Globally equity markets were nervous on account of investor concerns around China’s growth slowdown. Later in the month, monetary policy announcements by the ECB (European Central Bank) and the BoJ (Bank of Japan) soothed investor sentiment a bit. The BoJ announced that it will apply a negative interest rate of -0.1% on a part of excess reserves with the BoJ. It also announced that it would cut the rate further into negative territory if “judged as necessary". ECB President Draghi indicated that the central bank is inclined to ease in March, 2016.Domestic data-points on growth (Industrial Production) and inflation (December CPI at 5.6%) too were muted and corporate results in the third quarter of FY 2016 were disappointing especially across the banking and materials sector.
Nifty was down 4.8%during the month of January. Corporate earnings season was subdued with top-line disappointments and only a few companies demonstrating resilience in reported earnings. Energy sector outperformed, thanks to a 7% decline in global crude oil prices. IT, Pharma and Cement companies were the other outperformers whereas Telecom, Infrastructure and Real Estate companies were laggards. A continued decline in global commodity prices resulted in materials sector stocks going down further. The RBI efforts to address the rising non-performing loans in the banking sector resulted in adverse sentiment towards state owned banks. Foreign Investors sold Indian equities of close toUS$1.7 bn over the month. Domestic Institutions bought equities to the tune of US $1.9 bn.
A major policy action intended to rehabilitate state electricity distribution companies i.e. UDAY has gained momentum with four states Rajasthan, Jharkhand, Chhattisgarh and UP signing up. 18 states representing ~90% of outstanding DISCOM debt of Rs4.3tn (US $63bn) have given their in-principle nod to UDAY. This could lead to a lasting improvement in the health of the Indian utility space apart from sentiment improvements towards the banking sector which has large loan exposures to the utility sector.
Fixed Income yields hardened marginally in the month of January. Yield on the 10-year benchmark moved up 2 basis points from 7.76% to 7.78%. The RBI Policy in February, global events and commodity price movements will be watched along with the Union Budget for future cues on interest rates. Indian Rupee weakened by 2.5% on January 29th, 2016 to 67.78 from 66.15 on December 31st 2015.
The Index of Industrial Production (IIP) for the month of November contracted by 3.2% versus 9.8% in October dipping for the first time in 13 months driven by shift in festive season and adverse base effect. Consumer Price Index Inflation (CPI) for December came in at 5.6% vs. 5.4% in November led by pulses (up 0.9% over month) as food prices persisted in rise. The Wholesale Price Index (WPI) for December came in at -0.73% versus -1.99 in the previous month, contracting for the 14th straight month (though relatively improving for the past 4 months). Food inflation contributed to the increase along with slight uptick in fuel.
The trade deficit for December widened to $11.7bn vs. $9.7bn in November on the back of a sharp rebound in imports by 5.5%. Exports rose modestly at 1% while imports rebounded to $34bn on the back of higher oil and gold imports. Non-oil non-gold imports were recorded at $23.5bn and the trend remains volatile over last 3 months.
Post the earnings season, we expect both the equity and the fixed income market to shift attention to the Union Budget in February for cues on fiscal consolidation roadmap, government spending roadmap, consumption boosters from the 7th Pay commission and efforts to re-invigorate the rural economy apart from any changes to direct and indirect taxes.