Nifty fell 6.42% for the month of September. FIIs sold equities worth US$1.3bn while DIIs bought equities worth US$1.72bn. Markets fell due to rally in crude leading to currency weakening and default by ILFS triggering liquidity crisis in the bond market. Oil & Gas and Technology sector outperformed while Media and Telecom underperformed in the index in 3 months ending September 2018.
We remain neutral:
Deterioration in domestic macro due to elevated crude and INR weakness compounded with tight liquidity are the short term negative factors influencing the market. However, Nifty earnings growth is expected to be in mid-teens and valuations for larger market has become reasonable post correction. Additionally, government spend on infrastructure and rural sectors to benefit GDP growth.
Manufacturing PMI for September was seen at 52.2 while Services PMI was seen at 51.5 in August. Credit and deposit growth was seen at 13.47% and 8.59% respectively for the fortnight ending September 14, 2018. CPI inflation for August 2018 was seen at 3.69%. Indian Rupee closed against the dollar at 72.49 as on September 28, 2018.
We have a cautious outlook on bond yields. Bond yield spiked up sharply over the past month on the back of sharp rupee depreciation and higher crude prices. There are significant upside risks to inflation stemming from high crude oil prices and depreciating rupee. High supply by both central and state government would retain the pressure on bond yields. However, absolute yields on the bonds look very attractive. RBI announced Open Market Operations (OMOs) worth INR 360 billion in October. Continued support in the form of OMOs by RBI in will lend some support to the market. Based on the above factors, we remain cautious on the market and would add duration on uptick in yields.