Rahul Pal

Head - Fixed Income

A deluge it was: FII flows into the domestic capital markets (debt and equity) last month was close USD 9 billion marking the largest monthly inflow in the last 8 years. What followed was an extremely buoyant domestic equity market performance, a fall in yields in the debt markets and a significant appreciating INR against the USD. With such happy tidings; we could not but help say “My Cup Runneth Over”.

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

A month which saw an FII inflow of close to USD 4 billion resulted in drop in yields across the yield curve. While the extreme short end of the curve eased due to large mutual fund buying, the 10 year sovereigns eased by around 20 bps helped by buying in by FIIs and foreign banks. The US Fed too followed the script and raised the Fed funds target rate to ¾ to 1 percent, but continued with its accommodative monetary stance, thus easing any negative narrative of faster rate hike trajectory.

Equity Markets

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

Data as on: 31 Mar 2017; Performance – Absolute returns | Source: Bloomberg

The Markets gave three cheers to the mandate of state elections; it ended with handsome gains. Like in the last five years, this year too mid caps continue to outperform the large caps. Indian indices outperformed its global emerging market peers in the month. The market also saw strong inflows from both DII and FII for the month.

Within sectors high beta cyclicals outperformed in the markets.

Data Hangover

  • Retail Inflation for February 2017 indexed to CPI rose to 3.65% marked by an uptick in food price inflation to 2.01%. This rise in inflation continued was led by the vegetables subcomponent (having a weight of 6.04% in the index) where the disinflation slowed and printed a number of -8.29%. Benign pulses inflation at -9% (2.38% weightage) also kept the inflation on a lower bound However the core inflation fell marginally reflecting a falling commodity prices
  • Fiscal Deficit at the end of January stood at 113.4% of the budgeted deficit. Last fiscal the corresponding number was 107.1%.
  • The February composite PMI moved to 50.40, a continued upward tick from 49.40 recorded in January suggesting that the momentum in the economy returning slowly. The services PMI increased to 50.30, moving into the expansionary threshold, manufacturing PMI to moved up to 52.50.
  • INR vis-a-vis USD appreciated by 2.80%

We present a matrix of certain real economy numbers:


Quo Vadis

Debt Markets:

April ushers in the First bimonthly policy of the MPC for the current financial year and usually sets the tone for the rest of the year. While rise in commodity prices including crude has receded, it is difficult to call an end to the cycle. With gradually rising food prices and domestic economy gradually moving up, the MPC would likely continue with its neutral stance on the policy rates. It however faces a challenge with the surplus liquidity in the system, which is incompatible to the neutral liquidity stance. Measures to suck out the excess liquidity may have bearing on the short term rates.

However the risk reward ratio still appears to be tilted to the shorter end of the yield curve offer.

Equity Markets:

Over the last two years, the market has taken a full circle. While markets declined in FY16, they gained in FY17 thus completing the circle. This coincides with flat earnings growth for last three years. The performances of the domestic markets have mirrored the Global emerging markets as well.

Source: Bloomberg

Stock prices are usually driven by Flows and earnings. Flows have kept the markets positive for last couple of years. The valuation levels of the benchmark indices (at 1+ Standard Deviation of long term averages) would mean that earnings have to participate for further momentum to happen.

Macroeconomic base is slowly being created with the help of GST, Singular mandate, NPA resolution, global growth recover for an earnings recovery in second half of FY18. Till that point markets may be driven by Flows momentum from DII and FII.


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