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From CIO’s desk

Month gone by – A snapshot: Emerging market equities remained range-bound during the month. Indian equity market was weak as investors played cautious ahead of the GST roll-out. Global bond yields hardened last month as central banks signalled normalisation of monetary policy. Domestic bond yields were volatile but ended lower amid build-up of expectations of rate-cut and robust inflows from foreign institutional investors (FIIs). Going forward, the monetary policy stance of RBI and initial impact of GST implementation on the economy are crucial events to watch out for.

Global central banks look at normalising monetary policy
The US Fed hiked Fed Funds rate by 25bps and unveiled a roadmap to gradually shrink its balance sheet in the later part of this year. This was despite declining inflation trajectory amid falling global commodity prices. The European Central Bank and Bank of England also signalled their intent of normalising monetary policy stance amid improving macro-economic environment. This led to an increase in global bond yields in the last week of June.

GST sees light of the day
The much-awaited indirect tax reform, GST, has come into effect from July 1, 2017. While disruptive in the near-term as businesses take time to align and adjust to the new framework, GST is expected to bring large-scale benefits to the economy in the medium to long-term. GST is likely to provide a boost to manufacturing sector facilitated by 1) elimination of cascading of taxes, 2) reduction in inter-state trade barriers and 3) simplification of tax structure. Additionally, the government is likely to gain from higher tax collections emanating from better tax compliance.

Fixed income market performance
Fixed income market rallies but remains volatile: Fixed income market started the month of June on a positive note, continuing the previous month’s rally. This was led by strengthened expectations of a rate cut following 1) a softened RBI policy with sharp downward revision in inflation forecasts, 2) timely onset of monsoon and 3) declining crude oil and commodity prices. However, yields moved up towards the last week, mimicking the global trend. Overall, the 10-year g-sec yield fell by 15bps to end the month at 6.5% amid strong FII inflows (June: $4bn; YTD: $14.6bn).

Outlook: Domestic factors that are likely to influence fixed income market in the near-term include 1) impact of implementation of GST and 7th Pay Commission allowances on inflation trajectory, 2) RBI’s stance in the upcoming monetary policy review and 3) steps taken by RBI to absorb excess liquidity. On the global front, monetary policy stance of global central banks is a crucial event to watch out for.

Equity market performance
Equity market breaks the five-month long rally: After five consecutive months of positive returns, Indian equity markets ended marginally lower in June. This was led by 1) concerns ahead of GST implementation, 2) farm loan waiver by several states, 3) RBI’s directive to banks to increase provisioning for 12 stressed accounts referred for bankruptcy and 4) hawkish commentaries by global central banks. Both domestic and foreign institutional investors were buyers during the month. The Nifty Index declined by 1% in June; however, the YTD returns remain strong at 16%.

Outlook: Given rich valuations, equity markets may remain in consolidation mode in the near-term. On the domestic front, performance of Q1FY18 corporate earnings and management commentaries, particularly in the wake of GST implementation, remains crucial for equity markets. On the global front, geo-political risks as well as monetary policy stance of global central banks are important factors for sustenance of FII inflows. Our medium-term outlook on the market remains strong on account of pick-up in economic activity led by consumption and higher public spending.