Fixed Income:
Finance Minister P. Chidambaram announced a 3 month budget effective 1st April to June 30th, which more importantly tides over the election period. The much awaited Fiscal deficit numbers came in at 4.6 percent of GDP for FY14, 20 bps lower than budgeted last year. The government pencilled a fiscal deficit of 4.1% for FY15. As a result the gross borrowing burden for FY15 stands at INR 5.97tn which is slightly lower than the market expectation of INR 6.1-6.3tn. The net borrowing translates to INR 4.57tn versus last year's revised number of INR 4.69tn.
The government also announced a few election goodies, including cuts in excise duties. Excise duties for certain goods were cut from 12% to 10% for period up to June 30th. Excise duties were also reduced for cars, with cuts varying by the vehicle category. Other indirect tax cuts were introduced. Other populist steps included increasing agriculture credit target for banks by 14%, stepping up defence spending, and moratorium for student loan interest payments.
WPI inflation for January came at 5.05% as compared to 6.16% in December. The Indian Rupee continued to remain range bound against the dollar and closed at 61.76 against the dollar as on 28 February 2014.
Outlook:
We remain neutral on bond markets. The upcoming central government elections and fiscal slippage weigh on the bond market. However, abysmally low expected GDP growth of 4.5-5% does not augur well for the economy and hence very high interest rates are not sustainable. We expect Indian rupee to remain range bound against the dollar.
Equity Review:
Nifty gained ~3% in the month of February reversing some of its losses from the previous month (FYTD Nifty gained ~10%). While FIIs turned net buyers of Indian equities in the tune of US$ 0.4 bn, DIIs flows into equities were just US$ 48 mn for the month of February. Q3 FY14 corporate earnings reported earlier during the month remained a mixed bag across sectors. However, post the announcement of the interim FY15 budget which included sops for auto sectors and optimistic fiscal deficit target (4.6% of GDP in FY14), the domestic equity market rallied. This rally in Nifty was supported by positive cues from Asian peers and global sentiments. While sectors such as Information Technology, Pharma and EPC/Capital Goods outperformed the index, Telecoms, Metals & Mining and Cement underperformed the index over the last 3 months.
Outlook:
We continue to maintain our neutral outlook on the equity market in the short term. We also expect the market to remain range bound and lackluster due to the uncertainties surrounding the outcome of elections, weak economic environment, supply of paper and threat from withdrawal due to global liquidity. Sensex valuations at 14x, in line with historical average. However, as the Indian economy revives over the next few years, we expect equities to deliver double digit returns over long term. Therefore, our long term outlook remains positive for Indian equities.
