Nifty was up 7.70% for the month of March 2019 as sentiments improved on expectation of continuity of the current government and easing of worries on trade war between US and China. During the month midcap indices outperformed Nifty. While real estate and banking sectors outperformed the index, media and auto sectors underperformed in the month of March 2019.
We remain neutral in the short term since global optimism has been offset by weak domestic economic data. With ~70% probability of El Nino, the outcome of monsoons could have an adverse impact food inflation. Further, global economic slowdown could also impact Indian exports and GDP growth. However, the recent rally in equity market has led to expansion in P/E multiples as earnings downgrades continue. Moreover, the risk of default by real estate and NBFC sectors continue to remain elevated. The global change in policy stance ensures flows to continue into equity markets. Additionally, formation of a majority government in 2019 general elections will be considered positive for equity markets.
In its first monetary policy in FY 2020, RBI reduced the policy repo rate by 25 basis points from 6.25% to 6.00% while maintaining the monetary policy stance at ‘Neutral’. RBI revised down its FY20 GDP growth forecast by 0.20% to 7.20%. CPI estimates were scaled downwards to 2.9-3.0% (vs 3.2-3.4%) in H1 FY20 and 3.5-3.8% in H2 FY20 (vs 3.9% in Q3) with risks broadly balanced. RBI allowed banks to reckon an additional 2% of government securities within the mandatory SLR requirement for the purpose of computing Liquidity Coverage Ratio (LCR). Credit and deposit growth was seen at 14.46% and 10.03% respectively for March 15, 2019. CPI inflation for February 2019 was seen at 2.57%. Indian Rupee closed against the dollar at 69.16 as on March 29, 2019.
We have a neutral outlook on bonds. We believe that RBI will deliver one more 25bps rate cut in H1 FY 2020 as the high real policy rates continue to remain high. However, with a divided MPC on rate cut and little support for a stance change, it is difficult to expect a deeper rate cut cycle unless CPI surprises on the downside. RBI will likely to wait for further clarity on monsoon and its impact on food prices, the fiscal math of the new government, and the evolving dynamics in the global crude market before making its next policy move. Total borrowing by central and state government along with private sector will weigh on bond yields. Moreover, given that RBI has added foreign exchange swap as one of the toolkits for liquidity management, markets will keenly watch out for the quantum of Open Market Operations (OMOs) going forward.