turned dovish in its latest
policy meet and indicated to cut the rates as early as Q2 2019 vs. the market expectations of Q4 2019.
Commodity market snapshot
Source: Bloomberg, SBIMF Research
Rubber and Palm oil prices have increased sharply while
prices of wheat and coffee have primarily come down
Most of the energy prices rose during the CYTD (till April
2019) barring Coal, Uranium and Natural Gas.
Except Lead and Aluminum most of the base metal prices
have increased in 2019 (till Apr)Prices of Platinum and Palladium have increased while
Silver has come down. Gold prices are relatively stable
India Rates Snapshot: April 2019
Source: Bloomberg, PPAC, RBI, CEIC, SBIMF Research; NB: **Crude oil price is average $/barrel for the month, rest of the
data are % month end; *Corporate bond rate is for AAA rated bonds ,*** Refers to PSU Banks’ CD rate; # INR and Oil price
changes are % change; @ March end MIBOR has been taken for 28th March, just for a day MIBOR rose to 8.8% on 29th March
• During the month of April, Indian 10-year G-Sec yields inched higher by 6 bps despite of 25 bps reduction in the policy rate in
the latest RBI monetary policy meet. The yields increased probably on account of rise in the crude oil prices and net FII selling
by the foreign investors in the debt market. FIIs pulled out US$ 738 million in April and US$ 657 million in May (till 10th) from
the debt market.
• Money market rates, too, inched higher during the month due to tightness in liquidity.
• Crude oil prices increased by 6% during the month. YTD, crude price has risen by 23%.
• Rupee depreciated by 0.6% in April. YTD, rupee has appreciated marginally by 0.3%.
Dec-17 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19m-o-m change
(in bps)Change in 2019
(bps)
3M T-Bill 6.20 6.65 6.56 6.40 6.31 6.44 12 -21
1 Yr T-Bill 6.40 6.94 6.78 6.55 6.39 6.51 12 -42
10 year GSec 7.33 7.37 7.28 7.41 7.35 7.41 6 4
Overnight MIBOR Rate 6.20 6.73 6.50 6.35 6.28 6.20 -8 -53
Weighted Average Call money rate 5.99 6.57 6.36 6.49 6.50 6.39 -14 -28
3M CD*** 6.38 7.05 7.10 7.08 7.25 7.25 0 20
12M CD*** 6.75 8.08 7.93 7.73 7.48 7.73 25 -35
3 Yr Corp Bond* 7.66 8.50 8.22 8.18 7.97 7.98 2 -52
5 Yr Corp Bond* 7.68 8.43 8.32 8.45 8.10 8.30 20 -13
10 Yr Corp Bond* 7.90 8.51 8.56 8.73 8.52 8.54 2 2
1 Yr IRS 6.44 6.56 6.49 6.24 5.92 6.12 20 -44
5 Yr IRS 6.75 6.62 6.60 6.31 5.94 6.35 41 -27
INR/USD 63.9 69.8 71.1 70.7 69.1 69.6 -0.6# 0.3#
Crude Oil Indian Basket** 62.3 57.8 59.3 64.5 66.7 71.0 6# 23#
Global signs of monetary easing
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.
The direction of the global policy rate appears to be tilting towards hold or easing
Policy rate (in %), end period 2015 2016 2017 2018 2019 (till May 9th)
US 0.50 0.75 1.50 2.50 2.50Canada 0.50 0.50 1.00 1.75 1.75China 4.35 4.35 4.35 4.35 4.35Japan 0.10 0.10 0.10 0.10 0.10India 6.75 6.25 6.00 6.50 6.00Australia 2.00 1.50 1.50 1.50 1.50South Korea 1.50 1.25 1.50 1.75 1.75Indonesia 4.75 4.25 6.00 6.00Taiwan 1.625 1.375 1.375 1.375 1.375Thailand 1.50 1.50 1.50 1.75 1.75Malaysia 3.25 3.00 3.00 3.25 3.00Singapore 0.08 0.08 0.08 0.08 0.08Hong Kong 0.75 1.00 1.75 2.75 2.75Phillippines 4.00 3.00 3.00 4.75 4.50New Zealand 2.50 1.75 1.75 1.75 1.50Eurozone 0.05 0.00 0.00 0.00 0.00UK 0.50 0.25 0.50 0.75 0.75Switzerland -0.75 -0.75 -0.75 -0.75 -0.75Sweden -0.35 -0.50 -0.50 -0.25 -0.50Norway 0.75 0.50 0.50 0.50 0.50Russia 11.00 10.00 7.75 7.75 7.75Turkey 7.50 8.00 8.00 24.00 24.00Saudi Arabia 2.00 2.00 2.00 3.00 3.00Poland 1.50 1.50 1.50 1.50 1.50South Africa 6.25 7.00 6.75 6.75 6.75Brazil 14.25 13.75 7.00 6.50 6.50Mexico 3.25 5.75 7.25 8.25 8.25Argentina 21.00 26.00 26.75 50.00 67.00Colombia 5.75 7.50 4.75 4.25 4.25Chile 3.50 3.50 2.50 2.75 3.00
Source: CMIE economic outlook, SBIMF Research,
Indian growth-inflation dynamics favor monetary easing by RBI
CPI inflation likely to stay range-bound through out FY20GDP growth has moderated to 6.6% and is likely to remain sub-
7% for the next 1-2 quarters
• Indian growth-inflation dynamics are favorable for monetary accommodation. GDP growth has moderated to 6.6% in Q3 FY19
and is likely to remain sub- 7% for the next 1-2 quarters. CPI inflation likely to stay within RBI’s comfort zone through out most
parts of 2019.
• The risks to inflation comes from the increased risk of weak monsoon which has not been penciled in RBI’s and our inflation
expectation as yet. The trends in monsoon as well as global crude price movement will be closely watched. Further, while we
have penciled the mean-reversion in food prices (particularly vegetables, oilseeds, pulses and cereals), the quantum of the rise
cannot be predicted with certainty.
Source: RBI, CMIE Economic Outlook, SBIMF Research
Balance of Payments is expected to move back to surplus in
Q4 FY19 and FY20 after 3 quarters of deficit helped by…
FDI inflows are hovering around US$ 30-35 billion since FY15.
Recent deals pipeline showing optimism in FDI outlook
…improved FII sentiments; RBI’s measure (via VRR & FX
swap) has helped to attract other capital inflow
External account dynamics have stabilized
Improved capital inflow helped RBI to recoup the FX reserves.
India’s FX reserves stands at US$ 419 billion as of April end
Source: RBI, CMIE Economic Outlook, SBIMF Research
CAD is expected to see an improvement in Q4 FY19. We now
expect FY19 CAD at 2.0-2.1% of GDP (vs. 2.5-2.6% initially)…
…as both lower oil bill and reduced Non-Oil Non Gold
imports (helped by higher duties) will improve trade balance
Current Account balance is expected to see an improvement
• Balance of Payments is expected to move back to surplus in Q4 FY19 and FY20 after 3 quarters of deficit. We have revised our
Q4 BoP numbers positively. The narratives that we expected to pan out in FY20 has kicked in earlier.
• Capital inflows into India have improved since February end helped by shift of FII investment in the emerging markets and RBI’s
measure to attract capital inflows.
• We have also lowered our current account deficit numbers as non-oil non gold imports in January and February has been lower
than expected. It has been due to dual impact of higher import duties imposed in later half of 2018 (import substitution measures
by the government) and moderation in select sectors (such as auto).
• Our FY20 assumptions has Current Account Deficit at US$ 65 billion, 1.9% of GDP, Capital account US$ 85 billion (2.2% of GDP),
Balance of Payment Surplus at US$ 20 billion (0.6% of GDP). As long as Crude prices stays contained (by which we mean less
than US$ 75 per barrel) and any sharp risk aversion against emerging markets assets does not develop, rupee is likely to remain
range bound and gyrate around 69-72 against US$.
Source: Bloomberg, Various media reports, SBIMF Research;
Brent prices increased recently and hovering around US$ 70/bbl.
Crude prices have risen in recent months; not worrisome as yet
• Crude oil prices has risen in the recent months and currently hovers around US$ 70/ barrel. Complex geo-political dynamics
makes it difficult to predict the oil trajectory.
• US announced an end to waivers given to eight countries (China, India, Japan, South Korea, Taiwan, Turkey, Italy and Greece)
with regards to their oil import from Iran. This led to some speculative rise in the oil prices even as the US is nudging South
Arabia and other key OPEC countries to ramp-up their oil supplies.
• We have penciled crude prices to be around US$ 75/bbl. in FY20. Even with this assumption, we expect Balance of Payment
to post a surplus of US$ 20 billion (0.6% of GDP). For FY20, we see only a marginal depreciation pressure on rupee.
Rupee has been broadly stable Year-to-Date
Source: Bloomberg, CMIE Economic Outlook, SBIMF Research
Year-to-date, rupee has been broadly flat and the
performance vs. other EM currency is in the middle
Rupee depreciated by 0.6% in April and hovered around
~69-70/US$ levels during the month
Rupee is fairly valued on trade weighted REER basis
Banking system liquidity is tight; expected to ease by June-July
Source: RBI, CMIE Economic Outlook, SBIMF Research;
Inter-bank liquidity has been in deficit for last 9 months now Tight liquidity led call money rate to hover above the Repo
rate for most days in April
Rs 250 billion of OMO purchases scheduled in May (Rs 125 bn
done). We expect Rs ~1.5 trillion of OMO purchases in FY20. • Banking system liquidity tightened further in April 2019
(Avg deficit of Rs 723 billion vs. Rs 502 billion in March
2019).
• Part of the liquidity deficit is frictional owing to central
government spending less than its revenue collection. Our
estimate suggest that centre is sitting with cash balance of
~Rs 850 billion by April end.
• We expect banking system liquidity to ease and turn
neutral by the end of June-July 2019 owing to the
seasonal factors (relatively lower CIC leakage during April-
June), RBI’s continued liquidity support, favourable foreign
capital inflows and government spending full throttle in the
coming months and utilizing its cash balance.
Source: Bloomberg, RBI, SBIMF Research
Second round of FX swap auction witnessed allotment to
handful players (5 vs. 89 in the first auction).
3 year MIFOR rate got pushed up to 6.7% post the auction
(vs. 6.2% prior to the auction and 6.1% as of March end)
• RBI had introduced a new Rupee auction swap facility, with
3-year tenor as a tool to inject rupee liquidity in March 2019.
• The second round of RBI FX swap auction was conducted on
23rd April 2019. A handful of players (5) were allotted the
liquidity in the auction vs. 89 in the previous auction.
• It saw the premium getting pushed up to 838 paise as
opposed to 26th March premium of 776 paisa owing to
aggressive bidding in the auction.
• The 3 year MIFOR rate got pushed up to 6.7% post the
auction (vs. 6.2% prior to the auction and 6.1% as of March
end). The 1 year FX Fwd. premium stands at 4.2% as of April
end vs. 3.8% by Mar end.
FX forward premium shot higher post 2nd round of FX swap
1 year FX forward premium stands at 4.2% as of April end vs.
3.8% by March end
Details of USD/INR Buy/sell Swap auctionSecond auction
(23rd April 2019)
First auction
(26th March 2019)
No. of offers received 255 240
Total amount offered (in USD billion) 19 16
No. of offers accepted 5 89
Total amount accepted by RBI (in USD billion) 5 5
Cut-off premium (in paisa) 838 776
Weighted Average Premium of accepted offers (in paisa) 844 792
Rupee Liquidity injected in the first leg (Rs billion) 349 346
Policy Rate Outlook: We expect further rate cut
Source: RBI, SBIFM Research
RBI cut the policy rate by 25bps to 6.00%
• The RBI cut the policy rate by 25bps to 6.00% along the expected lines, even
as it retained its neutral stance. 4 members voted in the favor of rate cut and 2
members voted to keep the rate unchanged. 5 members voted to retain the
neutral stance while 1 member voted to shift to an accommodative stance.
• The rate cut came on the back of increased comfort on inflation stability and
rising growth concerns. The revised inflation expectation stands at 2.4% in Q4
FY19 (2.8% earlier), 2.9-3.0% in 1HFY20 (3.2-3.4% earlier) and 3.5-3.8% in
2HFY20, with risks broadly balanced (same as earlier). FY20 GDP growth
estimation has been lowered to 7.2% (7.4% earlier), 6.8-7.1% in 1HFY20
(7.2-7.4% earlier) and 7.3-7.4% in 2HFY20, with risks evenly balanced (same
as earlier). Comfort on inflation is led by moderation in household inflation
expectations, benign food inflation and recent price fall in fuel groups. The RBI
has mentioned that “the output gap remains negative and the domestic
economy is facing headwinds, especially on the global front. The need is to
strengthen domestic growth impulses by spurring private investment”.
• We expect the RBI to deliver another 25bp cut (either in June or August).
• More than the rate cut, the focus is likely to ensure a better transmission of
the 50bps rate cut delivered thus far and in that regard we expect RBI to
remain supportive of liquidity. RBI’s liquidity support coupled with positive
foreign capital inflow and the possibility of reduced currency leakage post-
election should ease the banking system liquidity which has been in deficit for
two quarters now. We expect the banking system liquidity to turn neutral by
end Q1 FY20 which will be instrumental in enabling the transmission.
• To sum, we believe that Indian macro environment will both enable and
necessitate monetary easing (in the form of rate cuts and liquidity
injection) by the RBI.
Valuations are attractive
Source: Bloomberg, SBIMF Research
CPI Inflation adjusted real rate in India at 4.6% G-sec is trading at 110bps spread to the Repo vs. LPA of 84bps
Valuations vs. US yield are attractive
Source: RBI, Bloomberg, SBIMF Research,
Quasi-sovereign bonds offer better spreads over G-sec
Spreads between 10-year SDLs and G-Sec are high when
compared to its long term average
Spreads of 10 year Corporate bonds vis-à-vis G-sec is at 113
bps vs its long term average of 111 bps
• The demand supply dynamics and valuation comfort are relatively better 10 year AAA corporate bonds and SDL as compared to
the G-sec
• The spreads of 10 year Corp bonds and SDL vis-à-vis G-sec has closed down considerably in last two months but they still
command some premium compared to their 5 and 10 year average.
Demand-supply dynamics for government bonds are deteriorating
Source: RBI, IRDA, CMIE Economic Outlook, SBIMF Research
• In FY19, RBI’s OMO purchase came as a very strong demand support absorbing nearly one third of the Government supply
or say 70% of G-sec supply (as RBI only buys G-sec not SDL). This helped off-set the weak bank demand. Banks (SCBs)
had purchased only Rs. 400 billion up until Jan 2019 and can at best purchase another 600 billion in the last two months.
This is sharply lower than last 5 year trend of Rs. 2-3 trillion. Banks’ SLR holdings have fallen from the peak of 28.5% in July
2019 to 25.8% by the March 2019 end.
• In general, since FY14, we find that insurance and pension fund together have become a relatively larger player in the
Government bond market, absorbing 40-60% of the total supply. Increasing penetration of these long-term financial products
are helping the expansion of their AUM base and given the regulatory backdrop, they mandatorily invest in government
securities. FY19 supply (net of redemption) was also Rs. 300 billion lesser than last two years.
• For FY20, total net supply is likely to go up by Rs. 800 billion with risks tilted to upside. Coming to the demand side in FY20,
OMO purchases are likely to continue in FY20 (expectation of ~Rs. 1.5 trillion). However, banks’ buying appetite is at risk
given the tightness in C/D ratio, regulatory relaxation in SLR holdings, and disbursement constraints in NBFC.
Government Securities Demand Supply Analysis
in Rs billion FY13 FY14 FY15 FY16 FY17 FY18 FY19 E FY20E
Demand Sources
1. Banks 761 3,039 1,725 2,344 2,198 3,709 1,000 1,200
2. Insurance Companies 1,822 1,896 2,412 2,451 2,679 2,932 2,500 3,200
3. Provident/Pension/ Gratuity 2,232 446 900 160 1,360 1,267 1,300 1,300
4. RBI's Net OMO 2,073 436 -364 499 1,092 -924 2,985 1,500
5. Others 1,265 445 1,886 1,852 1,035 1,268 619 1,000
A. TOTAL DEMAND 8,153 6,263 6,559 7,306 8,365 8,253 8,404 8,200
Supply Sources
Central Govt Sec (net of redemptions) 6,607 4,610 4,427 3,747 3,785 4,858 4,227 4,731
State Govt Securities (net of redemptions) 1,545 1,649 2,136 3,559 4,579 3,395 3,900 4,100
B. TOTAL SUPPLY 8,153 6,258 6,563 7,306 8,364 8,253 8,127 8,831
Source: RBI, SBIMF Research;
Credit growth picked up in 2018-19 and outpaced the deposit
growthC/D ratio is tight and stands at high level of 77x
Banks reduced SLR holding in FY19 to meet credit demand. If
CD ratio remains tight; SLR can fall further to 24%
Tight CD ratio may limit banks’ demand for SLR securities
• Bank deposit and credit growth is improving since FY19 but
credit growth (14.2% y-o-y) has been higher than deposit
growth (10.6% y-o-y), leading to tight C/D ratio.
Consequently, banks are running down on their SLR holding.
• Bank peaked out the SLR holding at in July 2018 (28.5%)
and then fell to 25.8% by FY19 end. The regulatory SLR
need would require SLR to fall by 1% in FY20 (spread over
four quarters). Moreover, additional 2% carve out from the
mandatory SLR for LCR maintenance will lead to a parallel
reduction in the banks’ need to hold government securities.
• If C/D ratio remains tight, banks’ SLR can fall further to 24%
by FY20 end. This year possibility of bank’s incremental
investment could by Rs ~1.2 trillion vs. Rs ~600 billion in
FY19 and an average of Rs 3 trillion during FY14-FY18.
Source: CMIE economic outlook, pib.nic.in, SBIMF Research;
April 2019 GST collections at Rs 1.14 trillion (highest since
the commencement) vs. Rs 1.07 trillion in March 2019…
… April collection improved by 10.1% over the year, but still
below the asking growth rate of 16.2%
April GST collection highest; yet below the asking rate
• April 2019 GST collection was at Rs 1.14 trillion (highest since the commencement) vs. Rs 1.07 trillion in March 2019. This
means, April GST collections grew by 10.1% y-o-y which is lower than the required growth of 16.2% in FY20.
• FY20 aggregate collection is budgeted at Rs. 13.7 trillion and warrants 16.2% growth in GST revenues.
• While moderating economic activity brings some risk to collection buoyancy, it is achievable if the government increases
compliance.
• It has become absolutely pertinent for the government to increase the compliance on GST
Source: CMIE economic outlook, indiabudget.gov.in, SBIMF Research;
Massive surge in the supply of quasi sovereign bond in
last 5 years…
Weakness in tax revenue leads to risk of higher bond supply
• The weakness in tax revenue along with FRBM compulsion to consolidate the fiscal deficit is leading the government to utilize
various quasi-sovereign entities to fund its expenditure needs
• In the last five years, even as the supply of G-sec and SDL has risen weakly, bonds issued by PSUs under extra-budgetary
resources has jumped by 3.1x.
• This coupled with falling financial savings puts pressure on the yields
• The government will have to work aggressively towards improving the revenue buoyancy, and particularly the tax revenue
buoyancy.
…coupled with falling financial savings puts pressure on
the yields
Debt Market Outlook
Source: Bloomberg, SBIFM Research
Valuations look attractive at G-sec vs. Repo rate
• Indian 10-year G-Sec yields inched higher by 6 bps despite 25 bps
reduction in the policy rate in April as crude oil prices rose and FIIs
were the net sellers in the debt market. Money market rates inched up
too, on account of tightness in liquidity.
• The stress in the fiscal situation and accompanying high supply (of G-
sec and other related government bonds) has created demand-supply
concern and impedes the transmission of policy rate cuts. The tight C-D
ratio of the banks limit their ability to invest in government securities.
OMO purchases in FY20 (Rs. 1.5 trillion) can be lower than ~Rs. 3.0
trillion in FY19 (owing to improved foreign capital inflow).
• We believe that the strength of other fundamentals factors will create
the demand from other channels and somewhat offset the reduced RBI
demand.
• Global narratives favor easing monetary policy. India's external
finances have improved. Capital inflows have risen and are likely to
push the balance of payments back into surplus (after three quarters of
deficit). That said, weak export competitiveness keeps the country
vulnerable to oil price moves or an uptick in domestic growth. Sudden
reversals or a halt in capital flows are all too common. But for now, the
sentiments are positive.
• The domestic demand supply dynamics favor monetary easing and
inter-bank liquidity is likely to turn neutral by end Q1 FY20.
• To sum, we see gains from staying long in bond market. Particularly, we
favor the SDLs and AAA corporates over the G-sec. That said, some
volatility around the election result is likely to be seen.
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.
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