The month was very eventful as the US Fed finally raised benchmark rates for the first time in 9 years. The US economic growth rate for third quarter came in at 2%. The European Central Bank (ECB) continued its loose monetary stance as it left its benchmark refinancing rate unchanged at a record low of 0.05% and extended its 60 billion Euros asset purchase program till March 2017.
At home, the Reserve Bank of India (RBI) left benchmark rates unchanged, in line with consensus expectations. RBI also hinted that besides commodity prices (oil and food), the impact of the 7th Pay Commission’s recommendations and One Rank One Pay on the fiscal deficit would be an important consideration in formulating monetary policy.
Equity markets globally were volatile and investment sentiment turned cautious with the continuous fall in commodity prices. Crude oil prices fell by close to 11% during the month. Mid-caps and small-caps outperformed relative to the large cap peers and on YTD have extended the outperformance to over 10%.
The Nifty was up 0.14% in the month of December. Winter session of the Parliament concluded without much progress on the GST bill. Pharma, Media & Metals outperformed while Banks and Autos underperformed the market. Foreign Portfolio Investors bought US$3.2 bn in the cash segment in Calendar Year 2015, whereas Domestic Institutional Investors boughtUS$10.3 bn during this period. During the month, FII bought USD 35 mn whereas DII bought UDS 949mn.
Fixed Indian markets eased marginally in yield terms in the month of December. Yield on the 10 Year benchmark Government Security moved 3 basis points lower from 7.79% to 7.76%. The Rupee strengthened by 0.8% to 66.15.
Uncertainty of Fed liftoff eased as The Federal Reserve communicated path of gradual increase in rate. Locally, food inflation pressures persisted and RBI left policy rates unchanged. The RBI left rates unchanged in the December policy meet in line with consensus. The dovish stance was subject to future commodity price trend, external developments, fiscal consolidation read along with recommendations of 7th Pay Commission and further transmission in bank lending rates.
November Consumer Price Index Inflation (CPI) rose to a 14-month high, at 5.4% vs 5% in October led by pulses which were up 3.6% over the month. November WPI came in at -1.99% vs -3.81% in previous month, contracting for 13th straight month although the trend is upwards. Food inflation contributed to the increase along with a slight uptick in fuel and manufacturing products.
October IIP surged sharply to a 5 year high of 9.8% vs 3.6% in September due to one-off move on the shift in festival season this year. November trade deficit narrowed marginally to $9.7 billion vs $9.8 billion in October aided by drop in value of oil imports. Exports fell for the 12th consecutive month to $20 billion led by global slowdown and lower commodity prices. Imports also contracted to $30bn due to decline in fertilizer imports.
Global events and commodity price movements will be watched along with estimates of the Union Budget. These factors will be crucial for future cues on interest rates.