Market Outlook

Equity Market Update

• Indian equity markets closed nearly 2% higher, after WPI inflation eased to 4.7% in May, which remained within the RBI's comfort zone for the second straight month. This, coupled with a steady rupee, made a section of investors hopeful that the RBI might consider a rate cut at its policy meet early next week.
• Key benchmark indices, S&P BSE Sensex and CNX Nifty, gained 1.86% and 1.92% respectively. Broader indices, S&P BSE Mid-cap and Small-cap, gained more than 1%.
• Tata Motors rose 4.91% on BSE after its U.K.-based subsidiary Jaguar Land Rover Limited recorded a strong growth in retail sales in May 2013. Infosys rose nearly 1% after the company said its U.S. subsidiary, Infosys Public Services, has won a contract from CareFirst BlueCross BlueShield. Apollo Tyres fell to its lowest level since January 2012 on worries over debt following the buyout of Cooper Tire & Rubber.

Global Market Update

• Asian markets recovered as investors sought value-buying after recent heavy sell-off. Today (as on Monday), Asian shares remained subdued ahead of the Fed policy meeting amid concern that monetary stimulus for the U.S. economy could unwind soon.
• As per the last closing, European shares pared earlier gains to end narrowly higher amid mixed economic reports from the U.S. These data did little to calm investors who worried that a reduction in central liquidity will bring financial markets to their knees. The disappointing Euro zone employment report weighed on sentiments.
• As per the last closing, U.S. shares gave up earlier gains to end lower amid mixed economic reports and caution ahead of the upcoming Fed policy board meeting. The U.S. industrial production remained flat, consumer sentiment retreated and current account deficit widened while producer prices witnessed modest gains.

Domestic News

• The Wholesale Price Index‐based (WPI) inflation stood at 4.70% (provisional) for the month of May against last month’s reported figure of 4.89% (provisional) and the same period last year’s figure of 7.55%. This is the fourth consecutive month of fall in WPI numbers.
• Finance Minister P Chidambaram said that the Government needs to take long-term measures for economic growth and stability as there are no quick-fix solutions to solve economic problems. He further said that more reforms measures will come up by the end of June-July to boost investment and growth.
• Chief Economic Advisor Raghuram Rajan said CAD for the fourth quarter of financial year 2012-13 is likely to be around 4% of the GDP.
• According to Planning Commission Deputy Chairman Montek Singh Ahluwalia, the Current Account Deficit (CAD) is likely to ease in the current fiscal with moderation in demand for gold.
• The Foreign Investment Promotion Board has deferred the decision to approve the Jet Airways’ deal with Etihad.

International News

• The Commerce Department reported that the U.S. retail sales rose marginally in May. It increased by 0.6% following a rise of 0.1% in April.
• The Labor Department reported that the U.S. weekly jobless claims fell unexpectedly to 3,34,000 from the previous week's figure of 3,46,000.
• Eurostat reported that the number of employed persons in the Euro area fell a seasonally adjusted 0.5% quarter-on-quarter to 415.1 million in the March quarter.

Debt Market Update

• Bond yields fell on Friday following lower WPI inflation numbers and a recovery in the domestic currency, but hopes of a rate cut still remain dim at the central bank's policy meeting on June 17.
• The yield on new 10-year benchmark bond, 7.16% GS 2023, ended down 2 bps at 7.31%, compared to its previous close of 7.33%, with a traded volume of Rs. 1,010 crore in NDS-OM platform.
• Banks’ net average borrowings under the central bank’s Liquidity Adjustment Facility (LAF) stood at Rs. 74,765 crore, much higher compared to the previous day’s figure of Rs. 44,890 crore.

Market Outlook

India is at among the preferred value zone when it comes to options for an international investor – in terms of the sheer depth and the breadth of investable palette, the medium term attractiveness on relative valuations (at ~14.5xFY14E) and long term structural growth drivers. However, given the vulnerability of markets on external flows, any volatility in the global markets would impact India disproportionately.
We remain dedicated to bottom up stock picking focusing on the business quality (business model, earnings, management and cash-flows), remodeling (resources, operations, balance sheet) and valuations.
Bond yields declined further as macro economic data points released post the policy review printed much softer than market expectations. The WPI data for April 13 registered a y-o-y growth of 4.89% as compared to market estimates of 5.45% and previous month growth of 5.96%. The retail inflation index, the CPI which had been relatively sticky printed at 9.39% y-o-y for April 13 as against the estimates of 9.74% and the previous month reading of 10.39%. The inflation readings provided comfort in terms of fall in sequential growth as well as reduced pricing power as evidenced by declining core inflation. Soft data points on inflation and continuing moderation in gold and international crude prices kept market sentiments upbeat, with anticipation of additional easing in policy rates in spite of a rather circumspect RBI policy guidance. The benchmark bond yield based on old 10-year paper moved lower by around 30bps during the month and closed at 7.44%, with an intra month low close to 7.30%. The RBI issued the new 10-year benchmark bond during the month at a cut off yield of 7.16%. AAA corporate bond yields moved lower in line with the sovereign curve movements with the 5-10 year yields moving lower by 30-35 bps.
Largely positive trends on the evolution of inflation have guided market sentiments in the recent past with the market largely ignoring the trade deficit data for the month of April 13. The Q4 GDP data, which was in line with estimates, cautionary comments from the RBI governor regarding the risks to retail inflation and external sector and INR weakness led to markets retracing some of the gains over the last week of the month. The new benchmark 10-year yield closed at 7.24% and the old benchmark at 7.44%, with the AAA PSU corporate yield curve being largely flat in the 3-10 yr space at around 8.15%-8.18%.
The RBI monetary policy response to address the moderation in growth has been constrained by the multiple challenges emanating from the risks on inflation, fiscal deficit and the current account deficit. The moderation in inflation and fiscal adjustments especially on the pricing of diesel has opened up the scope for monetary policy to support growth revival in a limited way, even as the external sector challenges continue. We anticipate a gradual improvement in the external sector accounts driven by incremental slowdown in both oil and gold imports and improving export competitiveness even as the near term dependence on capital flows is likely to continue. Soft macro data, reduced pricing power and negative output gap provide leeway for additional policy rate cuts. The extent and sequencing of the same would be largely guided by incoming data, providing near term market volatility.
We have been maintaining higher duration, with periodic profit taking as market positioning and momentum driven by soft data, has favored such a strategy.