market outlook december 2016 - sbi funds outlook_dec 2016.pdf · pan card requirement for higher...
TRANSCRIPT
Market Outlook
December 2016
Events that rattled the global and domestic economy
Donald Trump won US 2016 election against its Democrat opponent Hillary Clinton
Modi Led NDA government decided to demonetize high-denomination notes (500 and 1000 rupee notes)
Government decided on a broad tax rate structure to be implemented under GST
Source: SBIMF Research
Events prior to demonetization to curb black money in India
Source: Google news, SBIMF Research
The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015: to deal with undisclosed income stashed abroad.
Direct Benefit Transfers: curbs leakages in government machinery
Foreign Account Tax Compliance Act (FATCA) with US, Renegotiation of Tax Treaties (with tax havens) and Information exchange with several other countries: to combat tax evasion
Benami Transactions (Amendment) Act, 2016: Prohibits benami transactions and provides for confiscating benami properties
‘Project Insight’ by Income-Tax Department : information-driven approach for improving tax compliance
Tax Collection at Source (at 1%) on Cash Sales exceeding Rs.2,00,000/- : to curb high value cash transactions and create an audit trail
Supreme Court monitored Special Investigation Team (SIT) on Black Money
20% Penalty on Real Estate Transactions undertaken in Cash exceeding Rs.20,000/ and other Real Estate Regulations
PAN card must for cash transactions over Rs 50,000 from January, 2015
Only 1% of India’s population pay income tax, according to Income Tax department data.
Income Declaration Scheme, 2016: amnesty window to declare undisclosed income, with penalty payment of 45%
Focus on GST implementation: enables tracing of tax evasion
JAM Trinity: to enable financial inclusion and promote digitalization of financial services
Auction based process to allocate natural resources: checks on inefficiency and bribe-taking mechanism in government
Why demonetization?
Source: RBI, SBIMF Research
‘Demonetization’: withdrawal of legal tender status of 500 and 1000 rupee notes in India w.e.f. 8th November (midnight), barring a few emergency transactions
To address fake high-value
currency notes
Curb illegal and terrorist activities
Curb the Black money in India
• Public have been allowed to deposit/exchange their present holding of these notes in banks/post offices till December 31st, after proper identification
• New 500 and 2000 rupee notes are being issued to substitute the old ones.
• Limits have been imposed on withdrawal of currency notes from ATMs and Banks as RBI has four mints operating in the country and the pace of withdrawal cannot match the pace of deposits
One way of reducing corruption and tax avoidance is to go cashless!
Why did ‘demonetization’ shake India?
86% of Indian currency loses legal status overnight*
0.6 0.8 1.1 1.5 1.9 2.5 3.2 4.0 5.0 6.0 7.5 8.6 9.7 10.8 12.2 14.2 15.2
2.2 2.5 2.8 3.3 3.7 4.3 5.0 5.9 6.9 8.0
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11.8 13.0
14.5 16.6
17.8
0.0
5.0
10.0
15.0
20.0
2000
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2016
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(Oct
)
500 and 1000 rupee notes (in Rs. Trillion)Smaller denomination notes& coins (in Rs. Trillion)Total Currency in Circulation (in Rs. Trillion)
Source: Livemint, Indiaspend, RBI, SBIMF Research; NB: *Oct 2016 figures of 500 &1000 notes are SBIMF’s estimate
12.42
9.47
7.91
4.18 4 3.92 3.36
0
2
4
6
8
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12
14
India China Germany US Brazil Korea UK
Cash to GDP Ratio (as of 2014)
India depends heavily on cash for economic transactions
• There is one bank branch per 10,000 Indians while there is one ATM per 5,000 Indians. There are 132,834 bank
branches in India, of which 38% (50,554) are rural.
• India has about 700 million debit and 25 million credit cards.
• Agriculture, informal sector workers—about 482 million people - earn cash incomes (~40% of India’s population).
• Rural economy which comprise 800 million people, or 65% of India’s population depend largely on cash.
• The informal economy—presently employs more than 80% of India’s workforce.
• About 950 million people (78% of the population), do not have an internet connection. 30% of India’s population are
smart phone users.
Consequences of Demonetization
Source: SBIMF Research
Unintended Positive Consequences
• Distribution of Wealth effect • Rapid Transmission of rate cuts
may boost credit demand • Multiplier effects of bank deposits • Gold and Real Estate inventory
clearance • Productivity enhancement from
digitalization • Financialization of savings • Catalysis to Digitalization, cashless
economy
Possible Fall Out of Demonetization
• Growth Slowdown – Activity and Wealth effect
• Constrained Consumption • Policy Uncertainty • Derailment of Private Capital
Expenditure • Adverse effect on Real Estate
prices • Fiscal Impact due to slowdown • Balance sheet issues
Impact on Growth: Negative in the near-term
Source: SBIMF Research
• Demonetization has disrupted the business activity significantly, specifically for sectors which thrives on cash as a medium of exchange. Affects the ability to pay wages and make purchase orders for sectors.
• Financial services , on the other hand, will see positive impacts due to influx of low-cost deposits. Expectation of fiscal stimulus will also provide a boost to demand in related sectors.
• Net short-term effect is likely to be negative and to that extent, it can dilute the impact of consumption boost that market anticipated from the rolling out of 7thPay commission and improvement in rural income due to better harvest.
• To gauge the lasting impact of demonetization one needs to distinguish between liquidity, wealth, and income effect. Loss of demand due to liquidity effect would be transient and can be recouped to a large extent. The wealth effect impacts select sectors. However, consumption lost because of underlying incomes taking a hit may not necessarily be recouped.
• In the long run, both GST implementation and curbing of black money are structurally positive for growth.
4.9
5.6
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FY13 FY14 FY15 FY16 FY17 (till 1H)
GVA at basic prices Real GDP
Liquidity Impact: Can be recouped to a large extent once currency
flow normalizes
Wealth effect: Can adversely impact select sectors. In long run, distributional wealth effect may
lead to neutral impact on growth
Income effect: Consumption lost because of underlying incomes
taking a hit may not necessarily be recouped. Can have adverse spiral
effects and may take longer to correct
Growth impacts
Selective
CPI inflation: Impact mildly deflationary
Source: CSO, SBIMF Research
• Latest Inflation print (4.2% in October) depicted considerable softening in prices primarily due to fall in vegetable and fuel prices. However, certain food prices has worsened in the last month and pose concern. Inflation ex-food and fuel remain considerably sticky.
• Demonetization is likely to cause temporary fall in inflation due to reduced cash availability and hence reduced spending. This may lower the prices of discretionary goods and services (16% weight in CPI basket) and prices perishable food items. However, the effects may be transitory and a large portion of CPI basket may remain unaffected from demonetization (with apprx 45% food, 10% fuel and light and 10% housing rentals.
CPI Inflation softened considerably to 4.2% in October …as food and fuel prices fell
-4.0-2.00.02.04.06.08.0
10.012.0
Jan-
14
Mar
-14
May
-14
Jul-1
4
Sep-
14
Nov
-14
Jan-
15
Mar
-15
May
-15
Jul-1
5
Sep-
15
Nov
-15
Jan-
16
Mar
-16
May
-16
Jul-1
6
Core CPI (CPI ex food ex fuel) CPI Food
CPI: Transport and communication
% y-o-y
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
Jan-
12
Apr-
12
Jul-1
2
Oct
-12
Jan-
13
Apr-
13
Jul-1
3
Oct
-13
Jan-
14
Apr-
14
Jul-1
4
Oct
-14
Jan-
15
Apr-
15
Jul-1
5
Oct
-15
Jan-
16
Apr-
16
Jul-1
6
CPI % y-o-y
CPI target range 4% + 2%
Fiscal health of the economy will get a positive boost
Source: Budget documents, SBIMF Research
7.1 7.3 7.1 7.4 7.2 7.2 6.5 7.0 7.0
8.8 9.5 9.9 10.1 9.7 9.4 10.8 10.6 10.2
15.2 16.0 16.2 16.8 16.1 15.9 16.3 17.1 17.1
02468
101214161820
2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 BE 2015-16 RE 2016-17 BE
Centre State Total
Tax Collection (as % of GDP)
Both GST implementation and curbing the black money will boost the tax buoyancy for the government in the long-run
• Fiscal health of the economy will definitely see an improvement due to both these measures of GST implementation and
curbing the black money, though it may be marginally negative in the short-term due to implementation cost and reduced business activity. States tax collection which may also be adversely impacted due to reduced real-estate activity.
• In the long-run, demonetization, along with other measures such as GST implementation, DBT, Real estate regulations , PAN card requirement for higher denomination transaction will create a background which reduces the scope of evading taxes (and hence black money size in India)
• We are likely to see a massive improvement in revenue collection, whether it be through better tax to GDP ratio, through penalty payments (for black money) or through profit transfer from RBI (a likely possibility from this currency demonetization).
Equity Market Outlook
Source: Bloomberg, SBIMF Research,
Fall in Indian Equity
NIFTY fell 370 points in last one month due to twin effects of EM sell-off post Trump’s victory and demonetization
Global equity market snapshot: November 2016
Performance in November 2016 (local currency returns)
Source: Bloomberg, SBIMF Research
• Nifty (-4.7%) under performed most of the global markets during the month. However it delivered inline performance with MSCI EM index.
• Brazil/Russia/Pakistan/Indonesia happen to the best performing markets globally YTD. Sri Lanka/China/Japan amongst the laggards.
• India underperforms the MSCI Emerging markets index in YTD terms.
Performance YTD (local currency returns)
-8
-5 -5 -5 -4 -3 -3 -2 -1 -1 -1 -1
1
3 4 5 5 5
7
(10)(8)(6)(4)(2)02468
PHIL
IPPI
NES
INDO
NES
IAN
IFTY
MSC
I EM
BRAZ
IL UK
SRI L
ANKA
KORE
AM
SCI E
M -
EURO
PEHA
NG
SEN
GTA
IWAN
GERM
ANY
FRAN
CES&
P 50
0RU
SSIA
CHIN
AJA
PAN
DOW
JON
ESPA
KIST
AN
-9 -8 -4 -2 -1 -1
1 4 4 8 9 9 10 11 12 12
30 36
43
(20)
(10)
0
10
20
30
40
50
SRI L
ANKA
CHIN
AJA
PAN
PHIL
IPPI
NES
FRAN
CEGE
RMAN
YKO
REA
NIF
TYHA
NG
SEN
GS&
P 50
0M
SCI E
M UK
DOW
JON
ESTA
IWAN
MSC
I EM
- EU
ROPE
INDO
NES
IAPA
KIST
ANRU
SSIA
BRAZ
IL
Indian stock market snapshot: November 2016
Performance in November 2016
Source: Bloomberg, SBIMF Research
• Nifty/Sensex was down 5% in Nov’16. On YTD basis, the NIFTY index is up by 4%.
• Metals emerged as the top performers for the month, as well on a YTD basis.
• Real estate and Auto have been the worst hit sector during the month.
• Mid-caps (-7.2%) and Small-caps (-9.2%) under performed during the month, but outperformed on a YTD basis.
• Year-to-date, IT services and healthcare have been the worst performing sectors.
Performance YTD
-17
-9 -8 -7
-6 -6 -5 -5 -5 -5 -5 -4 -3
-1 0
4
(20)
(15)
(10)
(5)
0
5
REAL
EST
ATE
AUTO
SMAL
L CA
P
MID
CAP
CAP
GOO
DS
BSE
500
FMCG
BSE
100
NIF
TY
BAN
KEX
SEN
SEX
PHAR
MA
OIL
& G
AS IT
PSU
MET
ALS
-11 -7 -5
-1
2 3 4 4 5 5 9 10 12
16
25
44
(20)
(10)
0
10
20
30
40
50
IT
PHAR
MA
REAL
EST
ATE
CAP
GOO
DS
SEN
SEX
FMCG
NIF
TY
SMAL
L CA
P
BSE
100
BSE
500
AUTO
BAN
KEX
MID
CAP PS
U
OIL
& G
AS
MET
ALS
Source: Antique, SBIMF Research,
Earnings may see a downward revision
• Profits for Indian companies have been weak in FY15 and FY16 on the back of weak export and domestic demand, stressed balance sheet, high real interest rates, fall in global commodity prices (affecting the commodity related companies), delayed investment cycle and relative appreciation of rupee vis-à-vis the trading partners.
• The earnings narrative were expected to change since 2H FY17 and there were visible signs of cyclical recovery, beginning with a noticeable slowdown in the pace and magnitude of downgrades. 2Q FY17 posted 6.6% growth in PAT earnings for the NIFTY companies after nearly six consecutive quarters of near-zero growth.
• Markets expected a boost earnings from moderating interest rates, favourable base for select cyclical like metals and PSU banks and boost in consumption related sectors from normal monsoon after two consecutive years of drought and from 7th Pay Commission pay-outs, and very.
• The earnings narrative has now changed significantly post demonetization. Demonetization will significantly dent the expected boost in consumption. Earnings and consequently market performance in the near term will be a function of pace of re-monetization and recovery in sectors thriving on cash spending.
• Needless to say, global factors like global bond yields, capital flows and currency movement will also weigh. Second, the phase of commodity cost tailwinds – which drove margin expansion over FY14-16 – is now behind as commodity costs have bottomed out. This could pose downside risks to margins in an environment of demand compression.
For FY17, earnings were expected to grow by as much as 14%. Both FY17 and FY18 expectations is likely to be revised downward post the demonetization exercise
95 128
175 207
239
283 247
284
330 351
385 427
391 403
460
-20%
-10%
0%
10%
20%
30%
40%
0
50
100
150
200
250
300
350
400
450
500
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
e
Nifty EPS (RS.)% y-o-y (RHS)
Source: Bloomberg, Morgan Stanley, SBIMF Research,
Corrections in Indian Equity Valuations
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
27-Dec-00 27-Dec-03 27-Dec-06 27-Dec-09 27-Dec-12 27-Dec-15
MSCI India's P/E prem. wrt MSCI EM
India’s valuations relative to other EMs have come-off in recent months …
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0% MSCI India ROE Relative to EM
…while the relative RoE continues to strengthen
Liquidity: DII inflow cushioned the market
Source: Antique, NSDL, SBIMF Research
FIIs have sold US$ 3.3 bn from equity market and US$ 4bn from the debt market between Oct-Nov
DIIs, on the other hand, pumped in US$ 3.9bn in last two months
-10000-8000-6000-4000-2000
02000400060008000
May
-13
Aug-
13
Nov
-13
Feb-
14
May
-14
Aug-
14
Nov
-14
Feb-
15
May
-15
Aug-
15
Nov
-15
Feb-
16
May
-16
Aug-
16
Nov
-16
Equity Investment Debt Investment
USD mn
-1.5 -1.2
-0.2
0.2
-2.2
-1.1 -0.8 -0.8 -0.5
0.4
-0.2
0.7
-1.2
0.9
-1.3
0.3 0.0
1.8 1.3
1.9
0.1
2.5
1.6
-0.2
1.3 0.9
1.9 1.5
-2.5
-0.4
1.1
-0.3 -0.9 -0.7
0.3
1.2
2.7
Nov
-13
Feb-
14
May
-14
Aug-
14
Nov
-14
Feb-
15
May
-15
Aug-
15
Nov
-15
Feb-
16
May
-16
Aug-
16
Nov
-16
Market outlook
• The sudden shock of demonetization of high denomination currency in India and victory of Donald Trump in US 2016 election (between 8th and 9th November) caused sharp fall in the Indian equity markets- party due to a broader sell-off from the emerging markets space and partly due to the India-specific reasons.
• Sensex is down 4.6% during the month. Expectedly, performance down the cap curve was far worse with the BSE Midcap index and the BSE Small-cap index underperforming the large cap Sensex by 2.8% and 4.5%, respectively.
• FII flows hit a 12-month low with net selling exceeding USD-2-bn during the month. This was offset by significantly higher buying by domestic institutions, both Insurance and MFs.
• Valuations have corrected and are currently hovering at its long-term average of 16 times forward earnings.
• The demonetization impact might sustain for more than a quarter or two but given that there are too many moving parts, its bit too early to call. While the disruption in economic activity particularly on discretionary consumption may drive sentiments, one must not lose sight of the fact that a good part of index earnings (Technology, healthcare, energy, staples, telecom, global commodities etc.) may remain largely insulated. Barring the risk of a deeper slowdown leading to systemic balance sheet issues, ‘Digitalisation of finance’ and ‘financialisation of savings’ actually augur very well for financials (almost 30% of index).
• It is important to note that government over the last 2-years has taken measures keeping in mind long-term structural gains for the economy even at the cost of short-term pains. We believe that corrections due to these disruptive forces offers opportunity to investors as the developments are positive from a structural long-term perspective.
Valuations are at 16 times on 1 year forward earnings
Source: Bloomberg, SBIMF Research
7.0
9.0
11.0
13.0
15.0
17.0
19.0
21.0
23.0
25.0
Dec/
05Ju
l/06
Feb/
07Se
p/07
Apr/
08N
ov/0
8Ju
n/09
Jan/
10Au
g/10
Mar
/11
Oct
/11
May
/12
Dec/
12Ju
l/13
Feb/
14Se
p/14
Apr/
15N
ov/1
5Ju
n/16
Sensex 1Y fwd PE
Mean: 16
+1 SD
-1 SD
Debt Market Outlook
Global rates snapshot for Nov 2016: Bond yields are fast rising
• There has been a subtle shift in the direction of global bond yields over the last three month with markets doubting the incremental
effectiveness of additional QE/Monetary easing on aggregate demand.
• With the election results in the US, there has been a further rise in treasury yields, increase in long term market implied inflation expectations and curve steepening.
Source: Bloomberg, SBIMF Research
10 Year Gsec Yield (% mth end) 2014 end 2015 end Sep-16 Oct-16 Nov-16
Change m-o-m (in bps)
Change YTD (in bps)
Developed market
US 2.17 2.27 1.59 1.83 2.38 56 11
Germany 0.54 0.63 -0.12 0.16 0.28 11 -35
Italy 1.57 1.35 0.99 1.66 1.99 33 64
Japan 0.33 0.27 -0.09 -0.05 0.03 7 -24
Spain 1.61 1.77 0.88 1.20 1.55 35 -22
Switzerland 0.32 -0.06 -0.55 -0.39 -0.13 27 -7
Barring India, emerging markets bond yields are rising
Source: Bloomberg, SBIMF Research
10 Year Gsec Yield (% mth end) 2014 end 2015 end Aug-16 Sep-16 Oct-16 Nov-16
Change m-o-m (in
bps) % change
in 3m
Change YTD (in
bps)
Emerging Market
Brazil 12.36 16.51 12.08 11.58 11.40 11.83 44 -25 -468
China 3.63 2.83 2.79 2.72 2.74 2.94 20 16 11
India 7.86 7.76 7.11 6.82 6.79 6.25 -55 -86 -151
Indonesia 7.75 8.69 7.09 7.02 7.21 8.09 88 100 -60
Korea 2.63 2.08 1.48 1.42 1.68 2.15 47 67 7
Malaysia 4.12 4.19 3.59 3.55 3.62 4.35 73 75 16
Philippines 3.95 3.95 3.95 3.95 3.95 4.52 58 58 58
Russia 9.39 9.62 8.20 8.15 8.58 8.82 25 -80 -80
South Africa 7.96 9.76 9.05 8.66 8.70 9.02 32 -74 -74
Taiwan 1.61 1.02 0.68 0.68 0.68 1.18 50 16 16
Thailand 2.69 2.49 2.26 2.10 2.13 2.69 56 20 20
India Rates Snapshot for November 2016
• The withdrawal of the high denomination notes as legal tender led to massive deposits of money at bank branches. Given the ceiling on withdrawal of cash, the liquidity in the banking system rose sharply. At the same time, growth disruptive effects of demonetization led markets to expect deeper rate buts in the economy. Improved liquidity and rate cuts expectations led to softening of yields across the curve.
• Indian bond yields have softened massively with 10-year G-sec touching a low of 6.10% in November end, though the yields moved up post December 9 MPC meet to trade at 6.44% of 9th December. Money-market rates, too, softened on the back of anticipation of improvement in liquidity.
• Crude oil prices fell 9.6% over the month, but rose 25% YTD. Rupee depreciated sharply by 2.4% against the US Dollar in November.
Source: Bloomberg, PPAC, SBIMF Research; NB: **Crude oil price is average $/barrel for the month, rest of the data are % month end; *Corporate bond rate is for AAA rated bonds ,*** Refers to PSU Banks CD rate; # INR and Oil price changes are % change
Sep-16 Oct-16 Nov-16 Change YTD (in
bps) m-o-m change
(in bps) 1 Yr T-Bill 6.55 6.44 6.05 -117 -39 3M T-Bill 6.42 6.37 5.95 -119 -41 10 year GSec 6.82 6.79 6.25 -151 -55 3M CD*** 6.61 6.58 6.15 -105 -43 12M CD*** 7.06 6.93 6.48 -123 -45 3 Yr Corp Bond* 7.55 7.48 7.03 -130 -45 5 Yr Corp Bond* 7.60 7.52 7.16 -123 -36 10 Yr Corp Bond* 7.67 7.65 7.20 -122 -46 1 Yr IRS 6.47 6.35 6.00 -107 -35 5 Yr IRS 6.36 6.35 6.07 -89 -28 Overnight MIBOR Rate 6.50 6.24 6.51 -52 27 INR/USD 66.6 66.8 68.4 3.4# 2.4# Crude Oil Indian Basket** 45.1 49.2 44.5 24.6# -9.6#
India vs. US interest differentials: narrowed rapidly in last three months
Source: CMIE economic outlook, Bloomberg, SBIMF Research
India US interest rate differential narrowed down rapidly by 130-140 bps in last two months
Strengthening dollar bodes depreciation pressure for EM currencies
Source: Bloomberg, SBIMF Research
Dollar Index has moved above 100 after nearly 13 years
Commodity prices are rising
Source: Bloomberg, SBIMF Research; NB: Data as of 6th December
Commodity prices have moved up YTD posing an upside risk for inflation
Currency
Source: Bloomberg, SBIMF Research
-9 -11
-2
-19 -17
-2 -2 -4 -6 -12
-1
-15
-6 -1
-30-25-20-15-10
-505
1015
Afric
an R
and
Braz
il Re
al
Chin
ese
renm
inbi
Colo
mbi
an P
eso
Hung
aria
n Fo
rint
Indi
an R
upee
Indo
nesia
n Ru
piah
Kore
an W
on
Mal
aysia
n Ri
ngitt
Mex
ican
Pes
o
Phili
ppin
e Pe
so
Polis
h Zl
oty
Russ
ian
Roub
le
Taiw
anes
e Do
llar
Thai
Bah
t
Turk
ey L
ira
% change in 2014 % change in 2015 % change YTD
Indian rupee has been relatively less volatile and depicted marginal depreciation bias since 2014 at a time when most other Emerging Market currencies depicted large swings on either side
0.02.04.06.08.0
10.012.014.016.018.0
Jan-
01Ja
n-02
Jan-
03Ja
n-04
Jan-
05Ja
n-06
Jan-
07Ja
n-08
Jan-
09Ja
n-10
Jan-
11Ja
n-12
Jan-
13Ja
n-14
Jan-
15Ja
n-16
Avg volatility of EM currency INR volatility
India has built maximum FX reserves in 3 years which can help RBI cushion currency market volatility
Overall external account is still comfortable
Trade deficit has fallen to US$ 5-8bn per month since 2016 (vs. 10-12bn in 2015)- due to fall in oil and gold import
Source: CMIE, RBI, SBIFM Research
Low trade deficit has helped Current Account deficit to stay below 2% of GDP
India’s Net FDI inflow sufficient to fund Current account deficit since FY15
FX reserves at US$ 367bn as of October end is sufficient to finance 12 months of import
10 10 16
28 38
48
78 88
32 27 22
3 8 16
22 18 12
22 20 22 31 36
0
20
40
60
80
100
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
CAD Net FDI
USD bn
6
8
10
12
14
260280300320340360380
Jan-
10Ap
r-10
Jul-1
0O
ct-1
0Ja
n-11
Apr-
11Ju
l-11
Oct
-11
Jan-
12Ap
r-12
Jul-1
2O
ct-1
2Ja
n-13
Apr-
13Ju
l-13
Oct
-13
Jan-
14Ap
r-14
Jul-1
4O
ct-1
4Ja
n-15
Apr-
15Ju
l-15
Oct
-15
Jan-
16Ap
r-16
Jul-1
6O
ct-1
6
FX reserves (USD bn)- LHS Import cover (in months RHS)
-8.0 -7.0 -6.0 -5.0 -4.0 -3.0 -2.0 -1.0 -
-35.0
-30.0
-25.0
-20.0
-15.0
-10.0
-5.0
-
Mar
-11
Jul-1
1
Nov
-11
Mar
-12
Jul-1
2
Nov
-12
Mar
-13
Jul-1
3
Nov
-13
Mar
-14
Jul-1
4
Nov
-14
Mar
-15
Jul-1
5
Nov
-15
Mar
-16
Current Account Balance (US$ bn) as % of GDP- RHS
0
5
10
15
20
25
30
101520253035404550
Jan-
10
Jun-
10
Nov
-10
Apr-
11
Sep-
11
Feb-
12
Jul-1
2
Dec-
12
May
-13
Oct
-13
Mar
-14
Aug-
14
Jan-
15
Jun-
15
Nov
-15
Apr-
16
Sep-
16
Trade Deficit (USD bn)- RHS Exports (USD bn)
Imports (USD bn)
Currency outlook
Source: CMIE economic outlook, SBIMF Research
Indian currency has strengthened against its trade partners
• Over the last two months dollar has strengthened and bond
yields across the globe has rallied rapidly.
• India has been an exception to see bond yields falling massively at a time when even emerging markets rallied by anywhere between 50-100bps. This has narrowed down India’s interest differential vis-à-vis similar US treasury papers by at least 100 bps in last three months across the yield curve.
• Thus, Indian rupee, which has been a story high carry and low volatility, will see some loss of attractiveness on the former.
• Nearly US$ 80bn of foreign currency reserves has been amassed by the Indian central bank, at a time, when most other emerging markets dipped into their reserves. This provides some muscle power to the RBI to contain the rupee volatility. I
• While rupee depicted marginal depreciation against dollar, it strengthened against its trading partners in last three years.
• Looking ahead, in the event of depreciation in other emerging market currencies, rising crude prices and strengthening dollar, we do envisage sharper depreciation in rupee next year.
Banking system Liquidity to see sustained improvement
Source: RBI, SBIMF Research
• Currency Leakage has picked up pace in last two years which has been out-of-sync with the pace of economic growth. High currency leakage, on the margin, leads to tightness in the banking system liquidity.
• Liquidity has gone large shifts in Q3 FY17 to surplus zone. Currency in Circulations plunged by Rs. 7.4 billion, net of replacements up to December 2. Deposits in banking system surged in parallel.
• RBI implemented variety of measures to suck this surplus liquidity. Incremental CRR of 100% was implemented for a fortnight, variable reverse repo window was scaled up, oil bonds issued by government was allowed as eligible securities under LAF and limits on securities under market stabilization scheme (MSS) was scaled up from Rs. 0.2 trillion to Rs. 6 trillion on November 9. Cash Management Bills under MSS has been issued to the tune of Rs. 1.4 trillion by 6th December.
• Some of the cash is likely to permanently stay in the system as bank deposits even after conditions normalizes and hence lead to a permanent improvement in banking system liquidity.
8.0
10.0
12.0
14.0
16.0
18.0
Jan-
12
May
-12
Sep-
12
Jan-
13
May
-13
Sep-
13
Jan-
14
May
-14
Sep-
14
Jan-
15
May
-15
Sep-
15
Jan-
16
May
-16
Sep-
16
Growth in Currency in Circulation (% y-o-y)
Currency leakage from the banking system accelerated in last two years
Return of currency to the banks without a parallel withdrawal led to drastic improvement in liquidity
-4000-3000-2000-1000
0100020003000400050006000
6-Ap
r-15
6-Ju
n-15
6-Au
g-15
6-O
ct-1
5
6-De
c-15
6-Fe
b-16
6-Ap
r-16
6-Ju
n-16
6-Au
g-16
6-O
ct-1
6
6-De
c-16
Banking System Liquidity (Rs. Billion)
+1% of NDTL
-1% of NDTL
Banks lending rates may fall due to availability of low cost deposits
Loan growth remains soft while deposit growth surged further
Source: CMIE, RBI, SBIFM Research
MCLR has fallen by 25bps in November
• Buoyed by the demonetization drive, the deposit portfolio surge further by Rs. 5.3 trillion in November. Banks’ deposit growth thus increased to 16% y-y, highest in past few years and much higher compared to 1H FY17 growth of 9.5%.
• Some of the cash is likely to permanently stay in the system as bank deposits even after conditions normalizes and hence lead to a permanent cheaper source of funds for banks. Banks have already reduced their deposit rates for varying tenors due to the comfortable liquidity.
• Over the next couple of months, banks' lending rates is likely to come down due to fall in deposit rates and due to competitive pressure created by rate cuts announced by some of the banks.
• Weak near term credit demand can support bonds, until the working capital demand shifts to banking channels from the cash based channel. While we anticipate some of the informal lending demand to come to the formal banking system, a big jump in credit growth will depend on pick up in capital spending cycle.
6.00
8.00
10.00
12.00
14.00
16.00
18.00
20.00
Jan/
13
Apr/
13
Jul/1
3
Oct
/13
Jan/
14
Apr/
14
Jul/1
4
Oct
/14
Jan/
15
Apr/
15
Jul/1
5
Oct
/15
Jan/
16
Apr/
16
Jul/1
6
Oct
/16
Bank Deposit (% y-o-y) Credit % y-o-y-LHS
8.58.68.68.78.78.88.88.98.99.09.0
Apr/16 Jun/16 Aug/16 Oct/16 Dec/16
MCLR (Overnight) in %
RBI, in its 7th December MPC meeting left the repo rate unchanged contrary to market expectations of 25-50bps of rate cut. In doing so, the central bank had been influenced by multiple considerations, both domestic and external, as well as the lack of adequate data to judge the extent and the persistence of any growth slowdown associated with the decision of cancelling legal tender status of specified bank notes (SBNs).
Over the last two months dollar has strengthened and bond yields across the globe has rallied rapidly. India has been an exception to see bond yields falling massively at a time when even emerging markets rallied by anywhere between 50-100bps. This has narrowed down India’s interest differential vis-à-vis similar US treasury papers by at least 100 bps in last three months across the yield curve. Thus, Indian rupee, which has been a story high carry and low volatility, will see some loss of attractiveness on the former. Consequently, these developments puts incremental pressure on Indian rupee.
While the demand weakness in India and improved agricultural supply lifts off some pressure from inflation, rupee depreciation and rising commodity prices leads to imported inflation in India.
Further, the availability of comfortable liquidity in the banking system is aiding the central bank’s objective of rate cut transmission. Both deposit and lending rates have fallen in November at a pace much faster than seen in entire 2016 thus far.
We expect the central bank to closely monitor the growth impact of the currency cancellation to determine any persistence in the same. At the same time, monetary policy actions are unlikely to be independent of any material financial stability concerns arising from global developments, given that any such events could have feedback loop into domestic macros though the currency channel. Currently, the decision of further rate cuts is more likely to be reactive to data points rather than time dependent.
Rate Outlook
Source: RBI, CSO, SBIFM Research
4.00
5.00
6.00
7.00
8.00
9.00
10.00
Jun-
05
Mar
-06
Dec-
06
Sep-
07
Jun-
08
Mar
-09
Dec-
09
Sep-
10
Jun-
11
Mar
-12
Dec-
12
Sep-
13
Jun-
14
Mar
-15
Dec-
15
Sep-
16
Repo Rate (mth end, %)
There has been a shift in the direction of global bond yields over the last month with markets doubting the incremental effectiveness of additional QE/Monetary easing measures on aggregate demand.
With the election results in the US, there has been a further rise in treasury yields across the developed markets, increase in long term market implied inflation expectations and curve steepening.
Within the emerging markets too, barring India, yields have risen in all the key markets in last three months.
Exuberance driven by easier near term liquidity and hopes of policy easing have led to domestic yields getting disconnected entirely from global trends as well as markets under-pricing near term risks arising from weakness in currency as well as some uptick in commodity prices. Consequently, the central bank’s decision to leave the repo rate unchanged contrary to market expectations of 25-50bps of rate cut led to an immediate negative reaction from the market, with yields moving up by about 20-30bps.
The recent demonetisation of high value notes can have major medium-long term positive structural effects such as: a) potential additional government tax revenues from better compliance over the coming years, b) increase in tax/GDP ratios seen in conjunction with GST and c) reducing the role of cash economy and additional access to formal financial sector.
While fiscal situation can improve significantly over medium term, the market can also take comfort from near term weakness in headline CPI.
In this environment, the trend for a medium term easing in market yields remains intact driven by incremental news flow on potential benefits to government revenues over the medium term.
In the very short term, global yield volatility , shifting expectations of US Fed stance and lack of OMO’s /higher net supply will keep the markets volatile with slightly upward bias.
Market Outlook
Source: RBI, Bloomberg, SBIFM Research
6.00
6.50
7.00
7.50
8.00
8.50
9.00
9.50
Jan-
11M
ay-1
1Se
p-11
Jan-
12M
ay-1
2Se
p-12
Jan-
13M
ay-1
3Se
p-13
Jan-
14M
ay-1
4Se
p-14
Jan-
15M
ay-1
5Se
p-15
Jan-
16M
ay-1
6Se
p-16
10 year GSec yield (mth end, %) Repo Rate (mth end, %)
Average spread between G-sec and Repo in last 10 years: 75bps
Thank you
Disclaimer
This presentation is for information purposes only and is not an offer to sell or a solicitation to buy any mutual fund units/securities. These views alone are not sufficient and should not be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. All opinions and estimates included here constitute our view as of this date and are subject to change without notice. Neither SBI Funds Management Private Limited, nor any person connected with it, accepts any liability arising from the use of this information. The recipient of this material should rely on their investigations and take their own professional advice.
Mutual Funds investments are subject to market risks, read all scheme related documents carefully. Asset Management Company: SBI Funds Management Private Limited (A joint venture with SBI and AMUNDI). Trustee Company: SBI Mutual Fund Trustee Company Private Limited.
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