Rahul Pal

Head - Fixed Income

"The committee decided to change the stance from accommodative to neutral while keeping the policy rate on hold to assess how the transitory effects of demonetisation on inflation and the output gap play out." The Monetary Policy statement resolution left the market shell shocked: the street wasn’t certainly prepared for this narrative. As the rates sold off, we are prompted to ask: does it mark a cul de sac, for the domestic interest rates?

Bond and Money Market

In our last newsletter we were worried about the disconnect between rates movement and the sticky core inflation and had ended by saying, "With strong core inflation and a strong commodity prices we feel as a strategy it may be prudent to stay at the shorter end of the yield curve". While it is difficult to presage a market movement, we thought it wise to pen down the disconnect and mercifully; we were right!

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

Source: Bloomberg

It did not certainly look pretty for the debt markets. With MPC signaling a shift in the monetary policy stance to neutral, there was a broad based selling across the curve with the 10 year sovereign yield firming up by around by around 45 basis points (bps).The shorter end of the yield curve upto the 1 year segment, aided by the benign liquidity, eased by around 15-25 bps.

Equity Markets

We present charts tracking domestic index and sector, and global indices movements:

Data as on: 28.2.2017 | Performance – Absolute returns | Source: Bloomberg

Data as on: 28.2.2017 | Performance – Absolute returns | Source: Bloomberg

Both BSE-30 Index and Nifty-50 Index were up almost 4% in February while BSE Midcap and BSE Smallcap indices gained more than 5%. The month started on a positive note as there were no negative announcements on capital markets in the union budget. The rally continued with hopes for a rate cut by the RBI which however left the rates unchanged. Market momentum kept pace on several positive announcements by companies.

FIIs were buyers of US $1.4 bn of Indian equities in February, after four consecutive months of outflows. DIIs were marginal buyers at US $60 mn led by buying from insurance companies; while MFs turned sellers in February.

Data Hangover
  • Retail Inflation for January 2017 indexed to CPI fell sharply again to 3.17% marked by a sharp drop in food price inflation to 0.53%.This drop in inflation continued to be led by the vegetables subcomponent (having a weight of 6.04% in the index) which printed a number of -15.62%.
    However the core inflation remained flat and a firm commodity prices, tempered by continued fall in vegetables and other perishables (post the effects of currency replacement) may continue to have a salubrious effect on the headline inflation.
  • Fiscal Deficit at the end of January stood at 105.7% of the budgeted deficit. Last fiscal the corresponding number was 95.8%.
  • The January composite PMI moved up to 49.40 in January from 47.60 in December (which was a 3 year low) suggesting that the momentum loss in the economy may have been arrested. While the services PMI increased to 48.7( still below the expansionary mode), manufacturing PMI moved up to 50.40, above the expansionary threshold.
  • INR vis a vis USD appreciated by 1.60%.
  • We present a matrix of certain real economy numbers:


Quo Vadis
Debt Markets:

We continue to believe that the shorter end of the yield curve may continue to offer the best risk reward payoffs for the investors. The RBI has continued with its neutral liquidity stance; which would mean a normal liquidity situation thereby making the curve less hostile to possible upticks in inflation or global yields.

The Bond market now shifts its attention to the US Fed on March 15th and take cues from the outcome of the Fed meet.

Equity Markets:

Stock Market has rallied and given double digit returns globally in last two months. Due to the general bullishness there is a reduction in risk-reward in general. In terms of valuations, many stocks are trading much above the mean five year average valuations. The future course of the markets from here on is likely to be determined more by the earnings growth. The markets will take cues from recovery post the re-monetization phase. The markets may also seek direction post state election results to be announced on March 11.

Post many years of decline in private capex, any recovery in capex in FY18, FY19 becomes critical, this can lead to substantial support for current valuations to sustain.


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