Both Nifty and Sensex registered gains of around 1.5% in August, marginally underperforming its peers.
The month started with caution ahead of the passage of the GST Amendment Bill; however, smooth passage of the GST Bill in Rajya Sabha, Bank of England’s stimulus push and SBI’s lower-than-expected increase in bad loans led to upbeat investor sentiments. Towards the end of the month, the Fed Chair’s Jackson Hole comment on increased likelihood of a rate hike had limited impact on global risk appetite.
The Market is currently trading at a trailing PE of 24.09x which is at 28% premium to its 10 year average of 18.75x.
Fixed Income Markets
The long end of the yield curve shifted downwards by around 10 -15 bps during the month. The 10yr G-sec closed the month at 7.11%, 15bps lower than the previous month.
Credit spreads on corporate bonds also compressed with 10yr “AAA”/”AA+” rated bonds (PSU) trading at a spread of 40bps/62bps over the yields on government securities of similar maturity against 47bps/71bps at the previous month’s close.
The easy liquidity conditions coupled with continued Open Market Operations by RBI triggered the rally. The hardening of inflation did little to dampen the rally.
Macro indicators released in August pointed towards muted growth but higher inflation.
1QFY17 GDP growth decelerated to 7.1% from 7.9% in 4QFY16. Growth was dragged down by 1) consumption growth which decelerated to 6.7% from 8.3% in 4QFY16 and 2) gross capital formation, declining by 4.6% compared to -2.4% in 4QFY16. On the other side, growth was supported by 1) government consumption which rose by 18.8% compared to 2.9% in 4QFY16 and 2) net exports which rose by 93%.
RBI kept policy repo rate on hold at 6.5% in its August policy review while maintaining its liquidity stance at ‘Neutral’ RBI left its growth (7.6%) and inflation forecasts (5%) for FY17 largely unchanged.
Industrial production for Jun’16 grew by 2.1%, better than last month and market expectations. Manufacturing improved (+0.9%) along with core segment, with mining (+4.7%) and electricity (8.3%) registering higher growth.
Inflation stayed high with July CPI coming at 6.1%, higher than last month’s reading as food inflation (8.0% vs 7.5%) accelerated.
Core inflation accelerated to 4.5% from 4.4% last month. Wholesale prices stayed positive for the fourth straight month, rising by +3.5%.
July trade deficit was largely unchanged at US$ 7.7bn. Indian exports declined 7% yoy, while imports declined 19% yoy. Gold import reduced further to US$1.1 bn.
With bulk of the earnings season behind us, equity markets will be driven domestically by progress of the monsoons, reform momentum and improvement in macro indicators. Globally, September is an event heavy month with key central bank’s policy meetings in focus.
On the fixed income side, the borrowing program is expected to go through smoothly. Liquidity situation is expected to be easy during the month despite the repayment of FCNR deposits raised in 2013. Money market rates will remain range bound around the Repo Rate as RBI is expected to modulate liquidity into the financial system through Term Repos, Reverse Repos and Open Market Operations. We expect the monetary policy to be accommodative during the course of the year. The trajectory of CPI inflation in FY17 is above the RBI’s projected glide path. Unless there is significant disinflation over the next few months, the headroom for rate cut is limited. The shift in liquidity stance of Reserve Bank of India from systemic deficit mode to neutral liquidity mode during the year augurs well for the debt market. However, SLR reduction and heavy supply of state government securities due to UDAY scheme will impact demand and supply of government securities. Given the fiscal consolidation and easing of liquidity conditions, we expect 10 yr yield to be range bound.
Note: The above data has been generated from sources in public domain