Review

Nifty was down 0.85% for the month of August 2019 as disappointing results and muted outlook from corporates dampened domestic market sentiment. Possible GST cut for automobiles sector has driven some positive sentiment for the sector but monthly numbers continue to disappoint. A key sector weight announced strategic sale of its business at high valuations which led to a big up move for the stock and the market. Oil & Gas and media sectors outperformed the index while metals and capital Goods underperformed in the month of August 2019.

 

Outlook

We remain neutral on markets as GDP growth data has led to negative sentiments for India markets. Corporate commentary continues to be muted. China-US trade war continues to escalate impacting overall equity sentiment. However, dovish stance by global policymakers has been positive for risk asset classes. Government has started to seek industry comments to revive GDP growth. Transmission of lower interest rates could help economic recovery. Markets have also corrected from peak factoring in some of the slowdown in economic growth.

 

Review

In its third monetary policy of FY 2020, RBI cut its policy rates by an unconventional 35 bps – reducing the repo rate to 5.40%, while maintaining the monetary policy stance as ‘accommodative’. RBI revised its FY20 GDP growth forecast marginally lower by 0.10% to 6.90%. CPI estimates were largely maintained as 3.1% for Q2 FY 2020, 3.5-3.7% for H2 FY 2020 and 3.6% for Q1 FY 2021, with risks broadly balanced.

RBI accepted the Jalan Committee’s recommendation to transfer excess capital – amounting to ₹ 526 bn – along with the current years surplus of ₹ 1,230 bn, to the government in FY 2020. GDP growth for Q1 FY2020 printed at a 6Y low of 5.0%. CPI inflation for July 2019 was at 3.15% with core inflation almost flat at 4.1%. Credit and deposit growth remained slow at 11.6% and 10.2% respectively for August 16, 2019. Trade deficit narrowed to $13.43 billion in July due to a decline in imports. Manufacturing PMI for July was seen at 51.4. Indian Rupee appreciated against the dollar to close the month at 71.74.

 

Outlook

We expect RBI to cut policy rates by atleast 40 bps by the end of FY 2020. We also expect RBI to continue maintaining surplus liquidity in the banking system to assist in better transmission of rate cuts – to achieve this we expect RBI to undertake Open Market Operations (OMO) in H2 FY2020. The primary drivers for the bond markets going forward will be the likely stimulus measures announced by the government to propel the economy, FOMC Meeting and the October RBI Monetary Policy. However, borrowing by PSU / private sector is likely to keep the pressure on corporate bond spreads.

 

COMP/DOC/Sep/2019/99/2689.
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