Rahul Pal

Head - Fixed Income

The levitation act continued during the month. An emboldened market, despite FII outflows during the month, saw buoyant sentiment prevailing and the Sensex closed above 30000 for the first time in its history; Mount 30k scaled finally!

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

It was not a pleasant month for the domestic bond markets. Despite strong FII inflows into the debt market during the month, the benchmark 10 year sovereign moved up by around 30 bps during the month. The RBI, in its first bimonthly meeting, narrowed the LAF corridor to 25 basis points by raising the reverse repo rates to 6.00 percent. Further, it emphasized that it saw the path of inflation in 2017-2018 “challenged by upside risks and unfavorable base effects towards the second half of the year”.

What compounded the market worries was hawkish stance of some members of the MPC (one even suggesting a rate hike) and what followed was a general sell off across the domestic yield curve. Liquidity available in the system was also gradually taken out and the shorter end of the yield curve too remained under pressure.

Equity Markets

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

Data as on: April 28, 2017; Performance – Absolute returns | Source: Bloomberg

During April, broader market indices (CNX 500) went up by 2%. The Energy and Real estate sectors led the outperformance. The Midcap indices too logged in strong performances during the month and rallied around 5%. The rally was more back ended as global markets rallied following preliminary results of French Presidential Election. During the last couple of months market performance have been driven by sectors which have underperformed over last couple of years in terms of valuations.

Within the participants, domestic mutual funds invested $1.2 bn during the month, while FII and insurance companies were net sellers.

Data Hangover

  • Retail Inflation for March 2017 indexed to CPI rose to 3.81% marked by an uptick in food price inflation to 1.93%.This soft inflation continues to be led by the vegetables subcomponent (having a weight of 6.04% in the index) where the disinflation printed a number of -7.24%. Benign pulses inflation at -12.42% (2.38% weightage) also kept the inflation on a lower bound
  • The March composite PMI moved to 52.30, a continued upward tick from 50.70 recorded in January suggesting that the momentum in the economy returning slowly. The services PMI increased to 51.50 , while the manufacturing PMI remained unchanged at 52.50.
  • INR vis a vis USD appreciated by 1%

We present a matrix of certain real economy numbers:


Quo Vadis

Debt Markets:

The March rally did not sustain and the yields rose sharply in April. The MPC has continued with its neutral stance and its discomfort of the evolving inflation. A fear of shrinking US Fed balance sheet too looms large. While the commodity markets have taken a breather, closer home the remonitisation effect is playing through with potential shrinking of output gap. We remain cautious on interest rate trajectory and keep our biases towards the shorter end of the yield curve which appears to be a safer haven vis a vis the risk return tradeoffs.

Equity Markets:

Post run up in the markets, the market trades at a significant premium to long term average valuation multiple. Current valuations assume higher double digit growth in earnings for next two years. It is necessary for earnings to grow much higher for sustained further rally in markets.


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