Budget and Markets March 2016
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Transcript of Budget and Markets March 2016
Budget and Market Outlook
March 2016
Union Budget 2016-17
The Back Drop- Tougher than last year
CHALLENGES IN GLOBAL MARKET
DISCRETIONARY SPENDING
REQUIREMENT
TOUGH EQUITY AND BOND
MARKET CONDITIONS
DEMAND CHALLENGES IN
DOMESTIC ECONOMY
• Slow down in global growth from 3.4% in 2014 to 3.1% in 2015• Contraction in trade activity• Financial Markets have been battered. MSCI world had fallen ~12% since last budget
(as of 26 Feb 2016)• Fears over slowdown in Chinese growth and devaluation of Chinese currency• Fall in oil prices has induced fiscal worries on oil producing nations
• Slowdown in global trade activity leading to contraction in Indian exports demand• Rural distress due to two consecutive years of bad weather and slow down in
construction• Capacity under-utilization in manufacturing units and corporate deleveraging leading
tepid private capital spending
• NIFTY fell ~21% since last budget as FII pulled out money and earnings growth has fallen short of expectations
• Bond yields inched up primarily due to demand-supply mismatch
• Public sector banks in distress requiring capital infusion• Higher spending requirement on account of Pay and Pension as 2016 happens to the
year of OROP and 7th Pay commission implementation
Highlights: Prevented macro instability, focused on growth
Source: indiabudget.nic.in, SBIMF Research; NB: RE – revised estimate, BE- budget estimate
Key Budget Figures
• Union budget stuck to the earlier laid out path of fiscal consolidation thus preventing macro instability. Aims to narrow fiscal deficit to 3.5% in FY17 compared to 3.9% in FY16. Revenue deficit will also be lowered to 2.3%%
• Sticking to fiscal consolidation without losing focus to growth (in terms of rural and infrastructure push) is a huge positive. Central bank is likely to take the quality and quantity of fiscal stance in positive light opening the possibility of rate cut.
• Budget has avoided any populist measures at large
2014-15 2015-16 RE 2016-17 BE
Budget size (in Rs. Bn) 16,637 17,854 19,780
Expenditure growth (%) 6.7 % 7.3 % 10.8 %
Receipt growth (%) 9.1 % 8.4 % 15.5 %
Gross tax to GDP (in %) 9.9 % 10.7% 10.8 %
Fiscal deficit ( Rs. Bn) 5,107 5,351 5,339
Fiscal deficit ( % GDP) 4.1 % 3.94 % 3.54 %
Revenue deficit (% GDP) 2.9 % 2.5 % 2.3 %
Net market borrowing (Rs. Bn) 4,531 4,406 4,252
Nominal GDP growth (%) 13.6 % 8.2 % 11.0 %
Budget in Charts
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16 RE
2016-17 BE -
1,000
2,000
3,000
4,000
5,000
6,000
0.0
1.0
2.03.0
4.0
5.0
6.0
7.0
5.56.0 5.7
4.33.9 4.0
3.32.5
6.06.5
4.8
5.94.9
4.5 4.1 3.9 3.5
Fiscal Deficit (Rs. Bn)- LHS Fiscal Deficit (% GDP)- RHS
2000
-01
2001
-02
2002
-03
2003
-04
2004
-05
2005
-06
2006
-07
2007
-08
2008
-09
2009
-10
2010
-11
2011
-12
2012
-13
2013
-14
2014
-15
2015
-16
RE
2016
-17
BE
-2.0-1.00.01.02.03.04.05.06.0
3.9 4.3 4.33.5
2.4 2.51.9
1.1
4.55.2
3.24.5
3.7 3.2 2.9 2.5 2.3
0.9 1.4 1.10.0 0.0 0.4 -0.2
-0.9
2.63.2
1.82.8
1.81.1 0.9 0.7 0.3
Revenue Deficit (% GDP) Primary Deficit (% GDP)
Fiscal deficit targeted at 3.5% in FY17 Lowest revenue and primary deficit in last nine years20
00-0
1
2001
-02
2002
-03
2003
-04
2004
-05
2005
-06
2006
-07
2007
-08
2008
-09
2009
-10
2010
-11
2011
-12
2012
-13
2013
-14
2014
-15
2015
-16
RE
2016
-17
BE
-10-505
10152025303540
7 7
21
30
7
-4
23
33
-7
11
36
-4
17 159 8
16
9 1114 14
62
1522 24
16 17
9 8 117 7
11
Non-debt Receipts (%) Expenditure (%)
Sharper rise in receipts relative to expenditure
2006
-07
2007
-08
2008
-09
2009
-10
2010
-11
2011
-12
2012
-13
2013
-14
2014
-15
2015
-16
RE
2016
-17
BE
- 1.0 2.0 3.0 4.0 5.0 6.0 7.0
1.5 1.7 2.7
4.5 4.4 5.1
5.6 5.6 6.0 5.8 6.0
1.10 1.32 2.34
3.98 3.25
4.36 4.67 4.54 4.53 4.41 4.25
Gross Market Borrowings (Rs Tn) Net Market Borrowing (RS Tn)
Net market borrowing brought down- a huge positive
Source: indiabudget.nic.in, SBIMF Research
Receipts targets looks achievable, barring spectrum windfall
Source: indiabudget.nic.in, SBIMF Research
-10
0
10
20
30
40
50
13
6
11
50
25
18
9 1012 10
2013-14 2014-15 2015-16 RE 2016-17 BE
% growth
Conservative assumptions in tax growth- can surprise upward by year end
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 RE
2016-17 BE
4,000
6,000
8,000
10,000
12,000
14,000
16,000
5,699 6,298 7,419 8,159 9,036 9,475 10,541 2,186 1,217 1,374
1,989 1,979
2,586
3,229
353 369 410
419 515
442
671
Net tax revenue Non-Tax revenue Non-debt capital receipts
Non tax revenue expected to increase by 644bn, tax revenue by 1 trillion and non-debt capital receipts by 229bn
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 RE
2016-17 BE
0100200300400500600700800
228181
259 294377
253
Disinvestment Budgeted (Rs. Bn) Disinvestment Actual (Rs bn)
2016-17 BE= 565 Bn (in-clusive of 205bn strategic sale)
Credible divestment targets
2009-102010-11
2011-122012-13
2013-142014-15
2015-16 RE
2016-17 BE0
200
400
600
800
1000
1200
1400
159
1205
174 189
401306
560
990
Telecom Receipts
Optimism in receipts from telecom services
Expenditure: Higher revenue spend on account of Pay and Pension
Source: indiabudget.nic.in, SBIMF Research; NB: * Expenditure on Account of Finance ministry, Home ministry and Defence ministry has been excluded as they mainly capture sticky operating expenses
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16 RE
2016-17 BE - 5
10 15 20 25 30 35 40 45
15 14 10 9 10
7 5 12
25
39
1 5
12
5
21
4
Revenue Expenditure Capital expenditure
% growth
Sharper rise in revenue expenditure on account of provisioning for 7PC and OROP
DBT platform and lower gas, urea and crude prices helps contain subsidy bill
Food Fertilizer Petroleum 200
400
600
800
1,000
1,200
1,400
1,600 1,394
724
300
1,348
700
269
2014-15 2015-16 2016-17
Rs BN
Total subsidy bill expected at 2.5 Tn vs. 2.6Tn in FY16
Others31%
Social26%
Rural and Agriculture16%
Fertilisers 9%
Energy7%
Road7%
Communications4%
Expenditure has been focused on Social and Rural sectors*
The Budget Agenda
With a realistic approach and without compromising fiscal prudence
Agriculture and Farmers’ WelfareReviving the Rural economyEnhancing Social EquityIncentivizing education and employmentInfrastructure pushFinancial Sector ReformsEase to do Business
Key Reforms
Renewed thrust on the insolvency and bankruptcy law
Legal framework for dispute resolution in PPP projects and Utility Contracts
Aims listing of General Insurance Companies
Aims at giving a legal status to Aadhar
FDI Policy Liberalization
Simplification of Taxation Structure
New policy to realize Disinvestment targets
Rural Thrust: Bodes well for both Consumption and Investment
Source: Antique Research, SBIMF Research
FY12 FY13 FY14 FY15 FY16RE FY17BE 400
500
600
700
800
900
1,000
1,100
1,200
-15.0
-10.0
-5.0
-
5.0
10.0
15.0
20.0
25.0
846 763
859 850 926
1,139
-10
13
-1
9
23
Spending on Rural oriented schemes (in Rs bn) % growth- RHS
Spend on Rural economy under various schemes is budgeted to grow by 23%
• The Govt. has emphasised to improve rural development. Various rural schemes spread across rural electrification, seeds, crop insurances, fertilizer, irrigation, employment and housing is expected see a central support of Rs1.1 trillion.
• This is nearly 23% jump compared to last year.
• MGNREGS spend has been increased to Rs. 385bn and the focus will be to develop rural infratsructure.
• 100% village electrification is aimed at by 1st May 2018
Extra-Budgetary Sources to support Infrastructure Spending
Source: Axis Capital, SBIMF Research
Rs in (Bn.) FY14 FY15 FY16 RE FY17 BE GrowthFY 16 YOY%
GrowthFY 17 YOY%
Budgeted Capital Expenditure
1877 1967 2377 2470 21 4
Rs in (Bn.) FY14 FY15 FY16 RE FY17 BE GrowthFY 16 YOY%
GrowthFY 17 YOY%
ROADS CAPEX
Provisions in the Budget236 274 443 550 62 24
Extra Budgetary Support79 33 280 593 748 112
RAILWAYS CAPEX
Provisions in the Budget282 316 347 450 10 30
Extra Budgetary Support257 336 628 760 87 21
Total CAPEX in Roads and Railways 960 1233 2141 2903 74 36
Capital spending provisions in budget is projected to grow by mere 4%
Extra-budgetary support to Road, Railways and other infrastructure spend will give thrust to Public capex
Social sector spend will enable capitalizing demographic dividend
Social betterment with emphasis on health of individuals
New health protection scheme for economically weak families
Invigorating free supply of generic drugs
Tax incentives to go for health and general insurance
Tax and PF incentives to bring the workforce under formal employment
Tax incentives and duty assumptions to promote affordable housing
EQUITY MARKET
Impact of the Budget on Equity Market
Source: Bloomberg, SBIMF Research
POSITIVE
• Policy Reforms: Allowing 100% FDI in Asset Reconstruction companies, tax clarity on InvITs and REITs, resolution to deal with stressed asset recovery and bankruptcy code is an overall positive for the financial sector
• Consumption boost: Likelihood or OROP and Pay commission implementation in FY17 and focus on increased rural income is positive for consumption oriented companies
• Rural Thrust: Support to agriculture in the form of seeds, irrigation. crop insurance, 100% FDI in agriculture marketing is positive for agriculture sector oriented companies
• Continued Focus on Public Capex: Thrust on Infrastructure spending continues particularly on sectors like Roads and Railways – positive for industrials
• No change in LCGT: Budget refrained from decreasing the holding period of Long-term Capital Gains Tax on listed companies
NEGATIVE
• Lower than anticipated PSU support: The provisioning for Public sector Banks recapitalization was lower than market expectations.
• Taxation changes: Negative sentiments in some sectors have been mainly due to marginal rise in tax/cess or additions of sunset clause to currently enjoyed tax exemptions, tax on dividend income above Rs. 10 lakh
FII Outflow and Weak Earnings affecting market
Source: NSDL, Antique, SBIMF Research
FIIs have been pulling money out of India, in line with other emerging markets
Earnings Outcome has been depressed for five consecutive quarters
Feb/
13
Apr/
13
Jun/
13
Aug/
13
Oct
/13
Dec/
13
Feb/
14
Apr/
14
Jun/
14
Aug/
14
Oct
/14
Dec/
14
Feb/
15
Apr/
15
Jun/
15
Aug/
15
Oct
/15
Dec/
15
Feb/
16
-8000
-6000
-4000
-2000
0
2000
4000
6000
8000
Equity Investment Debt Investment
USD mn
Jun/
10Se
p/10
Dec/
10M
ar/1
1Ju
n/11
Sep/
11De
c/11
Mar
/12
Jun/
12Se
p/12
Dec/
12M
ar/1
3Ju
n/13
Sep/
13De
c/13
Mar
/14
Jun/
14Se
p/14
Dec/
14M
ar/1
5Ju
n/15
Sep/
15De
c/15
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
30.0
BSE 100 (ex OMCs YoY earnings growth, %)
While Short-term issues are dominating the market,There are reasons for medium to long-term optimism
Corporate Profits expected to improve in FY17
Source: MOSL, SBIMF Research
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
E
FY17
E
216 236 272361 446 540
720833 820 834
1,0241,120 1,182
1,339 1,354 1,366
1,643
FY01-08: 21% CAGR
FY08-15:7% CAGR
FY15-17E: 10% CAGR
1%
1%
20%
FY93-FY15: 14% CAGR
Sensex EPS (INR)
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
E
FY17
E
FY18
E
3.0
4.75.4
6.2
7.37.8
5.5
6.5 6.2
4.8 4.6 4.3 4.0 4.0 4.3 4.7Average of
5.4%
Corporate profit to GDP (%)
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
E
52
82 83
103
55
9588
7064 66
8070
Average of 76% for the period
Corporate profit likely to bounce back Market Capitalization to GDP (%)
Earnings growth likely to show cyclical recovery
Domestic money to keep pouring in
Source: NSDL, MOSL, SBIMF Research
Domestic MFs were buyers for sixth consecutive quarter DIIs (ex MFs) have also been net buyers for most months since 2015
Sep-
12No
v-12
Jan-
13M
ar-1
3M
ay-1
3Ju
l-13
Sep-
13No
v-13
Jan-
14M
ar-1
4M
ay-1
4Ju
l-14
Sep-
14No
v-14
Jan-
15M
ar-1
5M
ay-1
5Ju
l-15
Sep-
15No
v-15
-0.6-0.5-0.4-0.5
-1.0
-0.2-0.3
-0.3
-0.60.0-0.4
0.3
-0.4-0.7
-0.1-0.1
-0.4-0.2-0.6
-0.4
0.0
0.60.8
1.1
0.71.0
0.3
1.1
0.1
0.70.6
1.5
0.7
1.6
0.9
1.61.4
0.1
0.6
Chart Title
Sep-
12
Nov-
12
Jan-
13
Mar
-13
May
-13
Jul-1
3
Sep-
13
Nov-
13
Jan-
14
Mar
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May
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Jul-1
4
Sep-
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Nov-
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Jan-
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Mar
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Jul-1
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Sep-
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Nov-
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-1.1
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-2.3
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-1.6
1.5
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-1.0-1.4-1.4
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0.20.5
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-0.3
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-0.4-0.6
0.40.70.3
-0.7
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0.7
Chart TitleUSD bn
Market outlook• Budget outcome has been broadly favorable for the equity market.
While some sectors reacted negatively on account of specific provisions, the support to the rural economy and increase in infrastructure spend augurs well for the growth and earnings in the long run.
• Now that the event is behind us, market will shift back its focus on global cues, economic data and earnings outcome.
• Global markets have stayed under pressure since the beginning of CY 2016. With commodity prices particularly crude oil bottoming out, we expect some stability in the global markets.
• On domestic front, fears about stress in balance sheets of corporate and banking sector, and quarterly earnings season accentuated the market woes.
• Valuations, relative to history and to emerging markets, have risen clearly implying expectations of an earnings recovery in the coming quarters. We believe the earnings cycle will pick up on the back of a mean reversion in the economic cycle, rate cuts and policy initiatives.
• By sticking to the fiscal consolidation path, government prevented any macro instability. India’s macro-fundamentals are currently placed on a strong footing helped by conscious policy decisions by both RBI and the government.
• We believe that India is nearing the end of earnings downgrade cycle and the current stress induced by global events is offering a good entry opportunity for investors with long horizon.
Market valuations in line with its long period average
Source: Bloomberg, SBIMF Research
Oct
/05
Apr/
06O
ct/0
6Ap
r/07
Oct
/07
Apr/
08O
ct/0
8Ap
r/09
Oct
/09
Apr/
10O
ct/1
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r/11
Oct
/11
Apr/
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ct/1
2Ap
r/13
Oct
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Apr/
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4Ap
r/15
Oct
/15
7.0
9.0
11.0
13.0
15.0
17.0
19.0
21.0
23.0
25.0
Sensex 1Y fwd PE
Mean: 16x
+1 SD
-1 SD
FIXED INCOME MARKET
Rates Snapshot for February 2016
• 10 year G-sec rallied on account of favorable budget outcome.
• Money-market rates however, remained worse –off due to tight liquidity conditions
• Crude oil prices moved up by 9% during the month.
• Rupee depreciated by further 1% in February
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 YTD
Rates in % Dec-15 Jan-16 Feb-16 Change YTD (in bps)
1 Yr T-Bill 7.23 7.18 7.25 2
3M T-Bill 7.15 7.24 7.26 11
10 year GSec 7.76 7.78 7.63 -14
3M CD*** 7.20 7.65 8.49 129
12M CD*** 7.70 7.85 8.28 58
3 Yr Corp Bond* 8.34 8.30 8.53 19
5 Yr Corp Bond* 8.40 8.37 8.59 19
10 Yr Corp Bond* 8.42 8.43 8.67 25
1 Yr IRS 7.07 6.87 6.85 -23
5 Yr IRS 6.96 6.72 6.70 -26
Overnight MIBOR Rate 7.03 7.00 6.96 -7
INR/USD 66.2 67.8 68.4 3.4#
Crude Oil Indian Basket** 35.7 28.1 30.5 -14.4#
Budget outcome favorable for Bond Market
Supply of government bonds have risen sharply in FY16
Source: RBI, indiabudget.nic.in, SBIFM Research
• Despite RBI sounding accommodative in its monetary policy, bond yields- both state and central government- has inched up marginally since October 2015.
• The worsening of yields this year could be explained by unfavorable demand supply dynamics. While the supply of bonds and particularly state bonds have risen sharply in FY16, demand appetite for these bonds by banks (the largest buyer of government securities), mutual funds and FIIs has been very lack-luster.
• In this respect, central government projecting to lower borrowing in FY17 is positive for bond market. Additionally, government sticking to fiscal consolidation re-opens the likelihood of a rate cut by the central bank.
• The uncertainty around DISCOM bonds and likelihood of increased state bonds supply are preventing any sustained rally in bond markets.
FY13 FY14 FY15 FY16E -
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
0.01.02.03.04.05.06.07.08.09.010.0
Net Market Borrowings by GoI (in Rs. bn)Net Market Borrowings by State Govts (in Rs bn)Net borrowings by Central and State govt (% y-o-y)- LHS
2006
-07
2007
-08
2008
-09
2009
-10
2010
-11
2011
-12
2012
-13
2013
-14
2014
-15
2015
-16
RE
2016
-17
BE
- 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00
1.10 1.32
2.34
3.98
3.25
4.36 4.67 4.54 4.53 4.41 4.25
Net Market Borrowing (RS Tn)
In this light, lower borrowing by centre in FY17 is a huge positive
Currency: Rupee depreciation in line with emerging markets
Source: Bloomberg, SBIMF Research
Rupee depicted depreciation since start of 2016 in line with most other emerging markets
• Dollar’s broad strength against most currencies globally, fears related to China’s slowing economic growth and a likely further devaluation of the Yuan has kept the rupee and other Asian currencies under pressure since the start of this year.
• Rupee, along with other emerging markets, depicted depreciation in past two months. By February end, the currency depreciated by 3.3% despite a marginal appreciation post budget.
Mex
ican
Peso
Kore
an W
on
Colo
mbi
an P
eso
Russ
ian
Roub
le
Indi
an R
upee
Afric
an R
and
Polis
h Zl
oty
Turk
ey Li
ra
Braz
il Re
al
Taiw
anes
e Do
llar
Phili
ppin
e Pe
so
Chin
ese
renm
inbi
Thai
Bah
t
Hung
aria
n Fo
rint
Mal
aysia
n Ri
ngitt
Indo
nesia
n Ru
piah
-30-25-20-15-10
-505
-3.3
% change in 2015 % change YTD
Liquidity tightness in money market lifted the short-term rates
Source: RBI, Bloomberg, SBIFM Research
Tightness in banking system liquidity
• Liquidity conditions tightened since December with advance tax outflows, curtailed government spending (vis-a-vis revenue collection) and seasonal pick-up in currency demand and credit.
• To mitigate these conditions, the central bank increased the availability of liquidity under LAF and variable rate term repo.
• This helped weighted average call money rate to remain anchored around the repo rate. However, despite these efforts by RBI, the CP and CD rates –other segments of money market- moved up reflecting dearer short-term money and market expectations that liquidity will reflect tight for some time.
15-D
ec-1
328
-Dec
-13
10-Ja
n-14
23-Ja
n-14
5-Fe
b-14
18-F
eb-1
43-
Mar
-14
16-M
ar-1
429
-Mar
-14
11-A
pr-1
424
-Apr
-14
7-M
ay-1
420
-May
-14
2-Ju
n-14
15-Ju
n-14
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n-14
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l-14
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g-14
19-A
ug-1
41-
Sep-
1414
-Sep
-14
27-S
ep-1
410
-Oct
-14
23-O
ct-1
45-
Nov-
1418
-Nov
-14
1-De
c-14
14-D
ec-1
427
-Dec
-14
9-Ja
n-15
22-Ja
n-15
4-Fe
b-15
17-F
eb-1
52-
Mar
-15
15-M
ar-1
528
-Mar
-15
10-A
pr-1
523
-Apr
-15
6-M
ay-1
519
-May
-15
1-Ju
n-15
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10-Ju
l-15
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l-15
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g-15
18-A
ug-1
531
-Aug
-15
13-S
ep-1
526
-Sep
-15
9-O
ct-1
522
-Oct
-15
4-No
v-15
17-N
ov-1
530
-Nov
-15
13-D
ec-1
526
-Dec
-15
8-Ja
n-16
21-Ja
n-16
(3,000)
(2,000)
(1,000)
-
1,000
2,000
3,000
Daily banking system liquidity (in Rs. Billion)
1% of NDTL
-1% of NDTL
RBI’s current policy stance is accommodative. However, after having delivered 125bps of rate cut between January to September 2015, the central bank has stayed on hold in past two monetary policy meeting.
Evolution of Inflation trajectory and central budget outcome were pre-requisites cited for any further action.
We think the budget outcome has been conducive to deliver more rate cuts.
Barring the compulsory Pay and Pension increase, government has stayed away from any populist revenue spending. Effort to revive rural economy has been largely through investment spend. Infrastructure- the second key focus area- is non-inflationary as well.
The quantity and quality mix of budget outcome is likely to add to RBI’s confidence in delivering additional 25-50bps rate cut. Beyond that, the global aspect and evolution of CPI trajectory will determine any further easing.
Policy Rate Outlook
Source: RBI, CSO, SBIFM Research
Jan/1
2
Apr/12Jul/1
2Oct/
12Jan
/13
Apr/13Jul/1
3Oct/
13Jan
/14
Apr/14Jul/1
4Oct/
14Jan
/15
Apr/15Jul/1
5Oct/
15Jan
/16
6.506.757.007.257.507.758.008.258.508.75
-5.00-4.00-3.00-2.00-1.000.001.002.003.004.005.00
Real rate (%), RHS Repo rate (%)-LHS
Budget outcome has been taken favorably by the bond market. The commitment to 3.5% fiscal deficit target opened the possibility of rate cuts by RBI by as soon as in April. Reduction in net borrowing by the central bank also helped in marginal addressing of over-supply situation in the bond market causing the bond yields to rally by 10-15bps post budget.
The 10 year bond yield ended the month at 7.63% which is a marginal positive since the last month (7.78%). Cumulatively however, the yields have moved up since the last 50bps rate cut in October.
The likelihood of further rise in SDL supply and the uncertainty around UDAY bonds are keeping the bond yields under check. In this context, the near term movement of rates could largely be influenced by the further clarity on cumulative state borrowing numbers.
In the money market, liquidity conditions tightened at the margin on account of higher currency withdrawals and government building its cash balances (implying a lower expenditure than revenue collections). We expect the RBI to keep interbank liquidity in reasonable balance over the quarter.
We have positioned our portfolio in the front-end of the curve (5-7 year segment) that looks attractive from a valuation perspective.
Market Outlook
Source: Bloomberg, SBIFM Research
Jan/11
Apr/11Jul/1
1Oct/
11Jan
/12
Apr/12Jul/1
2Oct/
12Jan
/13
Apr/13Jul/1
3Oct/
13Jan
/14
Apr/14Jul/1
4Oct/
14Jan
/15
Apr/15Jul/1
5Oct/
15Jan
/16
6.00
6.50
7.00
7.50
8.00
8.50
9.00
9.50
10 year GSec yield (mth end, %) Repo Rate (mth end, %)
Average spread between G-sec and Repo in last 5 years: 50bps
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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