Nifty was flat for the month of April 2019 as large corporate downgrade led to fresh concern on NBFCs, possible GDP slowdown fears as some concurrent indicators pointed to a slowdown and fear of a crude rally post talks of US reinstating the Iran sanctions. While technology and cement sectors outperformed the index, real estate and telecom sectors underperformed in the month of April 2019.
We remain neutral in the short term since weak domestic economic data is offset by global liquidity. Alert on El Nino conditions and fear of crude rally may impact inflation expectations. Further, global change in policy stance likely to lead to continued flows for equity markets. However, the recent rally in equity market has led to expansion in P/E multiples as earnings downgrades continues. Additionally, formation of a stable government in 2019 general elections will be considered positive for equity markets.
CPI inflation for March 2019 rose to 2.86% with food inflation turning positive for the first time since September 2018. Credit and deposit growth was seen at 14.2% and 10.6% respectively for April 12, 2019. RBI infused rupee liquidity by absorbing another $5 billion through a 3 year dollar rupee swap auction. Trade deficit was seen at $10.9 billion for March and $176.4 billion for FY19 which was a 6-year high. Indian Rupee closed weaker at 69.56 against the dollar as on April 30, 2019. Manufacturing PMI for April was seen weaker at 51.8.
We expect that the election results, to be announced on 23rd May, would be the next significant trigger for yields. Until then the trajectory of crude oil prices and RBI’s Open Market Operations (total 25,000 crores announced for the month of May) will influence yield movements. We maintain a neutral outlook on bonds. While we expect the RBI to cut rates by 0.25% in H1 FY20, we believe it will likely take a breather at its next month’s policy meeting – awaiting clarity on monsoons and the new government’s full budget before taking its next policy move. Total borrowing by central and state government will continue to weigh on bond yields.