Fixed Income Outlook - Sundaram Mutual Fund

The New benchmark security closed the month at 7.64%. In Money ... be seen in conjunction with other economic data to assess the underlying momentum. We have .... deficit targets and inflation in its policy statement. We expect that apart ...
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Fixed Income Outlook Debt markets Government 10yr benchmark bond was trading in the range of 7.58% - 7.69% during the month as the Government announced new 10yr benchmark security during the month. However the old benchmark paper’s trading range was in 7.72% - 7.81% same as last month as there were no fresh triggers to induce any meaningful shift in the yield curve. The New benchmark security closed the month at 7.64%. In Money markets short term Bank Certificate of Deposit yields moved up sharply during the month and were trading in the range of 8.00% - 8.10%. This up move was triggered by tight liquidity in the banking system and increased issuances in short term by NBFC’s and banks in a busy quarter ending. Foreign Portfolio Investment saw outflows in equities and marginal inflows in debt during the month. Debt inflows were US$ 0.18bn as against outflows of US$ 0.63bn in the last month. Equities saw outflows of US$ 1.81 bn against the inflows of US$ 0.03 bn seen in December. Domestic Macro Factors The Index of Industrial Production (IIP) contracted by 3.2% y-o-y in November against an increase of 9.9% (revised up from 9.8% printed earlier) in October. This was the first negative print in IIP since October 2014 and also the quickest pace of contraction since October 2011. This was also well below the market expectation of a 2% growth. Part of this contraction was expected due to high base effect and festival related holidays in November. However the print was lower than expected due to sharper than expected decline in capital goods and consumer non-durable goods. In terms of use-based classification, capital goods production fell 24.4% against a growth of 16.3% in October 2015. Manufacturing output growth contracted in November by 4.4% vs a growth of 10.6% in October; mining growth also decelerated to 2.3 % from 5.2 % in October and similarly electricity growth dropped sharply to 0.7% compare to 9% in October. Industrial production data has been quite volatile in the recent past and needs to be seen in conjunction with other economic data to assess the underlying momentum. We have seen continuous improvement in Industrial production data barring the sharp decline in November which was mainly due to some one-offs like festival holiday and disruption due to heavy rains in South India. We believe that it would get settled down in a couple of months and trends in coming months needs to be watched. We expect that supported by stronger discretionary consumer demand, increased Government spending on Infrastructure and the Government’s efforts to debottleneck investment and policy reforms Industrial production will improve in coming months. India’s external trade deficit rises to USD 11.7 bn vs. $ 9.8 bn in November. Export growth continued to fall and printed at -14.7% in December against (-24.4%) yo-y in November, marking the 13th consecutive month of decline. Imports also continue to decline at (-3.9% y-o-y) in December compared to (-30.3% y-o-y) in November. The trade deficit increased in sequential terms due to broad-based rise in imports led by pearls, precious & semi-precious stones, machinery and electronic goods. Gold imports increased by US$0.3bn from the previous month to US$3.8bn in Dec. Oil imports were (-) 33.2% vs (-) 45% y-o-y in November. Non-oil non-gold imports contracted by (-3.3%) in December vs (-21.3%) in November. The moderation in contraction in non-oil non-gold imports is due to the rise in electronic goods imports. The rupee depreciated by 2.48% from last month and closed at 67.79/$. India’s forex reserves are close to at $347.56bn in the week ending January 22, 2016. Inflation Headline CPI inflation accelerated to 5.6% y-o-y in December from 5.4% in November, this was largely in line with market expectation of 5.5%. This marginal uptick in headline CPI inflation was due to higher food prices and unwinding of favourable base effect. Food inflation rose to 6.4% from 6.1% in November and core CPI (ex food & fuel) inched up to 4.5 from 4.3% in November. However Core CPI (ex food & fuel) after removing t