Review

While Nifty was flat for the month of December 2018, US markets were down ~9%. Moreover, crude (brent) also corrected by ~9% during the month on concerns regarding slowdown in the global economic outlook. FIIs bought US$ 0.33 bn in equity, while domestic flows remained moderate during the month. Capital goods/Infra sector outperformed while Pharma/Media underperformed in December.

 

Outlook

We remain neutral:

The domestic macro factors have turned for the better as brent prices have fallen to US$ 55/ bbl from peak of US$ 85/ bbl. Consequently, currency has appreciated to ~ `70/ US$. We expect RBI to be accommodative for growth as inflation fears have subsided. On the other hand, concerns regarding slowdown in US has ensured that Fed would remain guarded on rate hikes. Additionally, GDP growth for Q2 FY 2019 has softened to 7.1% vs 8.2% in the previous quarter with material slowdown in 2W/4W/CV sales during the festive season. Moreover, we believe that lower GST collections and spends on populist measures by government are expected to impact spending on infrastructure.

 

Review

Manufacturing PMI for December was seen at 53.2 while Services PMI for November was seen at 53.7. Credit and deposit growth was seen at 15.07% and 9.66% respectively for December, 2018. CPI inflation for November 2018 was seen at 2.33%. Indian Rupee closed against the dollar at 69.77 as on December 31, 2018.

 

Outlook

We have a neutral outlook on bonds. We remain sanguine on inflation and expect headline CPI to average ~2.8% in H2 FY 2019. However, we expect growth to remain weak on the back of subdued rural consumption and likely curtailment of government capital expenditure. Moreover, we expect RBI to change the stance to ‘Neutral’ from ‘Calibrated tightening’ with a possibility of a rate cut in the upcoming February Monetary Policy.

Open Market Operations (OMOs) by RBI have changed the supply-demand dynamics in favor of bonds. Continued OMOs by RBI in Q4 will help sustain the rally in bonds. Stable rupee and benign crude prices will further help the market. However, possibility of a fiscal slippage by the government can be a dampener. Considering that this is an election year, risks around political uncertainty and populist measures by the government will weigh on bond yields. Therefore, we remain neutral on bond yields with a bias to add duration in case of any correction in the market.

 

COMP/DOC/Jan/2019/71/1952
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