Outlook for December 2014
RBI clearly signaled a change in the policy stance by acknowledging the deceleration in inflation and stating explicitly that if conditions remained benign, it would cut rates in early 2015. RBI said that the recent fall in global crude prices will have a net positive impact on domestic growth. RBI also acknowledged the fact that broad based improvement in the US and accommodating monetary policies in advanced economies will remain supporting factors. On inflation, the RBI revised down its CPI forecast for March 2015 to 6%. RBI, however, remained concerned on changes in inflationary expectations and fiscal deficit of the Central Government. Indian Rupee remained range bound during the month to close at 62.0325 against the dollar as on 28 November 2014.
We are positive on the domestic bond markets. We believe that the subdued global oil and commodity prices over a considerable time period along with low food inflation in the domestic market would lead to a sustained downward momentum in inflation, thus providing a credible reason for RBI to reduce interest rates in coming months. The current yields still remain attractive for long term investors, providing an opportunity for good capital gains once RBI starts reducing the interest rates.
Nifty gained 3.2% in the month of November (FYTD Nifty gained 28%). While FIIs remained net buyers of Indian equities worth US$ 2.2 bn, DIIs turned net sellers of equities in the tune of US$ 1.1 bn. (FYTD FIIs bought US$ 12.1 bn and DIIs sold US$ 3.5 bn). The gains in Nifty were driven by the sharp fall global oil prices during the month (Brent fell by 18%) followed by hopes of cut in interest rates and liquidity flows, into EMs including India supported by economic stimulus program in Japan and Eurozone, remained strong. The following sectors outperformed the index: Financials, Information Technology and Pharma/Health Care as against sectors such as Metals & Mining, Oil & Gas and Cement which were laggards in the three months period (September to November).
Although we believe that the long term outlook is optimistic, we expect the markets to be range bound in the short term on account of primary issuance and government’s divestment program for FY15. Moreover, we also expect the impact from the rate hikes in US to be minimal for India due to the availability of additional global liquidity as result of the economic stimulus programs announced in Japan and Eurozone. Nifty valuations at 16.2x one-year rolling forward earnings remains higher than the long term historical average. We strongly believe that the Indian economy is on the cusp of a strong economic growth uptrend in the coming years.
INVESTMENT RISK CONTROL FRAMEWORK
The Company recognises that risk is an integral element of investment management and managed acceptance of risk is essential for the generation of value. The Company’s acceptance of risk is dependent on the return on risk-adjusted capital and consistency with its strategic objectives. The Company will endeavor to reduce risks to the extent it is optimal to do so. In general therefore, the Company’s control procedures and systems are designed to manage risk, rather than eliminate it.
To manage the risk effectively, the Company has a three tiered investment structure with varying levels of decision making, which comprises the Board Investment Committee, Executive Investment Committee and the Investment team.
The Board Investment Committee recommends and reviews investment policy and changes thereto, reviews investments and oversees the risk management framework for the investments. The Executive Investment Committee is responsible for building investment strategy, monitoring investment decisions and returns, providing support on regulatory and tax issues and it also approves delegation of authority to the Dealers. The Investment team is responsible for market tracking, investment decisions, investment compliance, monitoring and reporting of risk.
The Company has strong governance framework encompassing segregation of duties and adequate firewalling between Investment and other roles. The Company has code of conduct to prevent insider trading. System used for investment management is seamlessly integrated within and with its peripheral systems with adequate system as well as manual controls. The activities and systems of the Investment team are subject to concurrent audit.
The Company uses advanced risk identification, measurement and management tools to ensure that risk exposure is within the Board approved risk policy.