Economy and Markets May 2019 - SBI Mutual Fund

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Economy and Markets May 2019 - SBI Mutual Fund
Economy and Markets

      May 2019
Economy and Markets May 2019 - SBI Mutual Fund
EQUITY MARKET
Global equity market snapshot: April 2019
Performance in April 2019 (local currency returns)   Performance Year-to-Date (local currency returns)

 Performance in April 2019 (US$ returns)              Performance Year-to-Date (US$ returns)

   Source: Bloomberg, SBIMF Research
Indian stock market sector-wise returns: April 2019

Performance in April 2019 (local currency returns)              Performance Year-to-Date (local currency returns)

 • Nifty and Sensex were up nearly 1% each during the month. On YTD basis, both Nifty and Sensex were up 8%.

 • Large caps outperformed the small caps and mid caps during the month. Large cap index was up 0.8% while mid cap index
   and small cap index were down 3.8% and 2.7% respectively during the month. On YTD basis, large caps outperformed the mid
   caps and small caps by giving 7.1% returns while mid caps and small caps were down 3.6% and 0.6% respectively.

 • IT and metals were the sector outperformers while telecom and real estate were the sectoral laggards during the month. On
   YTD basis, IT and consumer durables were the sector outperformers while auto and capital goods were the sectoral laggards.

   Source: Bloomberg, SBIMF Research
Narrow rally in the Indian equity market

 83% of the top 2000 stocks delivered negative return

              83% stocks delivered negative returns                        17% stocks delivered positive returns
   40                                 37.6                       12
   35                                                                       9.6
                                                                 10
   30                                           26.4
                                                                  8
   25
                19.1
   20                                                             6
   15                                                                                      3.5             3.9
                                                                  4
   10
                                                                  2
    5
    0                                                             0
                +50

 1 year return: Apr 2018-Apr 2019; return distribution of top 2000 stocks by M-Cap

 Source: Capitaline, SBIMF Research
High frequency indicators have moderated during Jan-Mar 2019
                                                                          • Growth in high frequency indicators have moderated during Q1 2019.

                                                                          • Most recent is moderation in consumption demand (2-wheelers and
                                                                            car sales, FMCG products or sale of discretionary products).
                                                                            Consequently, domestic production and imports of consumer goods
                                                                            have moderated. Weakness in wage growth, depressed farm prices,
                                                                            moderation in NBFC loan disbursement (particularly in wholesale
                                                                            segment), and challenges in SMEs has affected consumer’s demand.

                                                                          • Investment related indicators and overall industry activity softened
                                                                            during the quarter. We will wait for election to tide over before reading
                                                                            into investment signals. Capacity utilization has improved and
                                                                            companies have deleveraged their balance-sheet in last three years
                                                                            indicating both need and ability to undertake physical investment.

                                                                          • However, even as bank lending to industrial sector is improving, signs
                                                                            of stress in non- Bank segment needs to be watched. Liquidity crunch
                                                                            in NBFCs and solvency challenges of certain non-bank financial
                                                                            entities may dampen overall commercial credit growth.

                                                                          • Infrastructure (production, bitumen, steel and cement) activities are
                                                                            holding strong.

                                                                          • March witnessed pick-up in goods exports and overall freight activity,
                                                                            but would wait for couple of months to ascertain the sustainability.

                                                                          • Services indicator depict mixed signals. While PMI services
                                                                            moderated, survey portrays positive outlook. Services exports growth
                                                                            have moderated. AUM growth of mutual fund has slowed down.
                                                                            Growth is supported by relatively better inflow in equity oriented
                                                                            schemes.
  Source: CMIE economic outlook, SBIMF Research; NB: 1. Green denotes improvement in the growth and Pink indicates a
  moderation. 2. We use some subjectivity in categorizing the data by looking at both the trends in the recent months as well as
  trends relative to long term average. 3. We have shifted to steel consumption data from steel production data since Jan 2019.
Consumption demand is weakening
Domestic sales of two-wheelers and cars, which act as a good      FMCG Sales growth grew moderated to 6.2% y-o-y in
gauge for rural and urban demand, have been moderating            Q4FY19 vs. 12.5% y-o-y in Q3 FY19

Domestic air traffic growth has moderated recently; partly also   Domestic production growth of both consumer durables
due to supply side shocks (cancelling of the flights).            and non-durables have softened

  Source: CMIE Economic Outlook, Capitalline, SBIMF Research
Factors weighing on consumption demand
Depressed farm prices: agri output (real GDP) is growing at 3.4% Rural wage growth has been depressed for long
but agri income (nominal agri GDP) moderated to sub ~2%

Even urban wage growth has softened
50                                                                                                • Other factors affecting the consumption demand:
                            44
45                                         BSE 500: Avg cost per Employee (% change)
40                                                                                                  o Moderation in NBFC loan disbursement (particularly
35
                                                                                                      in the wholesale segment)
                                                                                                    o GST impact on informal segment
30
                                                                                                    o Sand mining ban in select states
25
                     19                                               19                            o Weakness in real estate prices for long
20                                 17                                                               o Weak labor participation in recent years
              15                                               14
15
                                                 10                          9
10      7                                 7                                                8
 5                                                      3
                                                                                    2
 0
       FY05

                                                 FY11
              FY06

                     FY07

                            FY08

                                   FY09

                                          FY10

                                                        FY12

                                                               FY13

                                                                      FY14

                                                                             FY15

                                                                                    FY16

                                                                                           FY17

     Source: CMIE Economic Outlook, Capitalline, SBIMF Research
Risks skewed towards weak monsoon in 2019
IMD predicts ‘normal’ rainfall in its base case while Skymet                 Monsoon has been below the first predictions for the last
anticipates ‘below normal’ rainfall                                          five years
              Monsoon probability distribution for 2019                                IMD first predictions vs actuals (% deviation)
             IMD        Skymet   Criteria                                     Year          First prediction         Actual rainfall
 Excess            2%       0% Rainfall that is more than 110% of LPA
                                                                              2013          Normal (-2%)             Normal (5%)
 Above
                                                                              2014          Below Normal (-5%)       Deficient (-13%)
                 10%        0% Rainfall that is between 105 to 110% of LPA    2015          Below Normal (-7%)       Deficient (-15%)
 normal
 Normal          39%       30% Rainfall that is between 96 to 104% of LPA     2016          Above Normal (+6%)       Normal (-3%)
 Below                                                                        2017          Normal (-4%)             Below Normal (-5%)
                 32%       55% Rainfall that is between 90 to 95% of LPA
 normal                                                                       2018          Normal (-3%)             Deficient (-10%)
 Deficient       17%       15% Rainfall that is less than 90% of LPA          2019          Normal (-4%)
• Indian Meteorological Department (IMD), the government weather-forecasting agency, predicts 2019 S-W monsoon to be normal
  (96% of the LPA). On the other hand, according to the Skymet, the private weather forecasting agency, 2019 monsoon is likely to
  be ‘below normal’ to the tune of 93%. Skymet is relatively more concerned of El-Nino risk than the IMD and hence the difference.

• Both these agencies see the error margin in their forecasts at +/- 5%. Spatial and temporal distribution of monsoons will be
  available in the second update in June.

• The IMD had been over-estimating the monsoon outcome in last five years. And this keeps the risk of the final monsoon outcome
  being weaker than originally penciled. Even as IMD calls for a normal monsoon, the probabilities are more skewed on the weaker
  side. Only 39% of probability is assigned to normal monsoon. There are 32% chances of monsoon being below normal and 17%
  chance of deficiency in 2019 summer rains.

• Skymet is calling for 55% chances of below normal monsoon and 15% chances of drought in 2019

• The weakness in monsoon can adversely affect the summer crop cultivation and can be an added challenge to the weak farm
  income and consequently rural consumption demand. In parallel, it may also lead to some rise in food prices, but given the ample
  food stock of key grains, the price increase may be a bit gradual and later in the cycle.
  Source: CMIE Economic Outlook, Skymet, IMD, SBIMF Research;
Domestic industrial activity moderated in recent months
Domestic industrial production has moderated primarily   Construction related indicators are holding healthy as
due to softer manufacturing sector growth                evidenced in cement production and steel consumption

Investment related indicators (such as capital goods
production and imports) showing signs of softness
                                                         • The overall industrial activity has moderated in the recent
                                                           months.

                                                         • While the construction related indicators are holding healthy
                                                           as evidenced in cement production and steel consumption,
                                                           investment related indicators (such as capital goods
                                                           production and imports) showing signs of softness.

                                                         • We will wait for the election to get over before reading much
                                                           into the investment signals. The capacity utilization has
                                                           improved and companies have deleveraged their balance-
                                                           sheet in last three years indicating both the need and ability
                                                           to undertake physical investment.

   Source: CMIE Economic Outlook, SBIMF Research
PMI softened due to domestic factors; exports outlook positive
Manufacturing PMI moderated in April due to softness in               Export growth improved to 11% y-o-y in March 2019 vs.
production but exports prospects have brightened recently             3% y-o-y in Feb 2019;

                                                                    • Manufacturing PMI has moderated to 51.8 in April vs. 52.6 in
Services sector activity, too, moderated in April 2019
                                                                      March led by softness in new orders which is creating a domino
                                                                      effect and restricting growth of output, employment, input buying
                                                                      and business sentiment. The slowdown is reportedly curbed by the
                                                                      elections and firms have adopted wait-and-see approach until
                                                                      public policies become clearer post the elections.

                                                                    • Amidst weakness in domestic demand, exports offer some
                                                                      optimism. Respondents to PMI survey expect export growth to
                                                                      provide support. In fact, recent export data suggests an
                                                                      improvement in growth to 11% y-o-y in Mar vs. 3% y-o-y in Feb.

                                                                    • PMI services fell to 51 in April vs. 52 in March due to weaker rise
                                                                      in new business and output growth. However, the services sector
                                                                      is optimistic about pick-up in activity post election and has ramped
                                                                      up employment in April.
   Source: CMIE Economic Outlook, Markiteconomics, SBIMF Research
Capacity utilization improving; bodes well for investment
Capacity utilization improved to 75.9% by Q3 FY19 end; higher                    FICCI survey suggests improved capacity utilization in
than its long period average                                                     Auto, Capital goods, and Metals*

• There are signs of softness in investment related activity in the recent months which tests our expectation of pick-up in investment
  activity.

• One should wait for election to get over to get a better clarity on the investment outlook. The government orders, as well as
  private investors typically tend to be on sidelines just one or two quarters ahead of election.

• Some other key investment related indicators are encouraging. Capacity utilization (CU) has improved (75.9% in Q3 FY19, higher
  than its LPA of 75% and highest since March 20012). As per the FICCI, capacity utilization in sectors like auto, capital goods and
  metals have increased notably and could translate into capacity addition.

• The deleveraging exercise undertaken for last three years (FY16-FY18) has put the corporate balance-sheet in a relatively better
  place to undertake capacity expansion. Now, it all hinges on improvement in the economic cycle.

   Source: RBI, FICCI, SBIMF Research: *NB: Green indicates capacity utilization is higher than long term average
   (LTA), yellow indicates similar to long term average (+/- 2 LTA) and red indicates lower than LTA
FDI inflows can improve going ahead

                                 India has witnessed net FDI inflows of US$ 30 billion in FY19
                                 (till Feb) vs. US$ 28 million during the same period last year

 • India has witnessed net FDI inflows of US$ 30 billion during Apr-Feb 2019 which is marginally higher than US$ 28 billion
   seen during the corresponding period last year. That said, it is still lower than what was seen during FY15-FY17.

 • As per recent media reports, FDI inflows can improve going ahead. A couple of large-ticket deals have been announced
   (Brookfield Asset Management, likely capital infusion of Arcelor Mittal in Essar Steel etc…) and can lead to higher FDI inflow
   going ahead.

 Source: CMIE economic outlook, Various media reports, SBIMF Research
Bank industrial credit growth is picking up…
Bank Industrial credit growth has started to pick-up, but     In FY19, 20% of incremental credit disbursement went to the
still lower than the growth in the personal loan segment      industrial sector vs. 3.2% in FY18

Within the industrial sector, credit disbursal to small and   • Bank non-food credit improved to 13.3% in FY19 (10.2% in
medium enterprises extremely muted                              FY18). On a positive note, bank credit to industry bottomed out
                                                                and accelerated to 6.9% by end FY19 (vs. 0.7% by end FY18
                                                                and -1.9% by end FY17, 5 year avg. of 2.9%). Incrementally,
                                                                20% of credit disbursed by banks went to industrial sector
                                                                (mainly to large enterprises). While this is much better than last
                                                                several year trends, credit growth to industry still remains well
                                                                behind banks’ overall (non-food) credit growth. Personal loans to
                                                                households still makes a lion’s share of banks’ incremental credit
                                                                disbursement (trend being observed since FY15).

                                                              • Credit growth remain particularly unfavorable for small and
                                                                medium enterprises (0.7% and 2.6%, respectively, by end FY19).
                                                                The situation for the SMEs gets further exacerbated by the stress
                                                                in the non-banking financial entities (NBFEs).
   Source: RBI, SBIMF Research
…but credit growth from non-bank segment moderating
Corporate bonds issuances have moderated                     After being >1 since 2H FY16, debt weighted credit ratio
                                                             (upgrades/downgrades) fell to 0.89 in 2H FY19

Debt oriented mutual fund schemes seeing growth moderation • Since the IL&FS default in Sep’18, Rs ~7 trillion of debt has
                                                             been downgraded by various rating agencies. Handful of them
                                                             have seen steep downgrades in a very short span of time. A part
                                                             of corporate India, particularly promoter entities with higher
                                                             leverage, is also facing the stress. These challenges are
                                                             showing nascent signs of risk-aversion amongst lenders across
                                                             financial market. Corporate bonds issuances have moderated.
                                                             AUM growth in the fixed income oriented mutual fund schemes
                                                             have slowed down sharply.

                                                              • Hence, while gradual withering away of NPA issues in banks
                                                                offers scope to see continued expansion in banks’ credit book,
                                                                challenges in non-bank segment needs to be addressed swiftly,
                                                                lest could translate into weaker credit disbursal from capital
                                                                market and overall reduced risk appetite of lending fraternity.
   Source: CMIE Economic Outlook, CRISIL, SBIMF Research
Growth momentum unlikely to see any sharp recovery in FY20
                                                   • India’s economic activity has moderated and may remain so in
                                                     1H 2019.

                                                   • In recent months, the negativity around India’s growth outlook
Indian economic growth to hover around 7.0%          has stepped-up. It stems from
                                                     a) Signs of slowdown in global growth,
                                                     b) Strains in government’s finance and the rising clamour around
                                                        social and income support measures which inhibits
                                                        government’s ability to continue with the infrastructure
                                                        support,
                                                     c) Evidences of weaker sale in various consumption items (such
                                                        as auto sales, domestic air travels, FMCG, textiles and other
                                                        discretionary),
                                                     d) Weakening non-oil non gold imports which is closely linked to
                                                        domestic industrial/ investment activity and,
                                                     e) Challenges in the NBFCs which has affected the fund
                                                        availability in the wholesale loans and real estate segment.

                                                   • India’s growth may remain below potential in the near term, but
                                                     some pick-up is likely by the year-end helped by:
                                                     a) We expect investment activities to pick up post election.
                                                     b) Mainstream banks have stepped up to offset some of the
                                                        growth drag from the NBFCs.
                                                     c) The reforms, regulation and time correction in real estate
                                                        prices over last five years have now created a favourable
                                                        base for some pick-up in demand.

                                                   • As such, growth momentum is unlikely to see any sharp
                                                     recovery in FY20. We expect annual FY20 GDP growth rate
                                                     to hover around 7.0%. Economic activity post election needs
                                                     to be closely watched.
  Source: CMIE economic outlook, SBIMF Research,
India to comply with US sanctions on Iran
India’s import from Iran has been cut down by nearly 50%                  • In May 2018, US withdrew from 2015 nuclear deal between
in the last six months to comply with US import criteria                    Iran and brought back the sanctions. Accordingly, all countries
                                                                            had been asked to cut oil imports from Iran to nil by Nov’14.
                                                                            However, six month waiver (till 2 May 2019) was granted to
                                                                            eight countries (China, India, Japan, South Korea, Taiwan,
                                                                            Turkey, Italy and Greece) on the condition to reduce the oil
                                                                            purchases from Iran. India agreed to restrict the monthly
                                                                            purchase to 1.25 million tonnes to get the waiver.

                                                                          • India imported ~2.6 million tonnes of crude and products per
                                                                            month between Apr-Oct’18, which was brought down to an
                                                                            average of 1.26 million tonnes during Nov’18 to Mar’19.

                                                                          • India is the second largest purchaser of Iranian oil after China
                                                                            and imports ~9% of its annual oil import need from the nation.

 Lower imports from Iran has been substituted by higher                   • While China has cited to not abide by US restriction, Indian
 imports from Saudi Arabia, UAE, Mexico and Kuwait                          government has indicated to discontinue its oil purchase from
                                                                            Iran and garner supplies from alternate sources.

                                                                          • During Nov’18-Mar’19, India imported only 5.3% of its oil import
                                                                            need from Iran vs.11% during Apr-Oct’18. To make for this
                                                                            shortfall, oil imports increased from countries such as Kuwait,
                                                                            Mexico, UAE and Saudi Arabia. The imports from these
                                                                            alternate nations is likely to increase further in FY20.

                                                                          • Few of the key oil companies have already signed up for
                                                                            optional volumes (over and above the term contracts) from a
                                                                            number of suppliers from the above mentioned alternate
                                                                            countries. This can be exercised to make up for the shortfall
                                                                            from Iran.
  Source: CMIE Economic Outlook, Various media reports, SBIMF Research;
NIFTY: 4Q FY19 Earnings Interim Review
4Q FY19 sales growth moderated to 13%...                  …but EBITDA margin improved to 22%

Profit growth is weak but in line with previous quarter

                                                           • 20 companies in NIFTY 50 and 33 companies in BSE
                                                             100 reported their results for Q4 FY19.

                                                           • The interim study indicates some moderation in the top-
                                                             line. Sales growth moderated to 13.6% for BSE 100
                                                             and 12.6% for NIFTY vs. +20% growth for the
                                                             preceding three quarters in both the indexes.

                                                           • EBITDA margin and PAT has improved marginally in
                                                             Q4 FY19 for the results declared thus far.

   Source: Capitaline ,SBIMF Research,
Earnings downgrade continued for eighth straight year
Trend in earnings revision remains that of downgrades   • The interim review of the results point towards:

                                                           o Weakness in rural demand going ahead, in line with
                                                             the high frequency economic data

                                                           o Weakness in auto sales for at least 1-2 next
                                                             quarters

                                                           o Rising cost of funds for NBFCs. Demand for auto
                                                             loan has slowed while home loan demand stays
                                                             healthy

                                                           o Weakness in the refining and petrochemical margin

                                                           o Improvement top-line for cement companies helped
NIFTY 50 is expected to post an EPS growth of ~7% in         by the volume growth, hence leading to improved
FY19 but pick-up to ~30% in FY20                             capacity utilization. The price hike taken in April will
                                                             help to sustain the improvement in top-line for
                                                             coming quarters.

                                                           o Healthy top-line      growth   in   IT   services   but
                                                             challenges ahead

                                                           o Improvement in asset quality for corporate banks
                                                             and hence improvement in their profitability

                                                        • The trend in earnings revision remains that of
                                                          downgrades. NIFTY is expected to post an EPS growth
                                                          of ~7% in FY19 but pick-up to ~30% in FY20.

  Source: Capitaline, SBIFM Research;
Liquidity: FIIs invested, offsetting the DIIs outflow in April

FIIs invested for the third consecutive month in April 2019   Domestic institutional investors were net sellers owing to
                                                              the selling by the mutual fund

   Source: Bloomberg, SBIMF Research
FII equity inflow in India has been the highest among key EMs

FII inflows in the equity market            India’s is amongst the top key emerging market
                                            economies in terms of FII inflows
                                                                2018             2019 (till Apr)
                                            India                       -4,557                9,754
                                            South Korea                 -5,676                6,787
                                            Taiwan                     -12,182                5,989
                                            Indonesia                   -3,656                4,584
                                            Philippines                 -1,080                     817
                                            Brazil                      -3,408                      98
                                            Sri Lanka                      -48                     -24
                                            Thailand                    -8,913                 -301
                                            South Africa                -3,954               -2,533

  Source: CEIC, Bloomberg, SBIMF Research
Mutual fund equity inflows have moderated
Mutual Fund AUM growth moderated to 6.6% in April 2019                                                                                                                                        Equity AUM growth weakened to 2%
                                                                                                                                                                                              12                                                                                                     100
                                                                                                                                                                                                                                                                                   10.3
30                                                                                                                                                                           60                                                                                                                      80
                                                                                                                                                                                              10                                                                                           8.93
25                                                                                                                                              23.8 24.8                    50                                                                                             8.2
                                                                                                                                  21.4
                                                                                                                                                                                                                                                                                                     60
                                                                                                                                                                             40                8
20                                                                                                                      17.5                                                                                                                                         5.9                             40
                                                                                                                                                                             30                6
15                                                                                                            12.3                                                           20                                                                               4.0                                    20
                                                                                                   10.8                                                                                        4                                                       3.5
                                                                                   8.3                                                                                       10                                                                                                                      0
10                                                                   7.0                                                                                                                                            2.0    2.0                  2.0
                                     6.1        5.9       5.9                                                                                                                                      1.8                            1.8    1.7                                               1.8
       5.1          4.2                                                                                                                                                      0                 2            1.1
 5                                                                                                                                                                                                                                                                                                   -20
                                                                                                                                                                             -10
                                                                                                                                                                                               0                                                                                                     -40
 0                                                                                                                                                                           -20

                                                                                                                                                                                                                                                                                            Apr-19
                                                                                                                                                                                                   FY08

                                                                                                                                                                                                                                                              FY16
                                                                                                                                                                                                             FY09

                                                                                                                                                                                                                    FY10

                                                                                                                                                                                                                           FY11

                                                                                                                                                                                                                                  FY12

                                                                                                                                                                                                                                         FY13

                                                                                                                                                                                                                                                FY14

                                                                                                                                                                                                                                                       FY15

                                                                                                                                                                                                                                                                     FY17

                                                                                                                                                                                                                                                                            FY18

                                                                                                                                                                                                                                                                                    FY19
                                     FY10
         FY08

                     FY09

                                                FY11

                                                           FY12

                                                                       FY13

                                                                                       FY14

                                                                                                    FY15

                                                                                                               FY16

                                                                                                                          FY17

                                                                                                                                     FY18

                                                                                                                                                     FY19

                                                                                                                                                                 Apr-19
                Mutual fund AUM (Rs. Trillion)                                                     % growth in mutual fund AUM- RHS                                                                       Equity AUM (ex arbitrage)-Rs. Trillion              % growth in equity AUM- RHS

Equity oriented mutual funds witnessed an outflow in April                                                                                                                                     Monthly SIP inflow hovers around Rs. 80-82 billion per
2019 (first monthly outflow in last five years)                                                                                                                                                month
350

300               Rs. Billion
250

200

150

100

50

 0
                                       Oct-15
                Apr-15

                                                          Apr-16

                                                                                                     Apr-17

                                                                                                                                            Apr-18

                                                                                                                                                                                     Apr-19
                                                                              Oct-16

                                                                                                                        Oct-17

                                                                                                                                                                   Oct-18
      Jan-15

                                                 Jan-16

                                                                   Jul-16

                                                                                          Jan-17

                                                                                                                                 Jan-18

                                                                                                                                                                            Jan-19
                            Jul-15

                                                                                                               Jul-17

                                                                                                                                                        Jul-18

-50

                                      Mutual Fund: equity related inflows (Equity Fund+ELSS+ETF)

      Source: CMIE Economic Outlook, MF Dex, SBIMF Research
Valuations across the capitalization curve
Valuations across the capitalization curve

 Nifty is trading at ~18 times forward earnings   NIFTY 12m Fwd. P/E is trading at 35% premium to 10 year
                                                  G-sec (vs. the long term average premium of 16%)

   Source: Bloomberg, SBIMF Research,
MSCI India valuation corrected vis-à-vis MSCI EM

Valuation of MSCI India saw sharp corrections vis-à-vis MSCI     The RoE differentials is improving at the margin
EM since January 2019; getting closer to the long-term average

   Source: Bloomberg, SBIMF Research,
Equity Market outlook

• NIFTY rose 1.1% in April and Rupee gained 0.6% against the US dollar
  helped by strong FII inflows during the month. FIIs invested US$ 3.03
  billion in equity during the month offsetting the US$ 0.6 billion of outflows
  by the domestic institutional investors.

• However, these gains have been completely undone in the first fort-night of
  May largely due to weak participation by the domestic mutual funds.             Nifty is trading at ~18 times forward earnings

• The recent foreign inflows (during February to April) are more a reflection
  of India catching up with the other emerging markets. The global narratives
  around emerging markets had begun to change favorably since the start of
  the year, helped by increased dovish bias by the US Fed.

• While the market sentiments have improved, economic activity has
  moderated and may remain so in 1H 2019. Consumption indicators have
  softened sharply while investment appears to be on the side-lines just
  ahead of election. India’s growth may remain below potential in the near
  term and require significant easing in the domestic financial conditions.

• 20 companies in NIFTY 50 and 33 companies in BSE 100 reported their
  results for Q4 FY19. The interim study indicates some moderation in the
  top-line. EBITDA margin and PAT has improved marginally in Q4 FY19 for
  the results declared thus far. The trend in earnings revision remains that of
  downgrades. NIFTY is expected to post an EPS growth of ~7% in FY19
  but pick-up to ~30% in FY20.

• In the near-term, election related news flow will keep the markets volatile
  and a clear trend will only emerge post the election.

   Source: Bloomberg, SBIMF Research
Fixed Income Market
Bond yields in the key developed markets

                                                                                                         m-o-m       3m      Change in
 10 Year Gsec Yield (%
                       2015 end          2016 end   2017 end   2018 end   Feb-19   Mar-19     Apr-19   change (in Change (in 2019 (in
       mth end)
                                                                                                          bps)      bps)       bps)

 Developed market
     US                      2.27          2.44       2.41       2.68      2.72     2.41       2.50        10        21         -18
     Germany                 0.63          0.21       0.43       0.24      0.18     -0.07      0.01        8         17         -23
     Italy                   1.60          1.82       2.02       2.74      2.75     2.49       2.56        7         20         -19
     Japan                   0.27          0.05       0.05       0.00     -0.02     -0.08      -0.04       4          2         -4
     Spain                   1.77          1.38       1.57       1.42      1.17     1.10       1.00       -10        17         -42
     Switzerland             -0.06        -0.19      -0.15      -0.25     -0.24     -0.38      -0.30       9          6         -5
     UK                      1.96          1.24       1.19       1.28      1.30     1.00       1.19        19        12         -9

 •      10-year bond yields across the key developed markets (barring Spain) inched higher during the month of April as global
        growth concerns were marginally assuaged by better than expected growth prints. While the m-o-m movement saw a
        marginal up-tick, the year-to-date movement is still that of fall in 10-year bond yields across the developed markets.

 •      US 10-year bond yields inched up by 10 bps in April 2019 on account of better than expected Q1 2019 GDP growth and labor
        market data. However, the bond yield once again softened in the first week of May post the US indication to increase the
        tariffs on US$ 200 billion worth of Chinese goods thus re-kindling the strength of future demand concerns in US.

 •      10-year bond yields in UK increased by 19 bps led by relatively hawkish BoE. BoE kept the policy rate unchanged at 0.75%
        but signaled for a rate hike over the next three years with evolution of favorable growth & inflation dynamics and resolution of
        Brexit impasse.

 •      On the other hand, 10-year bond yields in Spain eased by 10 bps during April led by some stabilization on the political front.

     Source: Bloomberg, SBIMF Research
Bond yields in the key emerging markets

• Barring Russia and South Africa, 10-year bond yields in the key emerging markets inched higher during the month of April, in
  tandem with the advance economies.

• China 10-year bond yield increased by 33 bps in April led by better-than-expected economic data (like industrial output and
  retail sales). However, on the back of increase in the US-China trade spat, Chinese 10-year bond yields eased to 3.36% (as
  on 6th May).

• Turkish 10-year bond yields increased by 203 bps during the month due to a sharp fall in the Lira (6.6%) in April.

• On the other hand, bond yields in Russia eased by 25 bps in April as the Central Bank of Russia turned dovish in its latest
  policy meet and indicated to cut the rates as early as Q2 2019 vs. the market expectations of Q4 2019.

 Source: Bloomberg, SBIMF Research
Commodity market snapshot

Most of the energy prices rose during the CYTD (till April   Rubber and Palm oil prices have increased sharply while
2019) barring Coal, Uranium and Natural Gas.                 prices of wheat and coffee have primarily come down

Except Lead and Aluminum most of the base metal prices        Prices of Platinum and Palladium have increased while
have increased in 2019 (till Apr)                             Silver has come down. Gold prices are relatively stable

  Source: Bloomberg, SBIMF Research
India Rates Snapshot: April 2019

                                                                                                                   m-o-m change Change in 2019
                                          Dec-17       Dec-18      Jan-19      Feb-19       Mar-19       Apr-19
                                                                                                                      (in bps)      (bps)
 3M T-Bill                                 6.20          6.65        6.56       6.40         6.31         6.44           12          -21
 1 Yr T-Bill                               6.40          6.94        6.78       6.55         6.39         6.51           12          -42
 10 year GSec                              7.33          7.37        7.28       7.41         7.35         7.41             6          4
 Overnight MIBOR Rate                      6.20          6.73        6.50       6.35         6.28         6.20            -8         -53
 Weighted Average Call money rate          5.99          6.57        6.36       6.49         6.50         6.39           -14         -28
 3M CD***                                  6.38          7.05        7.10       7.08         7.25         7.25             0          20
 12M CD***                                 6.75          8.08        7.93       7.73         7.48         7.73           25          -35
 3 Yr Corp Bond*                           7.66          8.50        8.22       8.18         7.97         7.98             2         -52
 5 Yr Corp Bond*                           7.68          8.43        8.32       8.45         8.10         8.30           20          -13
 10 Yr Corp Bond*                          7.90          8.51        8.56       8.73         8.52         8.54             2          2
 1 Yr IRS                                  6.44          6.56        6.49       6.24         5.92         6.12           20          -44
 5 Yr IRS                                  6.75          6.62        6.60       6.31         5.94         6.35           41          -27
                                                                                                                             #
 INR/USD                                   63.9          69.8        71.1       70.7         69.1         69.6          -0.6         0.3#
 Crude Oil Indian Basket**                 62.3          57.8        59.3       64.5         66.7         71.0            6#         23#

 • During the month of April, Indian 10-year G-Sec yields inched higher by 6 bps despite of 25 bps reduction in the policy rate in
   the latest RBI monetary policy meet. The yields increased probably on account of rise in the crude oil prices and net FII selling
   by the foreign investors in the debt market. FIIs pulled out US$ 738 million in April and US$ 657 million in May (till 10th) from
   the debt market.

 • Money market rates, too, inched higher during the month due to tightness in liquidity.

 • Crude oil prices increased by 6% during the month. YTD, crude price has risen by 23%.

 • Rupee depreciated by 0.6% in April. YTD, rupee has appreciated marginally by 0.3%.

  Source: Bloomberg, PPAC, RBI, CEIC, SBIMF Research; NB: **Crude oil price is average $/barrel for the month, rest of the
  data are % month end; *Corporate bond rate is for AAA rated bonds ,*** Refers to PSU Banks’ CD rate; # INR and Oil price
  changes are % change; @ March end MIBOR has been taken for 28th March, just for a day MIBOR rose to 8.8% on 29th March
Global signs of monetary easing
 The direction of the global policy rate appears to be tilting towards hold or easing

        Policy rate (in %), end period           2015             2016            2017                  2018             2019 (till May 9th)
 US                                              0.50             0.75             1.50                  2.50                   2.50
 Canada                                          0.50             0.50             1.00                  1.75                   1.75
 China                                           4.35             4.35             4.35                  4.35                   4.35
 Japan                                           0.10             0.10             0.10                  0.10                   0.10
 India                                           6.75             6.25             6.00                  6.50                   6.00
 Australia                                       2.00             1.50             1.50                  1.50                   1.50
 South Korea                                     1.50             1.25             1.50                  1.75                   1.75
 Indonesia                                                        4.75             4.25                  6.00                   6.00
 Taiwan                                          1.625           1.375            1.375                 1.375                  1.375
 Thailand                                         1.50            1.50             1.50                  1.75                   1.75
 Malaysia                                         3.25            3.00             3.00                  3.25                   3.00
 Singapore                                        0.08            0.08             0.08                  0.08                   0.08
 Hong Kong                                        0.75            1.00             1.75                  2.75                   2.75
 Phillippines                                     4.00            3.00             3.00                  4.75                   4.50
 New Zealand                                      2.50            1.75             1.75                  1.75                   1.50
 Eurozone                                         0.05            0.00             0.00                  0.00                   0.00
 UK                                               0.50            0.25             0.50                  0.75                   0.75
 Switzerland                                     -0.75           -0.75            -0.75                 -0.75                  -0.75
 Sweden                                          -0.35           -0.50            -0.50                 -0.25                  -0.50
 Norway                                           0.75            0.50             0.50                  0.50                   0.50
 Russia                                          11.00           10.00             7.75                  7.75                   7.75
 Turkey                                           7.50            8.00             8.00                 24.00                  24.00
 Saudi Arabia                                     2.00            2.00             2.00                  3.00                   3.00
 Poland                                           1.50            1.50             1.50                  1.50                   1.50
 South Africa                                     6.25            7.00             6.75                  6.75                   6.75
 Brazil                                          14.25           13.75             7.00                  6.50                   6.50
 Mexico                                           3.25            5.75             7.25                  8.25                   8.25
 Argentina                                       21.00           26.00            26.75                 50.00                  67.00
 Colombia                                         5.75            7.50             4.75                  4.25                   4.25
 Chile                                            3.50            3.50             2.50                  2.75                   3.00

  Source: Bloomberg, SBIMF Research; NB: * Indonesia had announced to use new policy benchmark i.e. 7-day reverse
  report rate as its benchmark policy rate in April 2016; Red highlighted cells indicates interest rate hike and green
  denotes a rate cut.
Indian growth-inflation dynamics favor monetary easing by RBI

GDP growth has moderated to 6.6% and is likely to remain sub-          CPI inflation likely to stay range-bound through out FY20
7% for the next 1-2 quarters

• Indian growth-inflation dynamics are favorable for monetary accommodation. GDP growth has moderated to 6.6% in Q3 FY19
  and is likely to remain sub- 7% for the next 1-2 quarters. CPI inflation likely to stay within RBI’s comfort zone through out most
  parts of 2019.

• The risks to inflation comes from the increased risk of weak monsoon which has not been penciled in RBI’s and our inflation
  expectation as yet. The trends in monsoon as well as global crude price movement will be closely watched. Further, while we
  have penciled the mean-reversion in food prices (particularly vegetables, oilseeds, pulses and cereals), the quantum of the rise
  cannot be predicted with certainty.

   Source: CMIE economic outlook, SBIMF Research,
External account dynamics have stabilized
Balance of Payments is expected to move back to surplus in      …improved FII sentiments; RBI’s measure (via VRR & FX
Q4 FY19 and FY20 after 3 quarters of deficit helped by…         swap) has helped to attract other capital inflow

Improved capital inflow helped RBI to recoup the FX reserves.   FDI inflows are hovering around US$ 30-35 billion since FY15
India’s FX reserves stands at US$ 419 billion as of April end   Recent deals pipeline showing optimism in FDI outlook

   Source: RBI, CMIE Economic Outlook, SBIMF Research
Current Account balance is expected to see an improvement
CAD is expected to see an improvement in Q4 FY19. We now            …as both lower oil bill and reduced Non-Oil Non Gold
expect FY19 CAD at 2.0-2.1% of GDP (vs. 2.5-2.6% initially)…        imports (helped by higher duties) will improve trade balance

• Balance of Payments is expected to move back to surplus in Q4 FY19 and FY20 after 3 quarters of deficit. We have revised our
  Q4 BoP numbers positively. The narratives that we expected to pan out in FY20 has kicked in earlier.

• Capital inflows into India have improved since February end helped by shift of FII investment in the emerging markets and RBI’s
  measure to attract capital inflows.

• We have also lowered our current account deficit numbers as non-oil non gold imports in January and February has been lower
  than expected. It has been due to dual impact of higher import duties imposed in later half of 2018 (import substitution measures
  by the government) and moderation in select sectors (such as auto).

• Our FY20 assumptions has Current Account Deficit at US$ 65 billion, 1.9% of GDP, Capital account US$ 85 billion (2.2% of GDP),
  Balance of Payment Surplus at US$ 20 billion (0.6% of GDP). As long as Crude prices stays contained (by which we mean less
  than US$ 75 per barrel) and any sharp risk aversion against emerging markets assets does not develop, rupee is likely to remain
  range bound and gyrate around 69-72 against US$.

   Source: RBI, CMIE Economic Outlook, SBIMF Research
Crude prices have risen in recent months; not worrisome as yet

                      Brent prices increased recently and hovering around US$ 70/bbl.

 • Crude oil prices has risen in the recent months and currently hovers around US$ 70/ barrel. Complex geo-political dynamics
   makes it difficult to predict the oil trajectory.

 • US announced an end to waivers given to eight countries (China, India, Japan, South Korea, Taiwan, Turkey, Italy and Greece)
   with regards to their oil import from Iran. This led to some speculative rise in the oil prices even as the US is nudging South
   Arabia and other key OPEC countries to ramp-up their oil supplies.

 • We have penciled crude prices to be around US$ 75/bbl. in FY20. Even with this assumption, we expect Balance of Payment
   to post a surplus of US$ 20 billion (0.6% of GDP). For FY20, we see only a marginal depreciation pressure on rupee.

  Source: Bloomberg, Various media reports, SBIMF Research;
Rupee has been broadly stable Year-to-Date

Rupee depreciated by 0.6% in April and hovered around             Year-to-date, rupee has been broadly flat and the
~69-70/US$ levels during the month                                performance vs. other EM currency is in the middle

                          Rupee is fairly valued on trade weighted REER basis

  Source: Bloomberg, CMIE Economic Outlook, SBIMF Research
Banking system liquidity is tight; expected to ease by June-July
Inter-bank liquidity has been in deficit for last 9 months now   Tight liquidity led call money rate to hover above the Repo
                                                                 rate for most days in April

Rs 250 billion of OMO purchases scheduled in May (Rs 125 bn        • Banking system liquidity tightened further in April 2019
done). We expect Rs ~1.5 trillion of OMO purchases in FY20.          (Avg deficit of Rs 723 billion vs. Rs 502 billion in March
                                                                     2019).

                                                                   • Part of the liquidity deficit is frictional owing to central
                                                                     government spending less than its revenue collection. Our
                                                                     estimate suggest that centre is sitting with cash balance of
                                                                     ~Rs 850 billion by April end.

                                                                   • We expect banking system liquidity to ease and turn
                                                                     neutral by the end of June-July 2019 owing to the
                                                                     seasonal factors (relatively lower CIC leakage during April-
                                                                     June), RBI’s continued liquidity support, favourable foreign
                                                                     capital inflows and government spending full throttle in the
                                                                     coming months and utilizing its cash balance.

   Source: RBI, CMIE Economic Outlook, SBIMF Research;
FX forward premium shot higher post 2nd round of FX swap
Second round of FX swap auction witnessed allotment to                                       3 year MIFOR rate got pushed up to 6.7% post the auction
handful players (5 vs. 89 in the first auction).                                             (vs. 6.2% prior to the auction and 6.1% as of March end)
                                                        Second auction First auction
      Details of USD/INR Buy/sell Swap auction
                                                       (23rd April 2019) (26th March 2019)
No. of offers received                                              255               240
Total amount offered (in USD billion)                                19                16
No. of offers accepted                                                5                89
Total amount accepted by RBI (in USD billion)                         5                 5
Cut-off premium (in paisa)                                          838               776
Weighted Average Premium of accepted offers (in paisa)              844               792
Rupee Liquidity injected in the first leg (Rs billion)              349               346
1 year FX forward premium stands at 4.2% as of April end vs.                                 • RBI had introduced a new Rupee auction swap facility, with
3.8% by March end                                                                              3-year tenor as a tool to inject rupee liquidity in March 2019.

                                                                                             • The second round of RBI FX swap auction was conducted on
                                                                                               23rd April 2019. A handful of players (5) were allotted the
                                                                                               liquidity in the auction vs. 89 in the previous auction.

                                                                                             • It saw the premium getting pushed up to 838 paise as
                                                                                               opposed to 26th March premium of 776 paisa owing to
                                                                                               aggressive bidding in the auction.

                                                                                             • The 3 year MIFOR rate got pushed up to 6.7% post the
                                                                                               auction (vs. 6.2% prior to the auction and 6.1% as of March
                                                                                               end). The 1 year FX Fwd. premium stands at 4.2% as of April
                                                                                               end vs. 3.8% by Mar end.

    Source: Bloomberg, RBI, SBIMF Research
Policy Rate Outlook: We expect further rate cut
• The RBI cut the policy rate by 25bps to 6.00% along the expected lines, even
  as it retained its neutral stance. 4 members voted in the favor of rate cut and 2
  members voted to keep the rate unchanged. 5 members voted to retain the
  neutral stance while 1 member voted to shift to an accommodative stance.

• The rate cut came on the back of increased comfort on inflation stability and
  rising growth concerns. The revised inflation expectation stands at 2.4% in Q4
  FY19 (2.8% earlier), 2.9-3.0% in 1HFY20 (3.2-3.4% earlier) and 3.5-3.8% in          RBI cut the policy rate by 25bps to 6.00%
  2HFY20, with risks broadly balanced (same as earlier). FY20 GDP growth
  estimation has been lowered to 7.2% (7.4% earlier), 6.8-7.1% in 1HFY20
  (7.2-7.4% earlier) and 7.3-7.4% in 2HFY20, with risks evenly balanced (same
  as earlier). Comfort on inflation is led by moderation in household inflation
  expectations, benign food inflation and recent price fall in fuel groups. The RBI
  has mentioned that “the output gap remains negative and the domestic
  economy is facing headwinds, especially on the global front. The need is to
  strengthen domestic growth impulses by spurring private investment”.

• We expect the RBI to deliver another 25bp cut (either in June or August).

• More than the rate cut, the focus is likely to ensure a better transmission of
  the 50bps rate cut delivered thus far and in that regard we expect RBI to
  remain supportive of liquidity. RBI’s liquidity support coupled with positive
  foreign capital inflow and the possibility of reduced currency leakage post-
  election should ease the banking system liquidity which has been in deficit for
  two quarters now. We expect the banking system liquidity to turn neutral by
  end Q1 FY20 which will be instrumental in enabling the transmission.

• To sum, we believe that Indian macro environment will both enable and
  necessitate monetary easing (in the form of rate cuts and liquidity
  injection) by the RBI.

    Source: RBI, SBIFM Research
Valuations are attractive
CPI Inflation adjusted real rate in India at 4.6%   G-sec is trading at 110bps spread to the Repo vs. LPA of 84bps

                                                     Valuations vs. US yield are attractive

  Source: Bloomberg, SBIMF Research
Quasi-sovereign bonds offer better spreads over G-sec

Spreads of 10 year Corporate bonds vis-à-vis G-sec is at 113      Spreads between 10-year SDLs and G-Sec are high when
bps vs its long term average of 111 bps                           compared to its long term average

 • The demand supply dynamics and valuation comfort are relatively better 10 year AAA corporate bonds and SDL as compared to
   the G-sec

 • The spreads of 10 year Corp bonds and SDL vis-à-vis G-sec has closed down considerably in last two months but they still
   command some premium compared to their 5 and 10 year average.

   Source: RBI, Bloomberg, SBIMF Research,
Demand-supply dynamics for government bonds are deteriorating
 Government Securities Demand Supply Analysis
 in Rs billion                                   FY13         FY14     FY15        FY16        FY17        FY18      FY19 E       FY20E
 Demand Sources
 1. Banks                                         761        3,039   1,725       2,344       2,198       3,709       1,000        1,200
 2. Insurance Companies                         1,822        1,896   2,412       2,451       2,679       2,932       2,500        3,200
 3. Provident/Pension/ Gratuity                 2,232          446     900         160       1,360       1,267       1,300        1,300
 4. RBI's Net OMO                               2,073          436    -364         499       1,092        -924       2,985        1,500
 5. Others                                      1,265          445   1,886       1,852       1,035       1,268         619        1,000
 A. TOTAL DEMAND                                8,153        6,263   6,559       7,306       8,365       8,253       8,404        8,200
 Supply Sources
 Central Govt Sec (net of redemptions)          6,607        4,610   4,427       3,747       3,785       4,858       4,227        4,731
 State Govt Securities (net of redemptions)     1,545        1,649   2,136       3,559       4,579       3,395       3,900        4,100
 B. TOTAL SUPPLY                                8,153        6,258   6,563       7,306       8,364       8,253       8,127        8,831

 • In FY19, RBI’s OMO purchase came as a very strong demand support absorbing nearly one third of the Government supply
   or say 70% of G-sec supply (as RBI only buys G-sec not SDL). This helped off-set the weak bank demand. Banks (SCBs)
   had purchased only Rs. 400 billion up until Jan 2019 and can at best purchase another 600 billion in the last two months.
   This is sharply lower than last 5 year trend of Rs. 2-3 trillion. Banks’ SLR holdings have fallen from the peak of 28.5% in July
   2019 to 25.8% by the March 2019 end.

 • In general, since FY14, we find that insurance and pension fund together have become a relatively larger player in the
   Government bond market, absorbing 40-60% of the total supply. Increasing penetration of these long-term financial products
   are helping the expansion of their AUM base and given the regulatory backdrop, they mandatorily invest in government
   securities. FY19 supply (net of redemption) was also Rs. 300 billion lesser than last two years.

 • For FY20, total net supply is likely to go up by Rs. 800 billion with risks tilted to upside. Coming to the demand side in FY20,
   OMO purchases are likely to continue in FY20 (expectation of ~Rs. 1.5 trillion). However, banks’ buying appetite is at risk
   given the tightness in C/D ratio, regulatory relaxation in SLR holdings, and disbursement constraints in NBFC.

  Source: RBI, IRDA, CMIE Economic Outlook, SBIMF Research
Tight CD ratio may limit banks’ demand for SLR securities
Credit growth picked up in 2018-19 and outpaced the deposit   C/D ratio is tight and stands at high level of 77x
growth

Banks reduced SLR holding in FY19 to meet credit demand. If   • Bank deposit and credit growth is improving since FY19 but
CD ratio remains tight; SLR can fall further to 24%             credit growth (14.2% y-o-y) has been higher than deposit
                                                                growth (10.6% y-o-y), leading to tight C/D ratio.
                                                                Consequently, banks are running down on their SLR holding.

                                                              • Bank peaked out the SLR holding at in July 2018 (28.5%)
                                                                and then fell to 25.8% by FY19 end. The regulatory SLR
                                                                need would require SLR to fall by 1% in FY20 (spread over
                                                                four quarters). Moreover, additional 2% carve out from the
                                                                mandatory SLR for LCR maintenance will lead to a parallel
                                                                reduction in the banks’ need to hold government securities.

                                                              • If C/D ratio remains tight, banks’ SLR can fall further to 24%
                                                                by FY20 end. This year possibility of bank’s incremental
                                                                investment could by Rs ~1.2 trillion vs. Rs ~600 billion in
                                                                FY19 and an average of Rs 3 trillion during FY14-FY18.
  Source: RBI, SBIMF Research;
April GST collection highest; yet below the asking rate
April 2019 GST collections at Rs 1.14 trillion (highest since     … April collection improved by 10.1% over the year, but still
the commencement) vs. Rs 1.07 trillion in March 2019…             below the asking growth rate of 16.2%

  • April 2019 GST collection was at Rs 1.14 trillion (highest since the commencement) vs. Rs 1.07 trillion in March 2019. This
    means, April GST collections grew by 10.1% y-o-y which is lower than the required growth of 16.2% in FY20.

  • FY20 aggregate collection is budgeted at Rs. 13.7 trillion and warrants 16.2% growth in GST revenues.

  • While moderating economic activity brings some risk to collection buoyancy, it is achievable if the government increases
    compliance.

  • It has become absolutely pertinent for the government to increase the compliance on GST

   Source: CMIE economic outlook, pib.nic.in, SBIMF Research;
Weakness in tax revenue leads to risk of higher bond supply

 Massive surge in the supply of quasi sovereign bond in                 …coupled with falling financial savings puts pressure on
 last 5 years…                                                          the yields

 • The weakness in tax revenue along with FRBM compulsion to consolidate the fiscal deficit is leading the government to utilize
   various quasi-sovereign entities to fund its expenditure needs

 • In the last five years, even as the supply of G-sec and SDL has risen weakly, bonds issued by PSUs under extra-budgetary
   resources has jumped by 3.1x.

 • This coupled with falling financial savings puts pressure on the yields

 • The government will have to work aggressively towards improving the revenue buoyancy, and particularly the tax revenue
   buoyancy.

  Source: CMIE economic outlook, indiabudget.gov.in, SBIMF Research;
Debt Market Outlook
 • Indian 10-year G-Sec yields inched higher by 6 bps despite 25 bps
   reduction in the policy rate in April as crude oil prices rose and FIIs
   were the net sellers in the debt market. Money market rates inched up
   too, on account of tightness in liquidity.

 • The stress in the fiscal situation and accompanying high supply (of G-
   sec and other related government bonds) has created demand-supply
   concern and impedes the transmission of policy rate cuts. The tight C-D
   ratio of the banks limit their ability to invest in government securities. Valuations look attractive at G-sec vs. Repo rate
   OMO purchases in FY20 (Rs. 1.5 trillion) can be lower than ~Rs. 3.0
   trillion in FY19 (owing to improved foreign capital inflow).

 • We believe that the strength of other fundamentals factors will create
   the demand from other channels and somewhat offset the reduced RBI
   demand.

 • Global narratives favor easing monetary policy. India's external
   finances have improved. Capital inflows have risen and are likely to
   push the balance of payments back into surplus (after three quarters of
   deficit). That said, weak export competitiveness keeps the country
   vulnerable to oil price moves or an uptick in domestic growth. Sudden
   reversals or a halt in capital flows are all too common. But for now, the
   sentiments are positive.

 • The domestic demand supply dynamics favor monetary easing and
   inter-bank liquidity is likely to turn neutral by end Q1 FY20.

 • To sum, we see gains from staying long in bond market. Particularly, we
   favor the SDLs and AAA corporates over the G-sec. That said, some
   volatility around the election result is likely to be seen.

 Source: Bloomberg, SBIFM Research
Thank you
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