Market Update
Macro Economic Review
India’s broad macros have been largely stable for a relatively long period from 2015 until recently. However, there has been some deterioration in the macro data mainly in the external sector. The rise in the oil prices has started to increase the import bill, and that has widened the trade deficit, affecting the current account.
The current account deficit widened to US$15.8 bn compared to US$13 bn previous month. The headline CPI inflation for Aug’18 was 3.69% compared to 4.17% of the previous month. The drop in the headline inflation was primarily led by the drop in food prices inflation. While there has been some pick up in the energy price inflation but the drop in food price inflation was large enough to bring down the overall inflation. As per the recent monetary policy review, RBI has also brought down the inflation forecast over the next 6 months by 30bps to 3.9-4.50% from 4.80%. Similarly, there was some moderation in the WPI for Aug’18 from 5.09% to 4.53%.
The IIP data for July’18 witnessed some moderation from 7.0% to 6.6%. Output growth eased for both mining (3.7 percent vs 6.6 percent in June) and electricity (6.7 percent vs 8.5 percent), while manufacturing production rose at a faster pace (7 percent vs 6.7 percent).
August trade deficit contracted marginally to $17.39 bn vs $18.02 bn last month but is almost near its highest deficit months. However same month last year it was $ 12.72 bn. Imports in August rose 25.4 percent over last year to $45.2 billion, led by higher inbound shipments of petroleum, gold and capital goods. The value of petroleum and crude—the biggest burden on India’s import bill— rose 51.6 percent to $11.83 billion. The price of benchmark Brent crude oil was 42.3 percent higher in August compared with a year ago. The rise in exports in Aug’18 was at 19.2% despite the fall in INR value.
normal is generally followed by pressure on agri prices due to lack of irrigation water for agri produce and acreage, unless suitably managed.
Indian rupee continues to depreciate against hard currencies. Despite RBI Governor’s comment that the depreciation of INR is moderate compared to other EM currencies, INR remains weak. RBI has refrained to announce any plans to shore up inflows of foreign currencies, which has deteriorated the situation.
The recent drop in the excise duty on petrol is expected to widen the fiscal by about Rs. 10,000 crore. However, the government expects it to be made up by the tax buoyancy in the direct tax collections.
Equity Market
Equity markets witnessed a sharp selloff in September (down 6%) in the wake of global risk on trade wars, liquidity concerns in the debt market following default of in repayment of loans by IL&FS group entities and concerns over weakening currency amid deteriorating current account deficit (CAD). In terms of stock performance, most of the sectors were in red, except for IT services. On the monsoon front, the season ended with rains below 9% of long term average and with uneven geographical distribution. However, water levels at reservoirs across India are higher than last year. In terms of flows, Foreign Institutional Investors (FIIs) were significant net sellers while Domestic Institutional Investors (DIIs) turned out to be meaningful net buyers this month.
The S&P BSE IT index continued to outperform (+0.2%) aided by sharp currency depreciation, even as we continued to see mixed trends on individual businesses as evidenced by results and positive commentaries / guidance of some of the major IT companies. Meanwhile, the biggest underperformers were interest rate sensitive sectors like S&P BSE Realty (-20.5%), S&P BSE Auto (-13.1%), S&P BSE Bankex (-11.8%) and S&P BSE Consumer Durables (-11.8%).
Recent developments in the fixed income markets coupled with macro-weaknesses have created a significant risk-off atmosphere in the equity markets which may likely persist for some time. Certain measures taken by the govt and the RBI to restore short-term liquidity for the debt markets and constitution of a new management team for IL&FS will likely infuse confidence. We continue to maintain that the market will likely remain in the mode of re-calibrating recent gains in economic and earnings’ growth momentum against emergent risks of higher interest rates and steep currency depreciation. The recent sharp fall in mid and small cap stocks, as anticipated by us for a while now, has added to the overall market volatility, but, has also expanded investment opportunities given steep valuation corrections.
Portfolio approach continues to remain balanced with bottom-up stock selection and sector selection playing equally crucial roles. We believe evidence is emerging on strengthening of pro-cyclical stance and we are currently undertaking some portfolio shifts to capture a potential industrial/manufacturing recovery. We today prefer cyclicals with comfortable balance sheets and attractive valuations and /or companies with strong franchise value but presently facing growth headwinds.
Fixed Income Market
The market yields continued to be extremely volatile with hardening bias through the last month. In fact, the 10-year benchmark sovereign yield moved to levels over 8% as rising oil prices and a depreciating rupee continued to fuel negative sentiments in the market. Besides, absence of a clear Open Market Operations (OMO) calendar in the month of September ‘18 amidst default worries in the credit market also led to widening of credit spreads across the length of the yield curve and reduced volumes in the secondary and primary market. While the RBI did announce an OMO of Rs 36,000 crore in early October, its’ impact in terms of moderation of yields was only temporary in the wake of continued rise in the crude prices and a continued fall in the rupee.
Meanwhile, the headline CPI inflation remained contained under 5% and in fact moderated to below the neutral 4% level to 3.69% in Sept ’18 much lower than the expectations. However, it failed to improve the sentiments in the wake of August’18 trade deficit at $17.4 bn (marginally lower than the previous month’s deficit of $ 18.02 bn) amidst net selling of Rs 16, 000 crore local debt by foreign investors. While the headline CPI is expected to remain contained over the next few months due to favourable base, the undesirable developments in the global space has led to weakening of the market sentiment and sharp and swift depreciation of the INR leading to further exasperation. The 10-year benchmark yield hardened by about 30bps thus and crossed 8% in the early trading days of Sept’18 as the recent international trade war developments between the US & China and trade sanctions on Iran have led to contagion effect on the domestic currency, the INR.
The increase in import bill for India over the last few months has started to widen the trade deficit. The rise in oil and electronics’ import has started to deteriorate the external trade deficit. While the fiscal deficit situation is markedly better over time and benign inflation environment continues, the rupee continues to remain under pressure due to portfolio outflows & higher imports. This has way led the economy to witness similar kind of downward pressure on the rupee experienced during the taper tantrum period of 2013.
Monsoon, this year, which took off well in time, however eased somewhat thereafter and there is an overall deficit of 9% rainfall at an all India level.
The GST collections are marginally lower than expected and may put some pressure on the fiscal targets, which will be known by the end of FY ‘19. Meanwhile the borrowing calendar for the next 6 months beginning Oct’18 is about Rs72,000 crore lower than budgeted and has eased some supply pressure.
In the given market conditions, we urge investors to be cautious and pick fund duration aligned to their investment horizons. We do not expect any rate reductions soon but we do hold on to our stance for a need for tighter real rates and endorse efficient allocation of capital and savings/ investment. The market, in due course, is expected to move in sync with the Monetary Policy Committee (MPC’s) rate decision, which is expected to take cognizance of developing inflation and growth dynamics.
Last Updated: 15th September 2018
Next Update On: 15th October 2018
Update Frequency: Once Every Month
