Outlook for April 2015



FIXED INCOME


Review :


In a surprise move, RBI cut the rate at which it lends to the banks by 0.25% to 7.50%. RBI derived comfort from the recent softening of inflation and its trajectory going ahead. RBI also mentioned that a key factor behind the move was the Union budget for FY16 presented by the new Government. RBI noted that there were many important and valuable structural reforms embedded in the Budget. RBI commended the government’s intent to compensate for the delay in fiscal consolidation with a commitment to an improvement in the quality of adjustment. RBI also signed a memorandum with the central government setting out clear inflation objectives for the RBI. On its forward guidance, RBI said that the policy stance remained broadly unchanged from previous policy and said that future rate cuts will be data dependent. The Index of Industrial Production (IIP) for the month of January 2015 was seen at 2.6% as compared to 1.7% in December 2014. Consumer Price Index (CPI) and Wholesale Price Index (WPI) were seen at 5.37% and -2.06% respectively for the month of February 2015. Indian Rupee remained range bound during the month to close at 62.50 against the dollar as on 31 March 2015.


Outlook:


We have a neutral to cautious outlook on fixed income portfolio over short term. Given the overhang of the new borrowing calendar commencing in April, we do not see any downward movement in bond yields over next couple of months. On the inflation front, even though core inflation has softened, we expect food inflation to remain under pressure owing to unseasonal rains in the recent past. Moreover, markets will keenly watch out for cues on rate hike by Federal Reserve. However, if food inflation remains soft owing to a decent monsoon and core inflation continues to remain benign, then we expect RBI to cut rates in June policy.


EQUITY


Review:


Nifty lost ~5% in the month of March (FY15 Nifty gained ~27%). Both FIIs and DIIs were net buyers of Indian equities worth US$ 1.5 bn and US$ 31 mn respectively (FY15 FIIs bought US$ 17.7 bn and DIIs sold US$ 3.7 bn). Nifty declined in the month despite the surprise rate cut by RBI post Union Budget FY 16 primarily due to the lack of any immediate drivers for the domestic economy and strong economic data points from US, and due to geopolitical tension in Middle East which further hurt the market sentiments. The following sectors outperformed the index: Pharma/Health care, Real Estate and EPC as against sectors such as Oil & Gas, Metals & Minerals and Media which were laggards in Q4 FY15.


Outlook:


Short term-Neutral; Long term-Positive
The equity markets remained volatile during the quarter primarily driven by Union Budget FY16 and two surprise rate cuts by RBI, against backdrop of as yet soft economy and weak corporate earnings. In the short term, we expect the equity markets to be range bound on the back of primary issuance, concerns surrounding the implementation of reforms agenda and global liquidity. Nifty valuations at 16x FY16 earnings remains higher than long term average of 14.5x. However we believe that the combination of benign global commodity prices, improving domestic GDP growth, falling interest rates and falling corporate taxes along with stable currency would result in corporate earnings compounding at double digit, followed by similar returns from equities over the long term.


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.