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As on 28th February 2017

Monthly Review

In the equity markets, the Nifty-50 Index extended its rally with gains of 3.7% in February, to a near all-time high, while the Nifty Free float Midcap-100 index rallied much more, by 6.9% and made a new all-time high. A balanced Union Budget and a reasonable trend in corporate results aided the continuation of the rally. Global cues, too, were supportive, with expectations of pro-growth policies in the US, and improvement in economic data in the US, along with expectations of pro-growth policies.

In the fixed income markets, bond prices fell sharply in February (bond yields rose sharply by 46 basis points) due to a change in RBI’s stance on policy rates from accommodative to neutral. The spreads of corporate bonds over the 10 year G-Sec rose to 78bps from 74bps on higher supply in bonds from the State Government.

Economy

CPI inflation fell further to 3.17% in January vs 3.4% in December led by lower food inflation and core inflation. Demonetization impact was evident in Dec’16 Industrial Production figures, as it declined by 0.4% YOY from a growth of 5.7% in Nov’16.

Outlook for Markets

Equity Market

Both the quarterly (Q3: Oct to Dec 2016) earning numbers and GDP data have shown a lesser impact of demonetization against a bleak scenario earlier anticipated by the markets, though it is possible we could see some impact of the same in Q4. Markets will keenly watch upcoming domestic and global events which could result in some near-term volatility.

The Nifty has rallied over 12% in last two months on account of better corporate earnings, strong global markets, a balanced Budget and more recently, the outcome of recent Municipal elections in Maharashtra. The Nifty now trades at 17xFy18 earnings, at a slight premium to long-term averages. However the prospects for appreciation are healthy from a 3-year+ perspective, but returns are increasingly likely to be stock-specific, as compared to the gains in the Nifty.

Monthly Review

In the equity markets, the Nifty-50 Index extended its rally with gains of 3.7% in February, to a near all-time high, while the Nifty Free float Midcap-100 index rallied much more, by 6.9% and made a new all-time high. A balanced Union Budget and a reasonable trend in corporate results aided the continuation of the rally. Global cues, too, were supportive, with expectations of pro-growth policies in the US, and improvement in economic data in the US, along with expectations of pro-growth policies.

In the fixed income markets, bond prices fell sharply in February (bond yields rose sharply by 46 basis points) due to a change in RBI’s stance on policy rates from accommodative to neutral. The spreads of corporate bonds over the 10 year G-Sec rose to 78bps from 74bps on higher supply in bonds from the State Government.

Economy

CPI inflation fell further to 3.17% in January vs 3.4% in December led by lower food inflation and core inflation. Demonetization impact was evident in Dec’16 Industrial Production figures, as it declined by 0.4% YOY from a growth of 5.7% in Nov’16.

Outlook for Markets

Fixed Income Market

While the status quo on rates in the recent monetary policy in February had some impact on market yields, it was the sudden shift in stance from “accommodative” to “neutral” that led to a sharp fall in bond prices, with yields rising by 40bps. The markets were surprised negatively, primarily because the decision was surprising in the background of the consumer inflation being well below the earlier-targeted 5% level, an estimated 4.5% level for CY18 and relatively subdued growth estimates in comparison to expectations in the early part of the year.

The shift in stance appears to be due to global uncertainties in terms of the pace of interest rate hikes and the rise in commodity prices, and intent to have a lower consumer inflation of 4% in the medium-term on a more durable basis. The change in RBI’s stance reduces the possibility of further rate cuts in the near-term.

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