August was a risk-off month. The sell-off was driven by global factors such as Chinese Yuan devaluation, weak growth data out of China leading to a sell-off in commodities. This devaluation raised fears about the health of the Chinese economy. Emerging markets too sold off after China devalued its currency. India is in a unique position as a commodity importer. The fall in commodities has expanded fiscal headroom and lowered input costs. At home, political logjam led to Parliament’s Monsoon Session ending without the passage of any significant bill. Progress of the monsoon remained worrisome, with the seasonal rainfall deficit increasing to around 12%.
Indian equities market was down around 6.58% during the month. Clearly, exporters (on account of INR depreciation) and defensives outperformed. Pharma and Information Technology outperformed markets whereas Energy, Metals sectors were amongst the laggards. FIIs sold Indian equities aggregating US$ 2.6 bn in August , whereas DII were net buyer for US$ 2.5 bn .
In the month of August policy rates were left unchanged in the monetary policy meet held on August 4. The RBI kept the repo rate unchanged at 7.25%, as it is looking for clarity on: a) Outcome of Monsoons and its impact on inflation, b) US Fed actions and c) transmission of rate prior rate cuts. RBI acknowledged the drop in oil prices and its favourable impact on inflation and inflation expectations. We expect RBI to consider inflation data in the coming months, growth outlook and maintain accommodating stance going forward.
Gross Domestic Product (GDP) growth in first quarter of FY 2016 grew at 7% yoy vs 7.5% last quarter dragged by weaker net exports and increase in GDP deflator. Jun Index of Industrial Production data indicated a growth rebound as it came in at 3.8% as compared to 2.7% in May. The uptick was led by increase in manufacturing output. July inflation as measured by Consumer Price Index surprised on the downside as it dropped to 3.8% vs 5.4% in June, driven by broad-based decline in food, fuel & housing. Food inflation (2.9% vs 5.7% last month) was aided by base effect. Deflationary trends in Wholesale Price Index which measures inflation at wholesale level continued as it fell for ninth consecutive month, headline WPI came in at -4.1% vs -2.4% last month. Yield on benchmark 10-year Govt. Security closed at 7.78% as compared to 7.81% in July.
Trade deficit in July widened to $12.8bn vs $10.8bn in June despite 10% decline in crude prices over the month. The move was led by higher gold imports and deterioration in non-oil exports. Exports remained weak at -10.3%YoY (vs -15.8% in Jun) as non-oil exports fell by 6.7% over month. On the imports front, non-oil non-gold imports were up 1% over the month indicating potential uptick in domestic demand.
Lower commodity prices and expectation of policy rate cut in next policy should keep government bond yields well supported.