Fixed Income:

The Reserve Bank of India (RBI), in its bi-monthly review of monetary policy on April 1, kept key policy rates unchanged. The RBI moved to reduce liquidity available under the overnight liquidity adjustment facility from 0.5% of NDTL (net demand and time liabilities) to 0.25% of NDTL. Simultaneously, it raised the liquidity available under term repo to 0.75% of NDTL from 0.5%. The Government also announced its market borrowing schedule for Apr-Sep, the first half of 2014-15 financial year. It is set to borrow INR 3.68 trn in April through September which is 61% of its FY15 total borrowing figure.
WPI inflation for February came at 4.68% as compared to 5.05% in January. The Indian Rupee appreciated against the dollar and closed at 59.89 against the dollar as on 28 March 2014 fuelled by strong FII $ inflows into the Indian markets.

Outlook:

We continue to remain neutral on bond markets. The upcoming central government elections and fiscal slippage weigh on the bond market. Fresh supply of bonds by government will keep the yield in check. 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 6.8% in the month of March (Nifty gained ~6% in Q4FY14 and 18% in FY14). While FIIs remained net buyers of Indian equities in the tune of US$ 3.7 bn for the month, DIIs turned net sellers of equities worth US$ 2.2 bn. (In Q4FY14, FIIs bought equities worth US$ 4.1 bn and DIIs sold equities worth US$ 2.3 bn). Nifty gained primarily due to strong FII flows on hopes of a favorable outcome from the general elections. The market sentiments remained positive during the month due to improvement in a few macroeconomic indicators coupled with the expectations of a temporary freeze in rate hikes by RBI and lower crude prices. While sectors such as EPC & Capital Goods, Cement and Financials outperformed the index, Metals & Mining, Information Technology and Telecoms underperformed the index over in Q4 FY14.

Outlook:

We continue to maintain our short term neutral outlook on equity market as the outcome of the general elections remains the key risk. We also expect the equity market to remain range bound due to weak growth environment, supply of paper and threat from withdrawal of global liquidity. Sensex valuations marginally increased to14.5x, slightly higher than historical average. However, we continue to believe that India's long term growth story remains intact and offers a great opportunity for investment.