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Market Review

OVERVIEW OF MARKET

The economy is seeing the early effects of the demonetisation and recovery is likely to be gradual. Uncertainty over future government action is hurting SME sentiment. In its fifth bi- monthly policy, RBI has left its key policy rates unchanged and withdrew the incremental CRR requirement. On the international front, oil prices continued to rise as the historic OPEC deal to cut production by 1.8 million barrels per day took effect on Jan 1st 2017 which led to crude prices soaring 12.6% during the month to $ 56.8/ barrel. US bond yields rose further during the month in anticipation of Donald Trump to provide an impetus on the US economy.

The Index of Industrial Production (IIP) for the month of Oct 2016 fell 1.87% as compared to 0.73% increase in Sep 2016. Consumer Price Index (CPI) decreased to 3.63% in November 2016 from 4.20% in October, 2016.

During December 2016, Nifty was largely flat due to rising US yields and slowdown in domestic consumption due to demonetization. For the month, IT and Oil & Gas outperformed whereas there was underperformance in Pharma, Metals, Banking and Capital Goods. FIIs were sellers for more than Rs8,100 cr which was absorbed by domestic institutional buyers who bought more than Rs9,100 cr of equity during the month.

The Bond yields rose during the month of Dec 2016. The benchmark 10 year G-Sec (7.59% GOI 2026) opened at 6.36% and closed 27bp higher at 6.63% during the month. The newly issued 10 year security (6.97% GOI 2026) closed at 6.52%.

Outlook

Steady repo rate, stable inflation, comfortable liquidity and manageable macros will keep yields steady. Demonetisation will keep down growth and inflation in 2HFY17. The bond market is looking for the budget to be presented next month. The primary risk for interest rates is sharper than expected inflation in the US leading to faster pace of Fed rate hikes, which can lead to capital outflows.

Outlook

In backdrop of rising bond yields in developed markets, the FIIs have been sellers in Indian equities, however, the FII selling was largely absorbed by domestic institutional investors this month. Domestic flows are expected to be healthy as more savings flows to formal channels like insurance, mutual funds post demonetisation. The corrections led by global factors can be used to build quality/value equity portfolios across sectors.

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