Mid and Small Cap funds underperformed a rising Sensex while large cap funds stayed broadly in line with the Sensex, indicating indexation by the funds. Markets is still cautious and is not taking up mid and small cap stocks due to elections and worries on 3rd quarter results. Broad market rallied on improving macros.
Sensex & Nifty witnessed fall in volatility with benchmark indices rising sharply in the month of November 2018. Falling US treasury yields in the US along with falling crude oil prices, moderating inflation and RBI’s plan to infuse Rs.400 billion into the system through open market operations (OMOs) in the month of December 2018 have led to the INR strengthening from lows of Rs 74.49 to the USD seen in the month of October 2018 to levels of below Rs 70 in the month of November 2018.
Foreign investors have turned net buyers in the month of November for bonds and equities as a result of the improvement in the macroeconomic fundamentals. Indian equity markets also mirrored a rally in global stocks in the last week of November after dovish comment by the US Federal Reserve Chairman pushed up appetite for risk assets.The benchmark BSE Sensex rose 5% in the month of November 2018.
After reaching a four-year high in early October, crude has collapsed more than 30 percent, marking the worst crash since 2015. While oversupply concerns were fueled by American exemptions on sanctioned Iranian oil, a trade dispute between the U.S. and China has threatened to hurt demand. Oil has remained in an oversold territory this month and seesawed near the $50 threshold at the end of the month, which is a key budgetary marker for shale drillers. Oil prices have plunged more than $25 till the end of November 2018 from a high reached in October 2018.
Read our Analysis about Oil can get back into bear market as US Shale Output gains on OPEC Cuts.
India’s GDP growth rate moderated to 7.1% in the September quarter (Q2) of 2018-19, from 8.2% in the June quarter (Q1), data released by the Central Statistics Office showed. Agriculture growth slowed to 3.8% in the September quarter from 5.3% in June quarter while mining contracted by 2.4% against 0.1% growth in the previous quarter, CSO’s Q2 GDP data showed. The sectors that accelerated include electricity (9.2%) and trade, hotels (6.8%) and public services (10.9%).
The slowdown in growth momentum along with benign retail inflation could prevent any further interest rate hikes by the RBI during its monetary policy review on 5th December. After two successive hikes, RBI’s monetary policy committee (MPC) kept interest rates unchanged on 5th October due to easing inflation. The rate-setting committee also lowered its inflation projection to 3.9%-4.5% for 4.8% for the second half of the current financial year.
The RBI is however set to pump in further liquidity in December by infusing Rs 400 billion into the system through open market operations (OMOs). Based on an assessment of the durable liquidity needs going forward, the RBI has decided to conduct purchase of government securities under Open Market Operations (OMOs) for an aggregate amount of Rs.400 billion in the month of December 2018, the central bank said in a latest release.
The only risk in the current scenario for the market is on the political front as state assembly elections will be closely watched. Assembly elections in Madhya Pradesh and Mizoram started from 28th November 2018. Polling in Rajasthan and Telangana will be held on 7th December 2018. The election to the 90-member Chhattisgarh Assembly was held in two phases 12th and 20th November 2018. Counting of votes will be held across all the five states on 11th December 2018.
FIIs/FPIs have bought Indian equity shares worth Rs.50 billion in the month of November 2018 after they sold Indian equity shares worth Rs. 108 billion & Rs. 273 billion in the month of September 2018 & October 2018 respectively.
Central Banks Monetary Policy
The US Federal Reserve kept interest rates unchanged in an unanimous decision and signaled that it would continue to tighten monetary policy at a gradual pace. As expected, the Fed kept its benchmark target for rates unchanged in a 2% to 2.25% range.
Federal Reserve Chairman Jerome Powell said in the month of November 2018 that he considers the central bank’s benchmark interest rate to be near a neutral level, an important distinction from remarks he made less than two months ago. According to him interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy — that is, neither speeding up nor slowing down growth.
The Bank of Japan kept its ultra-easy monetary policy in place as concerns grow about the impact of US-China trade tensions on the Japanese economy. The board voted 7-2 to maintain short-term interest rates at minus 0.1% and the target for the 10-year Japanese government bond yield at around zero.
Japan’s monthly balance of trade tumbled to a deficit of 449 billion yen ($3.95 billion) in October amid elevated trade tensions and ramped up pressure to cut its trade surplus with the US, data from the country’s finance ministry showed.
In US economic data, orders for US-manufactured durable goods fell by 4.4% in October, the largest decline in 15 months. Existing-home sales rose for the first time in six months, at a seasonally adjusted annual rate of 5.22 million in October, up 1.4% from September. The University of Michigan’s consumer-sentiment index fell to 97.5 in November from 98.6 in October.
China’s consumer inflation remained at the second-highest level so far this year, buoyed by an acceleration in non-food prices, official data showed. The consumer price index rose 2.5% in October from a year earlier, unchanged from the growth in September, the National Bureau of Statistics said.
Wall Street closed flat in the month of November 2018 as it recovered sharply after comments from the Fed Chairman. European stock markets closed negative on a month on month basis.
The RBI is set to pump in further liquidity in December by infusing Rs 40,000 crore into the system through OMOs.
The RBI on 29 November 2018, relaxed rules for non-banking financial companies (NBFCs) to sell or securitise their loan books. In order to encourage non-banking financial companies (NBFCs) to securitise/assign their eligible assets, RBI has decided to relax the minimum holding period (MHP) requirement for originating NBFCs, in respect of loans of original maturity above 5 years, to receipt of repayment of six monthly instalments or two quarterly instalments (as applicable). However, minimum retention requirement (MRR) for such securitisation/assignment transactions shall be 20% of the book value of the loans being securitised/20% of the cash flows from the assets assigned. The above dispensation shall be applicable to securitisation/assignment transactions carried out during a period of six months from the date of issuance of this circular. Other terms and conditions of the above referred directions remain the same, RBI said.
India’s exports rose by 17.86% to $26.98 billion in October mainly due to the low base effect even as trade deficit widened to $17.13 billion, according to the commerce ministry data. Imports during October also rose by 17.62% to $44.11 billion, leading to widening of trade deficit to $17.13 billion. The deficit widened despite a steep decline of 42.9% in gold imports to $1.68 billion during the month under review. The trade gap was $14.61 billion in October 2017.
The annual rate of inflation, based on monthly Wholesale Price Index (WPI), stood at 5.28% (provisional) for the month of October 2018 (over October 2017) as compared to 5.13% (provisional) for the previous month and 3.68% during the corresponding month of the previous year. Build up inflation rate in the financial year so far was 4.64% compared to a build up rate of 2.12% in the corresponding period of the previous year.
India’s industrial production grew 4.5% in September compared with the upward revised 4.7% in August, data released by the statistics office showed. August growth had initially been estimated at 4.3%.
Inflation as measured by the Consumer Price Index stood at 3.31% in October compared to 3.70% in September, government data showed.
Auto Sales Update
The industry produced a total 19,575,255 vehicles including passenger vehicles, commercial vehicles, three wheelers, two wheelers and quadricycle in April-October 2018 as against 17,112,236 in April-October 2017, registering a growth of 14.39 percent over the same period last year.
The sale of Passenger Vehicles grew by 6.10 percent in April-October 2018 over the same period last year. Within the Passenger Vehicles, the sales of Passenger Cars, Utility Vehicle & Vans grew by 5.87 percent, 5.19 percent and 12.96 percent respectively in April-October 2018 over the same period last year.
The overall Commercial Vehicles segment registered a growth of 35.68 percent in April-October 2018 as compared to the same period last year. Medium & Heavy Commercial Vehicles (M&HCVs) increased by 42.80 percent and Light Commercial Vehicles grew by 31.56 percent in April-October 2018 over the same period last year.
Three Wheelers sales increased by 31.97 percent in April-October 2018 over the same period last year. Within the Three Wheelers, Passenger Carrier sales registered a growth of 36.71 percent and Goods Carrier grew by 13.21 percent in April-October 2018 over April-October 2017.
Two Wheelers sales registered a growth at 11.14 percent in April-October 2018 over April-October 2017. Within the Two Wheelers segment, Scooters, Motorcycles and Mopeds grew by 6.10 percent, 14.19 percent and 6.36 percent respectively in April-October 2018 over April-October 2017.
The key drivers for the ongoing rebound in the INR are falling oil prices and broad-based US dollar weakness over the past few trading sessions. The US dollar was dumped across the board following dovish comments by the Fed Chair Powell and the recent FOMC minutes, both of which suggested that the Fed is likely to slow its policy tightening amid economic growth concerns.
However, the main reason for the turnaround in the worst-hit emerging markets currency was the oil-price sell-off, triggered by mounting supply overhang concerns and escalating US-China trade tensions. Weaker oil prices, usually, help to narrow the current account deficit for the Indian crude importers. India is the world’s third-biggest oil consumer after the US and China.