Review

Nifty was up 0.93% for the month of December 2019 as dovish commentary from global central banks led to positive sentiments for equity markets globally. Also, possible relief announcements for stressed sectors led to rally in banking stocks. Further, phase 1 US trade deal aided sentiment. Metals & minerals and technology sectors outperformed the index while capital goods and cement underperformed in the month of December 2019.

 

Outlook

We downgraded our view to neutral as economy continues to weak and market rally factor corporate tax cut. Also, fiscal space is quite challenged to stimulate demand. Further, rise in food inflation may stall interest rate cut. While, stress in SMEs continued to be an overhang. However, global central banks continue accommodative while phase-1 trade deal positive for risk assets and EM assets in particular. We also witnessed support from government for stressed sectors.

 

Review

CPI inflation for November 2019 was seen significantly higher at 5.54% (against 4.62% in October 2019), led by a sharp rise in food inflation. As on December 6, 2019, credit growth was seen at 7.9%, lower than the deposit growth of 10.3%. Trade deficit was seen at $12.12 billion in November, led by a decline in imports. Current account deficit for Jul-Sep 2019 slowed to 0.9% of GDP compared to 2% in the previous quarter. Manufacturing PMI for December was seen at 52.7. Indian Rupee appreciated marginally closing the month at 71.23.

Outlook

RBI’s Open Market Operations are targeted towards protecting long term yields and absorbing the likely additional government borrowing program. However, the risk of fiscal slippage and additional borrowing program remains a concern for the bond market. We expect RBI to stay on hold till at least Q1 FY 2021 due to increased risk of uptick in CPI inflation. We expect RBI to continue maintaining surplus liquidity in the banking system to assist in better transmission of rate cuts.

 

COMP/DOC/Jan/2020/81/3060
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