And Thereby Hangs a Spectre

Mon 10-Oct-2016 09:47 AM
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Rahul Pal

Head - Fixed Income

"The Indian Army conducted surgical strikes at several of these launch pads."

Rarely does armed hostility figure in domestic financial markets narratives: Yet when the Director General of Military Operations (DGMO) announced these strikes on September 29, it was too difficult to ignore. The equity and debt markets both sold off that day to remind us of all of an uneasy spectre which capital markets abhor: the spectre of uncertainty.

The Retreating Monsoon.. and Some Happy Tidings

As the South West monsoon withdraws; this is how it went by for the season:

a) Cumulative seasonal rainfall (June 1 to September 28th, 2016) recorded a departure of -3%, with excess/normal rainfall recorded in 27 and deficient in 9 out of the 36 metrological sub-divisions.

b) A very healthy spatial distribution: 67% of the districts received excess / normal rainfall (51% in 2015, 55% in 2014).

c) Out of the 91 reservoirs storing water, they recorded 74% storage vis a vis 61% last year

d) The first advance estimates on food grain production released by the Ministry of Agriculture shows a Kharif food production of 135.03 Million Tonnes, marking an increase of around 9% from last year’s Kharif production estimates.

While the agriculture production growth has been well aided by the monsoon, it may lead to a rise in agricultural income, the usual caveat being the farmers being able to realize the MSP prices.

Source: IMD, Ministry of Agriculture

The Markets: Keep Calm and Carry On

It was Global Central Bank action obsessed market; the US Fed, European Central Bank(ECB) and the Bank of Japan (BoJ). While the US Federal kept rates unchanged and signaled gradual hikes in the near future (sounds a bit familiar now! The only change was three dissents to this stance), the ECB did not announce any fresh stimulus package and kept rates unchanged. The BoJ introduced a new concept: “Quantitative and Qualitative Monetary easing (QQE) with yield curve control wherein the Central Bank would control interest rates and an "inflation overshooting commitment ".

While the markets were wading through these news, the news on surgical strikes across the LoC rattled both the equity and the fixed income markets.

Bond and Money Market

We present a matrix detailing some movement in some key market rates (domestic and global) and key economic indicators:

Source : Bloomberg

Well, a runaway bond market: the old 10 year benchmark gilt fell by around 15 basis points (bps), a smaller fall in yield of corporate bonds and short term rates too fell by around 15-20 bps.

It was a benign CPI at 5.05 %, (largely aided by sharp fall in food inflation), a delayed US Fed response and healthy liquidity which led to a sharp rally. With the market expectation of a rate cut in the October 4th monetary policy meet, it was a firm bull grip on the bond markets.

As the nation moves to a new monetary policy conduct framework through the setting up of the Monetary policy committee, it would be interesting to read the minds of the new members of the committee for a look into the future course of action.

Equity Markets

We present a matrix tracking index and sector and movements:

Source: Bloomberg | Data as on: 30/09/2016

The Indian indices fell by 2% for the month. The fall happened in the latter part of the month. The fall was primarily led by surgical strikes India conducted along the LOC.

As the month of September was data light month for India, the focus on first half of the month was central banks decision across the globe ranging from USA to Japan. The investors keenly focused on the central banks commentary. The Global markets were very volatile in the latter half of the month due to the start of presidential election debate in USA.

FII continue to remain net buyers to the worth of $1.4 Billion.

Data Hangover

  • Retail Inflation for August 2016 indexed to CPI fell sharply to 5.05% marked by a sharp drop in food price inflation to 5.91%. With continued sobering of food price, we expect inflation may remain very benign in the near future.
  • The Fiscal Deficit for April –August 2016, was 76.40% of Budget estimates with Gross Tax collections increasing by 21.90% and total expenditure growing by 9.50%
  • The Central Government ,adhering to its budgeted borrowing commitment ,planned to borrow INR 2.45 trillion for the second half of 2017, totaling a gross borrowing of INR 6 trillion as budgeted
  • We present a matrix of certain real economy numbers:


Quo Vadis

Debt Markets

The short term rates have come off significantly and may have almost priced in the easy liquidity and a probable rate cut in October. However, spectrum auction, FCNR (B) deposits and possible busy credit season may keep a tight leash on liquidity thereby possibly creating an upward bias of short term rates.

The buying of sovereigns through OMO and the collateral liquidity may help short term gilt rates to remain benign. With spreads of AAA rated corporate too trading at narrow spreads, there remains a probability of short term gilt rates offering a better risk return trade off. Further there exists a possibility of lower printing of headline inflation numbers thereby helping the possible easy bias in the sovereign yield curve. While there has been some hardening in cement, steel and pet coke prices, they haven’t percolated through retail inflation. We would keep a close track of these prices on the potential inflation trajectory

Equity Markets

The month of October is the start of festivals in India. This is also the start of a new season for consumer durables. Markets will keenly watch the retail demand for consumer durable ranging from AC to four wheeler cars. The current valuation in India specific consumer companies anticipates significant uptick in festival demand across India.

The markets will keenly watch out for the half yearly numbers for Indian corporates. The focus would be specifically on IT large cap company’s volume growth and their outlook on global environment. The focus also will be on banks’ incremental declaration NPAs and their outlook on Indian corporate leverage.

Markets would keenly track the above mentioned data points and may try to encompass the direction accordingly.

While uncertainty certainly has its naysayers; the last time when there was an armed conflict in Kargil between May and July of 1999, we leave it for the curious readers to go back and see the movements in the capital markets!


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