Economic Update 4
Equity Outlook 8
Debt Outlook 12
Index Page No.
Real Estate Outlook 16
From the Desk of the CIO
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RBI kept the repo rate constant in its April monetary policy review. This
was along the lines of general consensus amongst market participants
and experts. For the monetary loosening enthusiasts, the falling inflation
numbers undoubtedly present an opportunity to start cutting rates.
However, it is unlikely that RBI is merely looking for a trigger of some
sorts to get started on reducing interest rates. There are still three
unknowns that could lead to the inflation spiking again. For one, the
expectation of normal or sub-normal monsoon in 2014 will have a strong
bearing on food and vegetable prices. Secondly the outcome of general
elections will strongly influence the pace of economic growth. Thirdly,
the continued tapering of monetary stimulus by the US Fed may start to
reduce the flow of money to emerging markets through 2014.
A development connected to the third of these factors is likely increase
in US interest rates (or the expectation of it) in 2015. In the face of
increasing yields in US, it could be unwise to reduce interest rates in
India – till such time that the India growth story is firmly back on track in
the eyes of global investors, who either do not mind the lower ‘carry’
(the difference between Indian interest rates and US interest rates) or
remain enthusiastic about Indian equities. RBI, being aware of the same,
is more likely to wait than rush into the monetary loosening. If indeed a
reforms-minded government comes to power in the centre, growth
would pick up in the short term simply on account of positive sentiment.
That could reduce the intensity of demands on RBI to cut rates quickly.
Interestingly enough, as current account deficit is falling consistently,
global investors have taken fancy to Indian equities again. Part of this is
driven by a bet on the general elections’ outcome. It is also driven by
money looking for a suitable emerging market to invest into. Owing to
several global developments, this list is getting shorter by the day. India
hence is temporarily the beneficiary of the adverse developments in the
investment climate in Brazil, Turkey, Russia and China. For now, the
capital account surplus on account of these inflows has swollen enough
to warrant RBI’s intervention in keeping rupee from appreciating too
much. Unlike defending a falling currency, stopping the rise of an
appreciating one is not that hard. That is because such anti-appreciation
intervention increases forex reserves of the central bank instead of
depleting them. Hence, speculators cannot bet on the running-out-of-
ammunition by the central bank.
These interventions at present are a good idea for two reasons. Firstly,
the export industries that received a boost from the falling rupee last
year could suddenly find themselves at the wrong end of the exchange
rate if rupee appreciates quickly. That could stymie already anemic
economic growth in India. Secondly, if a large part of these inflows does
indeed reverse on the outcome of general elections (either through
profit booking after expected outcome or worse, stop loss due to
unexpected outcome), that could lead to a rapid fall in rupee then. It is
prudent to build ammunition to defend a slide of rupee in such a
scenario. Unlike the slow and steady appreciation that comes in good
times, depreciation of currencies generally tends to be rapid and
disruptive. Also unlike the appreciation, the depreciation attracts
speculative interests which can worsen the fall.
Going into the election season, we remain circumspect about the
outcome and its immediate effect on capital markets as well as medium
term effect on the economy. For now, across asset classes, the prudent
thing to do seem to be to stay invested.
As on 25th
BSE Sensex 22055 6.0% 18.1%
S&P Nifty 6589 6.5% 17.0%
S&P 500 1865 1.0% 20.2%
Nikkei 225 14423 (2.8%) 15.0%
10-yr G-Sec Yield 8.79% (10 bps) 84 bps
Call Markets 8.89% 102 bps 117 bps
Fixed Deposit* 9.00% 0 bps 25 bps
RICI Index 3687 0.0% (0.5%)
Gold (`/10gm) 29058 (5.2%) (1.6%)
Crude Oil ($/bbl)
(As on 24th March)
106.59 (2.9%) (0.5%)
Rupee/Dollar 60.49 2.39% (10.57%)
Yen/Dollar 102.35 0.1% (7.8%)
Economic Update - Snapshot of
10 yr Gsec
• Indicates SBI one-year FD
•New 10 Year benchmark paper (8.15%, 2022 Maturity) was listed in the month of June, the 1 year yield is compared to the earlier benchmark (2021 Maturity)
165 S & P BSE Sensex CNX Nifty
S&P 500 Nikkei 225
• The U.S. government posted a smaller budget deficit than expected in February of $193.5 billion as
receipts came in stronger than in the same period a year ago.
• Fed trims asset purchase by another US$10bn to $55bn a month.
• Initial claims for state unemployment benefits dropped 9,000 to seasonally adjusted 3,15,000,the
lowest reading since November, suggesting a strengthening in labor market conditions.
Economy Update - Global
• Japan’s core consumer price index rose 1.3% in February from a year earlier, same as that in January &
• Japan’s retail sales rose 3.6% Y-O-Y in February, compared with a 4.4% gain in January.
• Japan's unemployment rate came in at a seasonally adjusted 3.6% in February, compared with 3.7% in
• The Indian economy can grow an annual 5.2 percent in the quarter to end-March on higher farm output
growth, the chairman of the Prime Minister's Economic Advisory Council said.
• India's HSBC manufacturing PMI grows to 52.5 in February .
• China’s industrial output rose 8.6% in the first two months of 2014 from a year earlier, missing market
expectations for a 9.5% rise,
• The European Central Bank left interest rates on hold at 0.25% & unveiling no other measures to bolster
a fragile Euro zone recovery.
• Greece’s major banks must raise an extra 6.4 bn Euros ($8.9 bn) in capital to make themselves strong
enough to deal with the fallout from future crisis.
• British house prices rose at the slowest pace in six months in February, suggesting the housing market
recovery still has a long way to run.
Economy Outlook - Domestic
• Q3FY14 GDP growth slowed down to 4.7% YoY as against
expectations of 4.8% YoY & as compared to 4.8% in the previous
quarter leading to Apr-Dec’13 growth of 4.6%. Strong growth in
Services sector contributed significantly to the growth in the
economy in the third quarter. While manufacturing growth
slumped by 1.9% in Q3FY14.
• Apr-Dec’13 GDP at Market Price remained below GDP at Factor
Cost at 4.2% as against 4.6% growth in GDP at FC. Excise duty &
Service tax collections has slowed down sharply in FY14 thus we
can expect going forward GDP at FC to remain above GDP at MP.
• Agriculture sector in Nominal term have recorded a growth of
18.5% YoY while in real terms have grown by 3.6%. Record high
production in food grains in FY14 is likely to reflect in Agriculture
sector’s growth in the next quarter.
• Nearly 90.0% of the GDP growth contribution was due to surge in
Services sector performance. Services sector growth sharply
augmented to 5 month high of 7.6% YoY as compared to 6.0% in
the previous quarter & 6.9% in corresponding quarter in last year.
• Jan’14 IIP witnessed a positive growth of 0.1% Y-o-Y after
decelerating 0.6% in Dec ’13 and after posting three months of
• IIP performance is expected to further improve in Feb’14. This
improvement is indicated by 4.4% Y-o-Y increase in Auto
production, 10.5% growth in Electricity generation and robust pace
of expansion indicated by PMI.
• Headline figure for Dec’13 & Oct’13 have been upwardly revised by
~40bps to (0.2)% Y-o-Y & (1.2)%, respectively. Revision in Dec’13 IIP
figures is mainly due to 1.3% upward revision in food products and
1.5% upward revision in textiles sector, while 3.2% sharp revision in
Basic Metals led to upward revision in Oct’13 IIP figures.
Jul 13 Aug
FY12(Q3) FY12(Q4) FY13(Q1) FY13(Q2) FY13(Q3) FY13(Q4) FY14(Q1) FY14(Q2) FY14(Q3)
Economic Outlook - Domestic
As on Feb 2014 Bank credits grew by 14.4% on a Y-o-Y basis
which is about 1.9% lower than the growth witnessed in Feb
2013. Aggregate deposits on a Y-o-Y basis grew at 15.9%, vis-a-
vis 12.8% in Feb 2013.
RBI kept the key rates unchanged when it met on 1st April,2014
to review it’s first bi-monthly monetary policy for this fiscal. Due
to this action of the RBI, the CRR remains unchanged at 4% ,
repo is kept unchanged at 8% and MSF at 9%. The Governor
however, reduced borrowing under the Liquidity Adjustment
Facility(LAF) to 0.25% of NDTL from the current 0.50% and
increased liquidity under 7 day & 14 day repo from 0.50% to
0.75% of NDTL. RBI soothed jittery investors by stating that
further tightening in monetary policy may not be required if
inflation continues along the intended glide path.
WPI for Feb’14 slowed down sharply to 4.68% Y-o-Y from 5.05%
in Jan’14 and 6.40% in Dec’13. Food inflation contributed
significantly to the headline number as it fell to 5.60% y-o-y
from a peak of 13.81% in Nov ‘13.
Dec’13 WPI has been revised upwards by 22bps to 6.40%
primarily due to revision in Core inflation. Core inflation edged
up to 3.15% Y-o-Y in Feb’14 as compared to 3.04% in Jan’14.
Fuel Inflation declined to 8.75% Y-o-Y from 10.03% in Jan’14
mainly due to drop in Coking Coal, Kerosene and Petrol prices.
Headline CPI dropped to a 25 month low of 8.10% in February
‘14 as against 8.79% in January ‘14 primarily on account of
decline in vegetable prices which fell from a high of 21.91% in
January to 14.04% in February ‘14. Core CPI also fell marginally
by 9 bps to 7.91% for the month from 8.0% in January ‘14.
Growth in credit & deposits of SCBs
* End of period figures
20.0% Bank Credit Aggregate Deposits
Indian equity markets continue to rally going into the election season. We have seen FII inflows topping three billion dollars
in the last four weeks. This has also lead to a sharp appreciation in the rupee with levels of 60 being breached for the first
time in eight months.
GDP growth continues to stagnate at 4.5-5.0% for last four quarters pulled down by poor performance of manufacturing and
industrial sectors. However, we don’t expect any further moderation and believe that the worst is behind us. India's economy
could gather pace in the new fiscal year, putting behind a dismal year. The pace of recovery will be a function of reform –
orientation of the new government and the political will to push ahead with difficult reform measures.
India Inc is looking forward to the next government for a big reform push. While corrective measures on the fiscal deficit and
current account deficit side undertaken by the Government in the recent months have started yielding results, it is important
that the momentum on reforms is not lost. There are a number of measures which a strong reform oriented government can
take in 2014 to accelerate the economy - Goods and Services Tax, direct cash transfer of subsidies and boost to
manufacturing sector. A cyclical upturn in investment, stronger external demand and monetary easing will also boost growth.
The crude oil prices are expected to stay flattish in 2014. However, if there is big upwards revision in crude oil prices, it would
further strain India’s twin deficits - fiscal and current account. Reserve Bank of India (RBI) might also find it difficult to carry
out the necessary monetary measures in the form of rate cuts if inflationary pressures don’t abate.
We expect CPI inflation would come down this year and could average around 7.5% due to moderation of food and vegetable
prices. The key risk factor for Indian markets in 2014 remains the political stability and the government’s ability to push
through fiscal consolidation. The right government can take measure to further reduce fiscal which will give RBI the
necessary cushion to carry out rate cuts starting July. The key to growth revival is the fillip to the capex cycle for which low
interest rates are an imperative. We should see 25-50bps cut in interest rates in 2014 provided fiscal deficit is curtailed.
We believe that going forward markets will reconcile to the fact that trend GDP growth rate has come down, and could settle
at 5-5.5%. This is the new normal for Indian growth. Further reforms on fiscal consolidation, financial liberalization and
infrastructure growth will be needed to sustain an improvement in trend growth. Revival of large stalled projects cleared by
the Cabinet Committee on Investments will give a boost to capital formation activity.
We expect FY14 Q4 results to surprise on the positive with earnings growth of more than 15%. A real GDP growth of 5.5%-
6% along with Inflation of around 7% should lead to a nominal GDP growth of 13% in FY15 leading to earnings growth of
around 13-16%.We believe sectors like Banking, selective infrastructure names, IT and Pharma would deliver strong earnings
growth in the new fiscal.
We see 2014 brining a new bull cycle into existence. Commodity price correction, a strong macroeconomic recovery in US & a
stable Euro area continue to be significant positives for equity market this year. With domestic macro-economic data also on
the mend, we are aggressive buyers of Indian equity.
Sector Stance Remarks
We believe in the large sized opportunity presented by Pharma sector in India. India’s strength in
generics is difficult to replicate due to quality and quantity of available skilled manpower. With the
developed world keen to cut healthcare costs, and a vast pipeline of drugs going off-patent, Indian
pharma players are at the cusp of rapid growth.
Demand seems to be coming back in US. North American volume growth has also remained
resilient. With significant rupee depreciation in the last few months, margins will get a boost.
Private sector banks and NBFC’s are expected to deliver healthy earnings growth. We expect public
sector to significantly outperform due to cheap valuations and stabilization in asset quality.
With the ongoing price deregulation of diesel, we believe the total subsidy burden on Oil PSU’s
will come down during the course of the year. Rupee appreciation will also help.
Power Utilities Neutral
We like the regulated return characteristic of this space. This space provides steady growth in
earnings and decent return on capital.
Sector Stance Remarks
We are positive on SUV’s and agricultural vehicles segment due to lesser competition and higher
We like the secular consumption theme. We prefer “discretionary consumption” beneficiaries such
as Cigarettes, IT hardware, durables and branded garments, as the growth in this segment will be
disproportionately higher vis-à-vis the increase in disposable incomes.
The significant slowdown in order inflow activity combined with lack of demand has hurt the sector.
The capex activity might pick up in the second half of the current year.
While regulatory hurdles seem to be reducing, recent aggressive bidding for spectrum has revived
fears of unhealthy competition. Emergent competition from the social media space also present a
Steel companies will benefit because of rupee depreciation. However, commodity demand stays
low globally due to low capex activity.
Cement industry is facing over capacity issues and lack luster demand. With regulator taking a
strong view against pricing discipline, the profits of the sector are expected to stay muted.
• The yields on 10 Yr G sec closed at 8.79% which is 10 bps lower than the last months close of 8.89%, tracking gains in the
• RBI infused liquidity worth Rs 5,000 cr through the repurchase auction of government securities during the month.
• 7 -day term repo rate auction for a notified amount of Rs 10,000 cr conducted during last week of March 2014, resulted in a
cut off yield of 8.78% with total amount of bids received at Rs. 48,714 cr.
• The spread on the 10 year AAA rated corporate bond decreased to 72 bps on 25th Mar, 2014 from 76 bps (as on 25th Feb,
10-yr G-sec yieldYield curve
Our recommendations regarding long term debt is neither buy nor sell for now. And
after the volatility settles Investors could look to add to dynamic and medium to long
term income funds over the next few months. Long term debt is likely to see capital
appreciation owing to the expected monetary easing. There is lesser probability of rate
cuts in the near future and there could be a lot of volatility in the g-sec yields as well.
An important point to note is that as commodity prices are cooling down, current
account deficit may reduce to some extent. But all this is coupled with uncertainty. We
suggest matching risk appetite and investment horizon to fund selection. Hence we
recommend that if investing for a period of 2 years or above then long term can be
looked upon or else holding/profit booking could be a good idea. Investors who may
want to stay invested for the medium term (exiting when prices appreciate) and those
who would want to lock in high yields for the longer term can also invest in longer
Some AA and select A rated securities are very attractive at the current yields. A
similar trend can be seen in the Fixed Deposits also. Tight liquidity in the system has
also contributed to widening of the spreads making entry at current levels attractive.
With RBI maintaining status quo on key interest rates in the economy we would
suggest to invest in and hold on to current investments in short term debt. Due to
liquidity pressures increasing in the market as RBI has a huge borrowing plan in the
first half of the new fiscal, short term yields would remain higher. Short Term funds
still have high YTMs (9.5%–10%) providing interesting investment opportunities.
• The Indian Rupee appreciated against all the four major currencies in
the last month. It strengthened by 2.39% against the US Dollar, 1.72%
against the EURO and 2.30% against Japanese Yen. The major
appreciation out of the four currencies was seen in GBP against which
the Indian Rupee appreciated by 3.55% in last one month.
• The rupee during the month end breached its crucial resistance level of
60 per dollar for the first time in eight months on the back of strong
dollar inflows. Foreign funds have bought shares worth $2.9 billion so
far in March, taking net inflows in 2014 to $3.3 billion. This has led to
• Other reasons for a stronger rupee are improving macros, hopes of a
stable pro-growth government at the centre & India being placed as a
better investment option amongst emerging market economies.
Rupee movement vis-à-vis other currencies (M-o-M) Trade balance and export-import data
• The projected capital account balance for Q3 FY 13 is projected at
Rs. 171984 crores along with the Q1 and Q2 being at 88013 Cr
and 130409 Cr respectively.
• We expect factors such as higher interest rates to attract more
investments to India. Increased limits for investment by FIIs
would also help in bringing in more funds though uncertainty in
the global markets could prove to be a dampener.
Exports during February,2014 were valued at US $ 25.68 bn which
was 3.67% lower than the level of US $ 26.66 bn during February,
2013. Imports during February,2014 were valued at US $ 33.81 bn
representing a negative growth of 17.09% over the level of imports
valued at US $ 40.79 bn in February, 2014 translating into a trade
deficit of $8.13 bn.
FY 11 (Q2) FY 11 (Q3) FY 11 (Q4) FY 12 (Q1) FY 12 (Q2) FY 12 (Q3) FY 12 (Q4) FY 13 (Q1)
USD GBP EURO YEN
Export(%) Import Trade Balance (mn $)
Given the sharp sell off last year, the global commodity indices increased their 2014 weightage to the bullions
given the attractive risk reward ratio. It seems that gold has moved past the tapering concerns given the
macro uncertainties surrounding the world and safe haven is back. The talks of India relaxing the import
norms and reducing the custom duty further kept prices elevated in anticipation of demand spike that was
largely absent last year. However, due to rupee appreciation expect prices to remain stable. Gold on 25th
March, 2014 closed down 5.2% on a M-O-M basis.
Real Estate Outlook
Asset Classes Tier I Tier II
Due to a flurry of new launches in the first quarter of the year, most
markets witnessed an increase in the unsold inventory levels even with
relatively steady sales. Consequently, last quarter saw lesser new
With reduced new launches and steady absorption, the demand supply
gap is expected to reduce over the coming months.
Mid-income residential segment with Rs. 4,000 – 6,000 per sq. ft.
entry pricing with good developers in Pune, Bangalore, NCR and
Mumbai suburbs cane be expected to continue generating good
percentage returns with relatively lower risk.
Demand in Tier II cities is largely driven by the trend
towards nuclear families, increasing disposable
income, rising aspiration to own quality products and
the growth in infrastructure facilities in these cities.
Price appreciation is more concentrated to specific
micro-markets in these cities. Cities like Chandigarh,
Jaipur, Lucknow, Ahmedabad, Bhopal, Nagpur, Patna
and Cochin are expected to perform well.
The over-supply in commercial asset class still continues, thereby
dampening the capital values.
While rentals have been seen increasing at a slow pace over the last
couple of months, they still remain lower than the peal values achieved
in the past. In relative terms, Bangalore market continues to
outperform other markets owing primarily to the demand from the IT
Specific pre-leased properties with good tenant profile and larger lock-
in periods continue to be good investment opportunities over a long-
Lease rentals as well as capital values continue to be
stable at their current levels in the commercial asset
class. Low unit sizes have played an important role in
maintaining the absorption levels in these markets.
Tier I* markets include Mumbai, Delhi & NCR, Bangalore, Pune, Chennai, Hyderabad and Kolkatta
Tier II* markets includes all state capitals other than the Tier I markets
Asset Classes Tier I Tier II
Capital values as well as lease rentals continue to be stagnant.
The effects of the change in FDI policy to allow 51% foreign
ownership in multi-brand retail and 100% in single-brand retail
are yet to have any effect of the market for retails assets.
Developers continue to defer the construction costs as
absorption continues to be low unsold inventory levels high.
Tier II cities see a preference of hi-street retail as compared to
mall space in Tier I cities. While not much data on these rentals
gets reported, these are expected to have been stagnant.
The mall culture has repeatedly failed in the past n the Tier-2
cities. Whether the FDI in retail can change this phenomenon
can be known with more certainty once the effect of FDI is more
visible in Tier I cities.
Agricultural / non-agricultural lands with connectivity to Tier I
cities and in proximity to upcoming industrial and other
infrastructure developments present good investment
opportunities. Caution should however be exercised due to the
complexities typically involved in land investments.
Land in Tier II and III cities along upcoming / established growth
corridors have seen good percentage appreciation due to low
investment base in such areas.
Real Estate Outlook
Tier I* markets include Mumbai, Delhi & NCR, Bangalore, Pune, Chennai, Hyderabad and Kolkatta
Tier II* markets includes all state capitals other than the Tier I markets
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