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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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Debt Markets

Fixed Income Market Update: December 2016

  • The month saw partial reversal of the bond market rally of the previous month when demonetization was announced. A combination of factors led by surprise decision to keep key rates unchanged by RBI, record issuance of CMBs (Cash Management bills) and US FOMC decision to hike rates with raising of rate forecast for 2017 led to this rise.
  • RBI raised the MSS ceiling to Rs 6 lakh crore from 30,000 crore in order to suck out the huge liquidity in the banking system due to demonetization. Under this, RBI issued short tenor CMBs on various days. At month end total CMB outstanding was Rs 5.2 lakh crore.
  • In a surprise decision, RBI decided to keep key policy rates unchanged at its Monetary Policy Review meeting which ended on 7th Dec 2016. It was a unanimous decision by the MPC (Monetary Policy Committee). Sticky core inflation, heightened global uncertainty due to imminent Fed hike and volatility in crude oil prices were mentioned as the main reasons. RBI also felt the impact of demonetization on growth maybe transitory and more time is needed to assess the impact.  Bond yields rose sharply post the policy and continued rising for major part of the month.
  • The ten year benchmark gilt closed at 6.51%, 27 bps higher than the previous month. The ten year AAA Corporate bond benchmark closed at 7.57%, 38 bps higher than previous month. The five year AAA corporate bond benchmark closed at 7.37%, 21 bps higher as compared to previous month.
  • 1 year CD rates rose by 15 bps to close at 6.62%. 1year T bill yield rose 27 bps to close at 6.32%. 3 months CD rates closed at 6.15%, similar levels as previous month
  • Brent Crude oil prices rose to USD 55.4 per barrel as market expected supply to be curtailed after the recent OPEC led producer pact to reduce supplies.
  • INR appreciated and closed the month around 67.92 as compared to 68.38 the previous month. Dollar strength, rising US Treasury yields and FII sales were the main reason. For the month of December, FIIs were net sellers in the debt market to the tune of Rs 18,000 crore approx..
  • The ten year benchmark US treasury yield ended further higher at 2.44%, as Fed hiked the target range for the Federal funds rate to 0.50% to 0.75% and raised its projection of rate hikes for 2017.
  • November WPI data release came at 3.15% as compared to 3.39% in previous month. CPI for November came at 3.63% compared to 4.2% in previous month.   
  • October Industrial production (IIP) growth continued to show tepid industrial activity at -1.9%.
  • The fiscal deficit data for period April-November 2016 was 85.8% of the FY2017 budget estimates at Rs 4.58 lakh crore.
  • Banking system liquidity remained well in surplus mode as deposits continued to come into banking system as a result of demonetization. Excluding CMBs, banking system averaged a surplus of Rs 1.57 lakh crore at various RBI liquidity facilities put together.
  • Towards the month end, the SDL borrowing calendar for Jan to march 2017 quarter was released. The borrowing of the states is pegged between Rs 1.1 to Rs 1.2 lakh crore as compared to Rs 95,000 crore to Rs 1, 05,000 crore range during same quarter last year.
  • RBI has issued guidelines for trading of Interest Rate options.
  • At month end, SBI effected a 90 bps lending rate cut across all tenors of MCLR. This was followed by other PSU banks and private banks in varying degrees. SBI’s 1 yr MCLR now stands at 8%. 

Fixed income market outlook:

  • We expect banking system liquidity to remain well in surplus zone (forecast of Rs 1 lakh crore to Rs 1.5 lakh crore) even as withdrawals may happen. Any relaxation in cash withdrawal limits may increase the currency in circulations.
  • The ten year benchmark G-sec yield is expected to trade in a range of 6.40-6.60% during the month. Large supply of SDLs may weigh on market sentiment. The five year AAA Corporate bond benchmark is expected to trade in a range of 7.20%-7.40%.
  • Money market rates are expected to remain stable as low CD issuance and surplus banking system liquidity. 

Equity Markets

Review of Equity markets for the month of December

Globally, the theme for equity markets in December continued to be investors’ preference for developed markets over EMs. This was likely a continuation of the trend in November, when the US markets had turned after Mr. Trump’s victory and his statements on reviving infrastructure spending. MSCI EM (USD) was flat during the month, while the MSCI World index (USD), which is dominated by developed markets was up 2.2%. During the month, EMs as a category had net equity outflows of USD 7.3 Billion. India was no exception with net equity outflows of USD 1.25 Billion in December. By way of comparison, US equity markets received net inflows of USD 18.8 Billion from offshore investors during the month (JP Morgan data). Domestic mutual funds however remained buyers, investing about USD 1 Billion during the month. The Rupee was up 0.7% during the month vs the USD. The DXY itself was up 0.7%, with the Yen and the Euro weaker. 

In terms of sectors, financials and healthcare did relatively poorly. Pharmaceutical companies were impacted as negative news flow around regulatory events continued. Banks were impacted as the markets worried about the impact on their margins as the deposits that they had garnered were deployed as relatively lower yielding government securities given that credit offtake remained weak.

 PERFORMANCE AS ON DECEMBER 30, 2016* 

 

Index

1 Month (%)

3 Months (%)

6 Months (%)

1 Year (%)

Broad Markets

 

 

 

 

 

Nifty 50

8186

-0.47

-4.94

-1.23

3.66

S&P BSE Sensex

26626

-0.10

-4.45

-1.38

2.56

S&P BSE 100

8387

-1.10

-5.38

-0.51

4.16

S&P BSE 200

3511

-1.32

-5.61

-0.08

4.51

S&P BSE 500

11036

-1.42

-5.68

0.06

4.34

S&P BSE MID CAP

12031

-3.74

-8.62

2.68

8.33

S&P BSE SMALL CAP

12046

-2.30

-5.75

2.07

2.27

Sectoral Performance

 

 

 

 

 

S&P BSE AUTO

20257

0.56

-8.88

2.60

9.56

S&P BSE Bankex

20749

-2.66

-5.88

1.06

7.23

S&P BSE CD

11237

-0.37

-10.45

-6.15

-6.52

S&P BSE CG

13665

-2.71

-6.29

-8.14

-3.35

S&P BSE FMCG

8131

0.74

-3.90

-3.81

3.89

S&P BSE HC

14728

-6.40

-8.98

-4.94

-12.98

S&P BSE METAL

10109

-5.22

3.54

18.66

37.63

S&P BSE Oil & Gas

12152

1.57

6.80

25.00

28.01

S&P BSE PSU

7691

-2.39

3.07

14.51

13.56

S&P BSE Teck

5498

1.61

-2.35

-9.40

-8.07

*Performance for less than one year are absolute returns

Source – MFI Explorer

The Indian macroeconomic and physical indicators presented a mixed picture, with some clearly impacted by demonetisation, while some others held steady. For example, two-wheeler sales saw a decline, possibly as a result of poor cash availability in rural areas yet. Passenger vehicles however held up reasonably well, with the two largest car manufacturers’ sales down only 4% yoy. MHCV sales were hit however. Anecdotally, consumer companies report weak consumer sentiment, with demand likely remaining impacted through part of the Q4 FY 2017 as well.  Some other physical parameters like electricity generation, diesel consumption etc. remained steady with moderate yoy growth. NBFCs reported slower demand, but collection efficiencies holding up reasonably well.

In macroeconomic parameters, inflation moderated during the month. CPI inflation for November was 3.6% (October 4.2%). Food prices, esp. pulses and vegetable moderated. India's trade deficit widened to a 16-month high of USD 13bn in November from USD10.4bn in October, as a result of a sharp slowdown in exports after demonetisation and a pickup in imports. The export slowdown is likely due to weaker export volumes, as the gem and jewellery and textiles sectors seem to have been impacted. The import acceleration is led by gold and higher commodity prices.

From the markets point of view, earnings recovery broadly seems to have been pushed to FY 18, though some sectors may show earnings off a low base of FY 16. The economy itself should start recovering from the slowdown as cash supply is substantially restored, probably through the current quarter.






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