January 31, 2015

Canara Rebeco. Mutual funds.

The month of January'15 saw WPI, CPI moderating while IIP recorded an uptick and trade deficit declined. In response to the sustained moderation in inflation RBI cut repo rate in a surprise inter-meeting move on 15th January 2015 giving fresh impetus to the fixed income markets. With improving macros and fundamentals (vis-a-vis other emerging economies) Indian equities are seeing interest from global investors and recording new highs.

Market Performance*

The domestic equity markets represented by the benchmarks CNX Nifty and S&P BSE Sensex touched record highs in the month. However the market witnessed some correction on the last trading day of the month. CNX Nifty gained 6.12% & & the BSE Sensex rose by 6.35% in the last month. Markets have been on an upward trajectory, on the back of supportive global cues, lower crude prices and surprise rate cut by RBI.


With a view to present a more realistic picture of the economy, the government released a new series of national accounts with 2011-12 as base year for computing the economic growth rate. The revision pushed up FY13 growth to 5.1% from 4.5% earlier; more prominently, the FY14 growth was revised up sharply to 6.9% from 4.7%. The upwards revision seem to imply that the economy had fared much better in the last financial year than previously expected.


The index of industrial production (IIP) rose 3.8% in November'14, above market expectation, from a year ago, data released by the statistics office showed that consumer segment continued to log negative growth. The growth in industrial production was largely because of the 3% rise in manufacturing in November. This sector has the highest weight of 75.5% in IIP. The expansion in manufacturing indicates a slow uptick in manufacturing activity momentum.


The Wholesale Price Index (WPI) based inflation rose marginally by 0.1% (y-o-y) in December 2014 from 0.0% in November 2014. Core inflation declined to a 60-month low 1.55% in December 2014 from 2.2% in November 2014. Consumer Price Index (CPI) inflation of December 2014 stood at 5.0% as compared to the low of 4.4% in November 2014. The rise primarily reflects the pick-up in food inflation & waning base effect. The core CPI inflation eased to 5.2% in December 2014 from 5.5% in November 2014.

With RBI announcing a surprise rate cut pre-policy we believe RBI is likely to wait & watch Government's stance on fiscal deficit. Further RBI is likely closely watch incoming data on inflation to determine further monetary policy moves.

Trade Deficit#

India's trade deficit narrowed to $9.43 billion as compared to last month's $16.86 billion deficit. The April-December 2014 period trade deficit increased from $ 107.08 billion to $110.05 billion. In a sign of weak economic scenario in Eurozone the, exports fell in December 2014, contracting by 3.77% to $25.4 billion over the same month a year ago. Though non oil imports rose by 9.9% overall there was a contraction in imports of 3.77% led by low crude oil prices.

ECB announces stimulus**

The ECB opened the stimulus door on 22nd January'15 by announcing asset purchases to the tune of €60 billion per month until end-September 2016 in order to combat prolonged period of low inflation. The scale of QE program announced was higher than expected and led to an euphoria in the Asian markets. Overall the sentiments are positive in the global markets on the back of fresh liquidity to be injected by the ECB which is also likely to support the domestic markets.

# http://commerce.nic.in/tradestats/filedisplay.aspx?id=1;
`MOSPI; http://www.afternoondc.in/business/sharp-jump-in-fy13-14-gdp-post-rebasing-exercise/article_130713
^http://mospi.nic.in/Mospi_New/site/PressRelease.aspx; ICRA
^^http://www.icra.in/Files/ticker/ICRA%20WPI%20Dec%202014.pdf ; http://www.icra.in/Files/ticker/ICRA%20CPI%20Dec%202014.pdf
* ICRA MFI Explorer
** http://www.ecb.europa.eu/press/pr/date/2015/html/pr150122_1.en.html

Mutual Fund investments are subject to market risks. Read all scheme related documents carefully.

Market scaled new highs in January'15. The surprise rate cut by RBI, a higher than expected QE of Euro 1.14 bn announced by ECB, sustained drop in crude oil prices were key propellers supporting market rally. Another key event which impacted market sentiment was the US President's visit to India. However markets corrected during the end of the month mainly led by banking & financial sector.

Market Performance*

In the month gone by India's benchmark indices S&P BSE Sensex & CNX Nifty rose by 6.12% & 6.35% respectively. Mid- and smallcap indices underperformed their larger peers. The S&P BSE Mid-cap index gained 3.53% and the S&P BSE Small-cap index gained 2.18%.

S&P BSE Realty, S&P BSE Consumer Goods & S&P BSE Consumer Durables were the top performing sectoral indices during the month rising by 16.48%, 10.71% & 10.15% respectively.


The Central Statistics Office (CSO) has announced a change in the method of calculation of GDP making it comparable the GDP numbers comparable with that of developed nations. The new measurement under the new base year of 2011-12 aims to capture more data thus getting better estimate of the overall GDP. Post the revision, FY14 GDP growth stands at 6.9% and FY13 at 5.1%.

India's manufacturing sector represented by HSBC Manufacturing PMI came at 54.5 in December'14 up from 53.3 in the previous month. Faster expansion in output, new business orders & easing cost inflationary pressures contributed to the accelerated growth in manufacturing sector.

HSBC India Services PMI Business Activity Index which tracks the changes in activity at Indian services companies on a month-bymonth basis – was indicative of a moderate expansion in business activity in December'14. The index came at 51.1 in December'14, down from 52.6 for the prior month as activity and new business expanded at weaker rates.

Expansion in IIP^

The Index of Industrial Production (IIP) expanded by a five-month high 3.8% (y-o-y) in November'14 after contracting by 4.2% in October'14.

Sector-wise mining, manufacturing & electricity recorded a rise of 3.4%, 3% & 10% respectively. On the use-based side basic goods, capital goods & intermediate goods recorded a growth of 7%, 6.5% & 4.3% respectively. The consumption basket on the whole contracted by 2.2% dragged by 14.5% contraction in Consumer Durables, Consumer non –durables on the other hand grew by 6%.

Trade Deficit Narrowed#

India's trade narrowed in December'14 to USD 9.43 billion from USD 16.86 billion in the previous month. Imports contracted by 4.78% on back of low crude oil prices. However the non –oil imports rose by 9.9%. On export front the contraction in exports of 3.77% is a cause of concern.


In the coming months equity market direction will largely be driven by the corporate result season and the budget. So far the corporate earnings are broadly in line with expectations. We expect the impact of operating & financial leverage on the company may come into play only in the next financial year & overall corporate earnings for FY15 are likely to be muted.

Post the recent sharp rally, we expect some consolidation in the short term. However on a long term horizon we believe India is heading towards a period of sustainable growth & conducive macroeconomic scenario. We feel India is in a structural bull run, there will be corrections on the way, however a staggered exposure to equities may help even out market volatility.

^http://mospi.nic.in/Mospi_New/site/PressRelease.aspx; ICRA
`http://www.hsbc.com/news-and-insight/emerging-markets-pmi; http://www.moneycontrol.com/news/economy/baseyear-revision-impact-fy14-gdp-at-69-fy13-at-51_1288236.html

Mutual Fund investments are subject to market risks. Read all scheme related documents carefully.

RBI policy : preparing for rate cuts

With RBI delivering a surprise inter-meeting repo rate cut by 25 basis points in January '15, the next action is likely to be post the Union Budget in February 2015, giving RBI some more incoming data to digest. Most likely timing is the April 2015 policy, however RBI could move after budget if inflation continues to surprise on the downside in the next few readings.

Headline CPI inflation rose

Even as headline CPI inflation rose to 5.0% in December, '14 (as the base effect dissipates) as against 4.4% in November, '14 , the rise was more muted than expected. The downward surprise in December,‘14 was due to a sharp sequential contraction in vegetable prices ((-)7.9% mom). Food inflation was 4.8% in December, ‘14, higher than 3.1% in November, ‘14 as the base effect wore off. CPI (ex food and fuel) inflation fell to 5.2% from 5.5% in December, ‘14. WPI inflation remain almost flat at 0.11% in December, ‘14 compared to 0.00% in November, ‘14.

Fiscal Deficit

Fiscal deficit remains near government target of 4.1% of GDP for F2015. Bunched-up flows from divestment and telecom license fee are likely to help manage fiscal deficit. Moreover, tax revenue picks up seasonally in the last quarter of the fiscal year, with an average collection of 47.3% of total tax revenue during Dec-Mar. The government ran a fiscal surplus over Dec-Mar last year (cumulative basis).

Liquidity eased in the January

The liquidity deficit as measured by LAF, MSF and the Standing Liquidity Facility availed from RBI added together was at Rs. 67,409 crore as on 31st January, 2015 compared to Rs.1,21,501 crore as on 30th December, 2014, '14. Liquidity situation returns to comfort zone due to robust FX flows and good deposit growth whilst slowdown in credit growth.

Credit ratio improving

Corporate India's credit quality is showing early signs of recovery, as indicated by CRISIL's credit ratio (ratio of number of upgrades to number of downgrades) of 1.64 times for the first half (H1) of 2014-15 (refers to financial year, April 1 to March 31). Upgrades exceeded downgrades in H1 2014-15, with 741 upgrades as compared to 451 downgrades. Firms with low debt exposure primarily witnessed positive trends in credit quality.


We maintain our call of 75-100 bps of rate cuts in the next one year; implying an incremental 50-75 bps after recent 25bps rate cut. We expect CPI inflation to undershoot 6% Jan'16 target, by a comfortable margin. Also the guidance for further rate cuts/timing draws from the policy document highlighting that “key to further easing are data that confirm continuing disinflationary pressures. Also critical would be sustained high quality fiscal consolidation as well as steps to overcome supply constraints and assure availability of key inputs such as power, land, minerals and infrastructure.” We believe that lower oil prices are likely to continue to reduce inflation through second and third round impacts.

Ongoing global commodity price correction and buoyant domestic sentiment will help repair India's structural imbalances. Low inflation can lead to low interest rates, improved savings and investment can offer scope for higher, sustainable growth. We expect yields to continue its downward trend, as inflation continues to moderate, over the next few years. Investors can look to increase allocation to fixed income funds, from medium to long term perspective, depending on their respective risk profiles.


Mutual Fund investments are subject to market risks. Read all scheme related documents carefully.