May 31, 2015

Canara Rebeco. Mutual funds.

May 2015 saw the release of FY15 GDP data. The Indian economy expanded 7.3% in the recently concluded financial year wherein the 4QFY15 growth stood at 7.5%. The month also saw contraction in trade deficit, Wholesale Price Index WPI), Consumer Price Index CPI) and Index of industrial production (IIP). The sustained decline in inflation and improvement in growth signals recovery and indicates that RBI may continue its' accommodative monetary policy stance

Market Performance*

Indian equity markets closed on a positive note owing to rate cut expectation in June 2015. Benchmarks CNX Nifty and S&P BSE Sensex gained 3.08% and 3.03% respectively. As expected, the earnings of the companies were muted. However we believe that earnings will pick-up in the 2HFY15.


GDP growth was recorded at 7.3% for FY15. This is marginally higher than FY14's 6.9% indicating that the economic recovery is on the right track. The 4QFY15 growth came in at 7.5% as against 6.6% in 3QFY15. Agriculture and mining underperformed while there was pick-up in growth rate of manufacturing, electricity & utilities and financial services. Manufacturing grew to a robust 7.1% compared to previous year's 5.4%. Electricity and utilities and financial recorded a growth of 7.9% and 11.5% respectively. Agriculture registered growth of 0.2% compared to 3.7% in FY14. Mining and trade & hotel segment contracted to 2.4% and 10.7% respectively.


The index of industrial production (IIP) came at 2.1% in March 2015 compared to 4.9% in February 2015. On sectoral basis, manufacturing sector recorded highest growth of 2.2% followed by electricity and mining which grew by 2.0% and 0.9% respectively. As per Use-based classification Consumer durable goods registered a negative growth rate of 4.7% while Basic goods, Capital goods, Intermediate goods and Consumer Non-durable goods witnessed a positive growth.


The wholesale inflation represented by Wholesale Price Index (WPI) plunged deeper for the 6th consecutive month. WPI fell to a record low of -2.65% in month of April 2015 as compared to -2.33% in the month of March 2015. Consumer Price Index (CPI) inflation eased to 4.87% in April 2015 compared to 5.25% in the previous month. Despite of unseasonal rains in certain parts of the country, food inflation declined substantially to 5.4% in April 2015 from 6.3% in March 2015.

Trade Deficit#

India's trade deficit contracted to $10.99 in April 2015 as compared to last month's $11.79 billion deficit. Exports declined by 13.96% y-o-y in April 2015 to $22.05 billion. Despite 12.58% increase in non-oil imports overall imports contracted by 7.48% y-o-y to US $33.05 billion due to fall in oil in the last 1 year.


  • On domestic front, the implementation of GST and Land Acquisition bill will act as major triggers for markets.

  • There has been some uptick in crude oil prices, after the sharp fall in latter part of 2014. If this trend continues raising the crude oil prices above US$ 70, it could raise some concerns for India's current account deficit, inflation expectations and fiscal deficit. However, since the government has deregulated diesel, the impact on fiscal would be minimal.

  • The next big focus is on the timing of a US rate hike. FED policy, going forward, will be an important trigger for global markets and liquidity flow

  • Market participants will keenly watch out for the resolution to Greece Debt deal. Any negative news flows is likely to impact market adversely.


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

The month of May 2015 saw markets both correcting & bouncing back due to mixed news flows. While IPO by China, persistent worries over Minimum Alternate Tax (MAT) & fall in IIP resulted in FPI outflows; declining wholesale & retail inflation, strong GDP numbers, low possibility of a US interest rate hike in the June'15 FOMC & expectation of policy rate cut brought cheer to the markets. In the last one year post election the BJP led Government has taken steps to reduce corruption, streamline processes & reign – in food inflation.

Market Performance*

In the month gone by India's benchmark indices S&P BSE Sensex & CNX Nifty rose by 3.03% & 3.08% respectively owing to rate-cut expectations by market participants. S&P BSE Mid- cap index & S&P BSE Small-cap index also ended the month in green recording 2.88% & 3.08% growth respectively.

The broad based rally in market encompassed all sectors except S&P BSE Realty, S&P BSE Power Index & S&P BSE Metal which contracted by 2.25%, 1.21% & 0.74 % respectively. S&P BSE Telecom & S&P BSE IT were the top performers rising by 9.67% & 4.8% respectively.


The GDP data for FY15 shows Indian economy recording a robust growth of 7.3% (y-o-y). The 4QFY15 growth rose to 7.5% (y-o-y) as against 6.6% (y-o-y) in 3QFY15. Growth in manufacturing, electricity & utilities and financial services was instrumental in pushing up GDP growth while slowdown was witnessed in agriculture sector growth.

India's manufacturing sector represented by HSBC Manufacturing PMI witnessed a slowdown in April 2015 post strong reading in March 2015. HSBC Manufacturing PMI for the month came at 51.3 compared to 52.1 in March 2015 due to subdued improvement in operating conditions.

HSBC Services PMI fell to three month low of 52.4 in April 2015 indicating a moderate expansion in output. Category wise, the fastest increase was seen in Post & Telecommunication, while Hotels & Restaurants was the only sub-sector to see a contraction.


The Index of Industrial Production (IIP) rose at a slower pace of 2.1% (y-o-y) in March 2015 compared to 4.9% in February 2015. Sector-wise mining, manufacturing & electricity recorded a rise of 0.9%, 2.2% & 2.0%respectively. On the use-based side basic goods, capital goods & intermediate goods recorded a growth of 2.3%, 7.6% & 1.9% respectively. The consumption basket contracted by 0.7% owing to de-growth in Consumer Durables (4.7%) & marginal growth in Consumer non –durables (1.9%).

FPI Outflows*

The month saw FPIs trimming exposure to the tune of Rs. 5768 Crs. in Indian equities amongst the emerging markets basket. The contentious issue of Minimum Alternate Tax (MAT), upward movement in crude oil prices & IPO issued by China were key contributors to the FPI stance.


In the near term, we see volatility due to global news flows; markets will closely track any developments on Greece & ECB front. Crude oil price which spiked due to Yemen crisis is likely to stabilise near current levels.

The 4QFY15 earning season was disappointing due to lackluster earnings and weak guidance by management. As mentioned in our earlier commentary slowdown persists in the Corporate space, we believe that the earnings are likely to remain subdued in the near term & impact of operating & financial leverage on the companies may come into play only in the next financial year.

In the medium term markets will track passage of two important bills viz. Land Acquisition Bill & Goods & Services Tax.

Equity market buoyancy over the last one year has primarily been driven by expectation. With India slowly heading towards a period of sustainable growth; the pick –up in corporate earnings growth is likely to follow resulting in PE expansion. Any interim correction can be used as an opportunity to enter the market by investors having medium to long term investment horizon.

*ICRA MFI Explorer
`HSBC Emerging markets PMI, MOSPI

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

CPI inflation continue to decelerate in April 2015

CPI inflation remains soft, printing 4.87% in April from 5.25% in March. Encouragingly, the softness of the print was mostly broadbased. Food inflation, which was feared to have shot up owing to unseasonal rains, has remained benign at 5.1%, with vegetable prices contracting 0.4% sequentially. However, high frequency data for mandi prices indicates a considerable built-up in food prices in May so far, particularly pulses, vegetables and oilseeds. Energy inflation rose 5.6%, even as sequential momentum slowed marginally. The transport and communication category continued to contract on a yoy basis, partly helped by a favorable base effect. Core inflation, however, picked up to 4.28% from 4.16% in March, with the miscellaneous items inflation rising 3.3%. Separately, housing inflation eased further to 4.65%. We expect core inflation to remain modest in FY2016, averaging ~5.2% as against 5.6% in Fy2015.

Source: Kotak Research

Fiscal deficit for 2014- 15 lower than target level

The fiscal deficit (central government) for F2015 decreased to 4.0% of GDP vs. 4.4% in F2014, lower than the target level of 4.1% of GDP (revised estimate, or RE). The main reason for the marginally better than expected performance vs. RE was significantly lower growth in expenditure at 5.5% YoY in F2015 vs. 7.8% YoY RE, which compensated for the underperformance in tax revenue growth. F2015 fiscal deficit stood at 97.9% of RE vs. 95.9% in the corresponding period last year.

Compared to F2014, the improvement in F2015 fiscal deficit again reflected a significant reduction in expenditure growth to 5.5% YoY vs. 10.6% YoY growth in F2014. Capital expenditure contracted 0.5% YoY in F2015 vs. 12.5% YoY growth in F2014. Revenue expenditure growth decelerated to 6.3% YoY vs. 10.4% YoY in F2014.

Gross tax revenue collection growth decelerated to 9.4% YoY in F2015 vs. 9.9% YoY in F2014, coming lower than the target level of 9.9% YoY (RE). The main cause of underperformance vs. RE was lower personal income tax growth.

Source: Morgan Staley

Government expenditure gradually going up

With the markets keenly watching the government's expenditure pattern in FY2016, it seems the government has not disappointed; at least in April. Non-plan expenditure increased 22% and plan expenditure grew 53% in April. More important, capital expenditure increased by ~110% over April last year while revenue expenditure was more muted at ~19%. The high growth rates are a reflection of expenditure cuts last year. Expenditure in April this year reverts to norm with plan expenditure at 7.6% and non-plan expenditure at 9.1% of budget estimates respectively. Encouragingly, plan expenditure growth has been buoyed by roads transport and highways, rural development and railways. The fiscal deficit in April was 23% of the FY2016 budget estimate. However, this metric needs to be analyzed with caution in a first quarter given the volatility due to refunds. India's gross tax collections in April grew 21% yoy, higher than the 16% growth estimated in FY2016 budget (after accounting for FY2015 provisional estimates). Indirect tax collections in April grew 35% and direct taxes grew 8%. Customs duty collection growth was 23% and services tax collection growth was 41%.

Liquidity tightened towards financial year end

The liquidity deficit as measured by LAF, MSF and the Standing Liquidity Facility availed from RBI added together was at Rs.94,302 crores as on 29th April, 2015 compared to Rs.1,12,440 crores as on 30th April, 2015. Lower government expenditure in April has kept liquidity on a tighter side.



  • Even with continuous negative prints of WPI inflation, the focus of RBI will remain on CPI inflation. However, with WPI in deflation for so long and growth showing no signs of picking up, pressure will be on RBI to start easing soon. We maintain our view of another 25 bps rate cut in June 2015, further with RBI's yardstick of 1.5-2% real rates and CPI inflation at ~5%, repo rate at 7.5% remains in a restrictive policy zone. We continue to expect RBI to cut repo by further 50 bps to 7% in next few meetings.

  • Liquidity conditions did not improve much in May 2015 so far, on slow government spending. However there are government bond redemptions of Rs.72,075 cr in May/June 15, which should improve liquidity conditions considerably going into 2nd Qtr of FY16.

  • INR continues to remain under pressure due to global bouts of volatility and higher crude prices. However, INR was overvalued and this correction is likely to be beneficial for exporters in the medium term

  • While the recent downtrend in sentiment has created short term negative outlook on bonds, we continue to believe that RBI is likely to move again in Jun'15, on back of continued downtrend in inflation (inspite of damage on crops due to unseasonal rains), banks having passed on some of the earlier rate cuts, FED rate hike likely shifting to latter part of the year and concerns on INR over valuation. We expect RBI to ease at least by 50bps in next few policy meets, before further assessing inflation expectations going into 2016-17. We expect 10Y G-Sec to drift down to 7.25-7.40% range.

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