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Fund Manager Commentary

Read the latest market analysis and commentary on the Equity & Debt market from our Investment Desk as they share their views on market trends, market outlook and how to capitalize on investment opportunities.

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Fixed Income Market Update: June 2018

During the month, rates rose corporate bonds and gilts while short term money market yields fell. The main reasons were continued rise in crude oil prices, FII outflows from debt market, rupee depreciation, increase in core CPI, RBI rate hike and CMB auctions. Poor market sentiment also continued to impact yields. An OMO purchase announcement of Rs10,000 helped to cool yields somewhat.

• The ten year gilt benchmark closed the month at 7.90%, 8 bps higher from previous month. The ten year AAA Corporate bond benchmark closed at 8.73%, 20 bps higher than previous month. The five year AAA corporate bond benchmark closed at 8.77%, 21 bps higher as compared to previous month. Ten year SDL spreads rose to be in a range of 50-55 bps to the ten year gilt benchmark.

• 1 year CD rates closed at 8.06%, similar levels as previous month. 1 year T bill yield closed 20 bps higher at 7.09%. 3 month CD rates closed at 6.92 % (80 bps lower).

• Brent Crude oil prices further rose during the month to USD 78.6 per barrel. INR also depreciated during the month to Rs 68.47 as compared to 67.41 in previous month. For the month of June, FPIs were net sellers in the debt market to the tune of Rs 11,421 cr. India’s May trade deficit was higher at USD 14.62 bn as compared to USD 13.72 bn in previous month.

• The ten year benchmark US treasury yield remained at similar levels at 2.86%.

• May WPI data release came at 4.43%. CPI for May came at 4.87% compared to 4.58% in previous month.

• April Industrial production (IIP) growth came at 4.9% compared to 4.6% for previous month.

• For the month banks net lent on an average Rs 22118 Cr at various RBI liquidity facilities put together reflecting surplus liquidity conditions.

• RBI announced a cash management bill auction worth Rs 25000 cr presumably to mope up some short term cash for the government and suck out liquidity. In total Rs 45,000 cr worth of CMBs is outstanding.

• MSP for Kharif crops were announced in first week of July with a median increase of 25% vs. 5.7% in FY18 (and five-year avg. 3.5%). The MSPs level has been recalibrated to at least 1.5 times cost of production.

• Progress of Monsoon: So far, Till June 27, cumulative rainfall was 10.5% below normal. On a regional cumulative basis, southern India has seen a favorable rainfall till now while the rest of India, especially, east and north India receiving deficient rainfall.

Fixed income market outlook:

• Near term macro risks to debt market remain with CPI inflation expected to come higher, FPIs may continue with sales in debt market given risk off sentiment and geopolitical concerns and weakness in USDINR. We expect gilt and corporate bond yields to remain in current range with an upward bias.

• Short Term money market rates are expected to remain benign with neutral to positive liquidty in banking system.

Equity Markets Round Up:

  • June was an eventful month as there was news flow on crude oil supply and prices, US Fed raising rates, further ratcheting up of trade tensions between the US other countries, particularly China, weak FII flows and weakening of the Rupee.  There were outflows from EMs as a category (net outflows of USD 3.8 Billion) in June from non-resident investors. The cumulative capital flows (including both equity and debt) in EMs year to date (January to June) have turned negative. Incidentally, inflows into US equity and bond funds have risen (US equity funds have gained about USD 40 Billion since April). (IIF data).
  • Indian equity markets did better than MSCI EM during the month. MSCI India (USD) was down 1.3% during the month as against a fall of 4.6% in MSCI EM (USD) index. Within sectoral moves, the pharma sector stood out as it was the only major sector to show positive performance. This was driven by sector rotation as investors were running underweight positions here, a weaker Rupee and news of approvals for product launches from the US FDA or completion of inspection at a few large companies.
  • In macroeconomic data, the CPI for May came in at 4.9% yoy, which was the consensus estimate. However, the core inflation (ex-food and beverages and fuel) rose 6.3% yoy. The core inflation momentum remains strong (it was 6.1% yoy in April, source: Nomura). Further, the government announced the MSPs for the kharif crops in the first week of July. According to Nomura, the weighted average in MSPs is about 15%. Depending on how successful the public procurement program is, it can lead to inflation rising by 50-90 bps according to economists’ estimates.
  • On banking, the committee which was appointed by the government to look into the creation of a ‘bad bank’ suggested graded approaches for SMEs, midsized companies and for large corporates (where banks’ exposure is greater than Rs. 500 crores). The committee has suggested an AMC to manage the assets. However, capital remains a constraint for most PSU banks and as such, private sector banks and NBFCs should continue to grow.

Equity Market Outlook

  • There are conflicting data points emerging on the economy. Anecdotally, consumer demand especially in rural areas remains strong. This should further get a fillip from higher MSPs and decent monsoon rains. However, tighter financial conditions (higher rates, limited lending from PSU banks esp. those under PCA mechanism) and rising input costs for energy and commodities would be negative influences. Incidentally, fuel demand growth (petrol, diesel) in May was about 3% overall. Diesel demand growth was flat, which is something to watch for. Given the macro parameters and rising risk aversion globally, we expect markets to move sideways with substantial volatility.
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