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Dear Investors,

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Equity Markets continued to rally with gains of 3% during the month of March, led by favourable election outcome in few states including UP, increase in FII flows during the month and rebound in IIP numbers. During the month, FIIs were net buyers to the tune of USD 4.5bn vs USD 1.5bn in the month of February 2017.

In recently concluded elections across five states of India, BJP emerged as a clear winner in two of the five states and formed government in four states i.e. UP, Uttarakhand, Goa and Manipur. Key surprise is the unprecedented victory with 325 of the 403 seats won by BJP in UP, the largest state. With negative vibes emanating from demonetisation, the results indicate that electorate supports Modi Governments development reforms and initiatives to tackle corruption in India. Post these elections, reform agenda may continue for coming years.

Internationally the US Fed increased the Fed funds rate (FFR) target range by 25bps to 0.75%-1.00%. The changes to the median FFR remained muted for the years 2017 and 2018. However, the dot plot showed additional dots moving up, signalling greater confidence by committee participants in the outlook for the economy. The Federal Open Market Committee (FOMC) now expects its estimate of long-term average FFR of 3%, which is likely to be met by the year 2019.

After contracting to 0.1% in the month of December 2016 industrial production grew 2.7% in January 2017. Manufacturing growth turned around to grow 2.3%. The recovery came in due to double-digit growth in capital goods and strong growth in consumer durables. Basic goods and mining growth also remained buoyant. The contraction in industrial production last month, which was due to the cash crunch, was compensated by the higher-than-anticipated growth this month.

After falling for three months in a row, CPI inflation climbed to 3.7% in February 2017 (vs. 3.2% the month prior). Food inflation, which had touched a low 0.6% in January 2017 rose to 2% the month after. Vegetables and pulses were in deflation, at -8.3% and -9%, respectively. Fuel inflation inched up to 3.9%. Services inflation, at 4.9%, was unchanged from the month prior. While non-core inflation more than doubled to 2.3%, core inflation fell slightly to 4.8%. Rural inflation and urban inflation, climbed to 3.7% and 3.6%, respectively. Inflation for 11M FY 2017 was at 4.6%.

The ultra-short term rates to trade in are likely to soften bias due to ample liquidity in the system and neutral stance by RBI. We believe that government may take proactive steps to contain food inflation. The CPI is likely to stay below RBI’s projection of 5% by end of FY 2017. However, the core inflation may remain sticky. Recent drop in crude and commodity prices and appreciation in rupee is likely to help in containing inflation in near term. The stance of monetary policy is changed to neutral with caution on core inflation. Therefore, RBI may not cut rates in near future. The bond market may trade on range bound in future. We do not expect any rally in the bond market but lower CPI print and fiscal consolidation measures may bring yields down. The key risk to the bond market may be hike in US interest rate and sharp increase in global crude and commodity prices.

Future direction will  be decided by forthcoming quarterly results. Despite valuations inching up, we remain constructive on equities.

 
Sanjay Chawla
Chief Investment Officer
Source: Bloomberg, Economic Times
 
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