Rahul Pal

Head - Fixed Income

The delightful French expression found its way to English usage: Joy of Living. And as a practitioner in the Indian capital markets, July was indeed a “joie de vivre” for us. And the reasons are a aplenty:

The Rain Gods were smiling; Finally

A two year hiatus and parched lands, the wait for “Normal” monsoons finally ended this year. Bringing glad tidings to the agricultural sector, monsoon progressed well throughout the country. India Meteorological Department, in its  weekly weather report^, (ended July 27th) stated that the cumulative seasonal rainfall was excess /normal in 28 and deficient in 8 out of the 36 meteorological subdivisions. And this bountiful rainfall led to an increased Kharif crop sowing, with the total sown area increasing by around 6% with pulses recording the highest increase (41%) in sowing area.

^Source: IMD website

Spreading smiles across domestic markets

Bond and Money Market:

The bond markets celebrated: the benchmark 10 year sovereign gilts cracked around 30 basis points (bps) in July to close at 7.16%. The sharp fall in global yields, adequate liquidity and lower inflationary expectation led to a drop in the yields.

The short term rates also eased with benchmark 3 month and 12 month benchmark yields on Commercial papers(CPs) easing by about 55 bps (7.25%) and 40bps (7.34%) respectively.

A matrix showing the movement in rates is presented below: 

Source: Bloomberg
Equity Market

It was a celebratory mood too: Domestic equity markets moved up across sectors save the Technology sector. 

We followed the global paradigm; equities across global markets were vibrant, strong and moved up. 

Shrugging off the Brexit worries the markets rallied with risk on trade and with stability in global commodity prices, cyclical sectors outperformed the overall markets. Domestically, various protectionist initiatives like Minimum Import Price for steel sector and stability in global commodity prices, metal and financial services index outperformed the overall market. 

Leading up to the month of July, market had overestimated the impact of Brexit on Indian companies that correction could have led to the improvement in overall markets.

A Sectoral performance matrix is presented below:

Source: Bloomberg
And a broad based Global rally too..

Source: Bloomberg

But some furrows too…

While the markets, both domestically and globally rallied, it wasn’t all smiles; some furrows in the brow did appear. The domestic Consumer Price Inflation (CPI) inched up to 5.77% driven predominately by vegetable ,pulses and sugar, the core inflation too remained steady with marginal upward bias. The fear of food inflation becoming entrenched coupled with the implementation of the Seventh pay commission could potentially be inflationary.

A small graph of global food and commodities index could highlight the reason behind our discomfort

CRB (commodities) index showing an uptick in the first graph

World Food Price index too showing similar trends of an uptick in the second graph

Source: Bloomberg

Domestically, the initial earnings published for the first quarter of 2017 continued a subdued pattern as we witnessed for the past several quarters. While some recovery of earnings could be witnessed because of healthy monsoon and the seventh pay commission awards, any missteps in the second half in earnings could potential pressure on equity indices.

And the US Federal Reserve continues with their conundrum: will they, won’t they. The Fed, in its recent concluded meeting , admitted to “near tem risks to economic outlook have diminished “,and that “the stance of the monetary policy could remain accommodative” ,leaving an air of uncertainty.

Quo Vadis

Debt Market:

Easy liquidity may continue to keep the short term rates very benign. The buying of Government Bonds through open market operations (OMO) could keep adequate liquidity and may help 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.

Equity Market:

The recent run-up in last three months has led equity markets on a broader sense have reached a deviation beyond one standard deviation, and has entered into a zone of high hope and expectation.

Current valuation reflect caution as these valuation expect the current run up in global commodity prices to sustain and also significant recovery in quarterly earnings.

Foreign Portfolio Investors pumped in INR 10529 crs^ in equity market in the month of July. The rally has been global flow dependent; any reversal could trigger higher downside risk to the markets as deviation between expectations and reality on ground remains quite high.

Source ^ : Bloomberg


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