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As on 31st January 2017

Monthly Review

In the equity markets, the NSE Nifty-50 Index ended with a strong gain of 4.6% in January 2017, while the NSE Free float Midcap-100 index rallied much more, by 7.4%. The month began with positive global cues, with the minutes of the US Federal Reserve’s meeting indicative of only gradual increases in interest rates in 2017. Better than expected corporate results for the Oct-Dec quarter (with the adverse impact of demonetization being lesser than feared by the analyst community), coupled with continued buying by domestic mutual funds helped the market rally. The GST Council made some progress in January, and the implementation is expected to be in July (though we could see some more delay but not beyond September).

In the fixed income markets, bond prices rose in January (bond yields fell by 11 basis points) due to a fall in inflation levels: Consumer Price Inflation fell to 3.4% y-o-y in December from 3.6% in November, with both food and core inflation easing. Foreign institutions sold around Rs 2,300cr of debt securities, driven by rising global yields and commodity price trends. The spreads of corporate bonds over the 10 year G-Sec fell to 74bps from 78bps.

Economy

CPI inflation fell further to 3.4% in December vs 3.6% in Nov led by lower food inflation and core inflation. The Rupee remained relatively stable during the month of January at closed at 67.8, up 0.3% vs December. FPIs sold US$73 bn in the month while DIIs were net buyers, investing US$697 mn in the cash segment.

Outlook for Markets

Equity Market

The equity market has responded very positively to the Budget, and the January rally has continued in the first few days of February as well, to 8800 levels. Valuations are now at 16.5xFy18 expected earnings, in line with the long-term multiples. We could see some consolidation in the near-term, but downside appears to be limited, and there is a possibility of support from some of the Foreign Institutions ahead of the March 31st deadline for grandfathering from the zero long-term gains perspective, as per the recent treaties with Singapore and Mauritius. There are prospects of healthy returns over a 2-3 year period even from current levels. Returns are increasingly likely to be stock-specific, as compared to the gains in the Nifty.

Monthly Review

In the equity markets, the NSE Nifty-50 Index ended with a strong gain of 4.6% in January 2017, while the NSE Free float Midcap-100 index rallied much more, by 7.4%. The month began with positive global cues, with the minutes of the US Federal Reserve’s meeting indicative of only gradual increases in interest rates in 2017. Better than expected corporate results for the Oct-Dec quarter (with the adverse impact of demonetization being lesser than feared by the analyst community), coupled with continued buying by domestic mutual funds helped the market rally. The GST Council made some progress in January, and the implementation is expected to be in July (though we could see some more delay but not beyond September).

In the fixed income markets, bond prices rose in January (bond yields fell by 11 basis points) due to a fall in inflation levels: Consumer Price Inflation fell to 3.4% y-o-y in December from 3.6% in November, with both food and core inflation easing. Foreign institutions sold around Rs 2,300cr of debt securities, driven by rising global yields and commodity price trends. The spreads of corporate bonds over the 10 year G-Sec fell to 74bps from 78bps.

Economy

CPI inflation fell further to 3.4% in December vs 3.6% in Nov led by lower food inflation and core inflation. The Rupee remained relatively stable during the month of January at closed at 67.8, up 0.3% vs December. FPIs sold US$73 bn in the month while DIIs were net buyers, investing US$697 mn in the cash segment.

Outlook for Markets

Fixed Income Market

As global volatility settles down we expect the key commodities and global bond yields to trade in a range hereon. We expect the Mar-17 inflation to undershoot the RBI target of 5%, however we may be close to the end of interest rate-cut cycle, and we might see only another 25 bps cut by RBI over the course of the next 1 year. Post the cut in lending rates by 50-90 bps by banks, and the sluggish credit off take, there could however be reasonable demand for Government Securities. As demonetization has accelerated deposit growth in the banking system, and there are continuing restrictions on withdrawals, the resultant higher bank deposit growth will also lead to a sustained demand for bonds.

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