Market Outlook. December 2017

Transcription

1 Market Outlook December 2017

2 EQUITY MARKET

3 Global equity market snapshot: November 2017 Performance November 2017 (local currency returns) % m-o-m (1) -1 (2) (3) (4) -3-3 BRAZIL SRI LANKA FRANCE CHINA UK TAIWAN KOREA GERMANY PHILIPPINES INDIA NIFTY INDONESIA MSCI EM - EUROPE MSCI EM PAKISTAN RUSSIA S&P 500 JAPAN HANG SENG DOW JONES (10) (20) Performance YTD (local currency returns) -16 PAKISTAN -2 RUSSIA Local currency return (% till November end) UK 3 3 SRI LANKA 7 CHINA FRANCE MSCI EM - EUROPE INDONESIA GERMANY TAIWAN S&P 500 JAPAN BRAZIL PHILIPPINES KOREA DOW JONES INDIA NIFTY MSCI EM HANG SENG The US equity markets did well in November on strong earnings and economic data and positive sentiment ahead of the proposed tax cuts. S&P 500 was up 2.8%. In local currency terms, all European equity markets registered a sell off. Emerging Market (MSCI-EM) was broadly flat during the month. NIFTY was down by -1% during the month. On YTD basis, NIFTY delivered 25% return- thus being amongst top 3 markets and in line with overall emerging market performance. On a YTD basis, MSCI EM index has delivered 30% returns in local currency terms.u Source: Bloomberg, SBIMF Research

4 Indian stock market snapshot: November 2017 Performance in November (2) (4) -4 (6) -6 (8) METALS OIL & GAS PSU PHARMA NIFTY AUTO BSE 100 SENSEX BSE 500 CAP GOODS FMCG BANKEX MID CAP IT SMALL CAP REAL ESTATE Performance YTD (20) PHARMA IT PSU AUTO SENSEX NIFTY FMCG BSE 100 OIL & GAS BSE 500 CAP GOODS METALS BANKEX MID CAP SMALL CAP REAL ESTATE Sensex was down by -0.2%, while Nifty ended the month 1% lower Small and mid-caps continued to outperform the broader market. BSE small cap index was up 3.6%, and the mid-cap index was up 2.0%. Sector-wise: Real Estate and IT were the sector out-performers during the month. YTD, Nifty and Sensex are up by 25% and 24% respectively. Sector-wise performance has been positive across all sectors on a YTD basis (barring Pharma). Real estate continuedto out-performsignificantly (up 93%). Source: Bloomberg, SBIMF Research

5 Growth improved marginally in Q2 FY18 Both demand side and supply growth depicted improvement in Q2 FY18 % pt contribution to Real growth- Demand side Q3 FY17 Q4 FY17 Q1 FY18 Q2 FY18 GDP Pvt Consumption Govt Consumption Gross Capital Formation Investment Change in Stocks Valuables Net Exports Discrepancies % pt contribution to Real growth- Supply side Q3 FY17 Q4 FY17 Q1 FY18 Q2 FY18 GVA Agriculture Industry Total Mining Manufacturing Utilities Construction Services Total Q2 FY18 growth improved to 6.3% y-o-y (vs. 5.7% in Q1) majorly due to some mean reversal in investment and lower negative contribution of net exports. Private consumption demand continued to moderate as consumer confidence took a knock post demonetization. We expect these sentiment related wrinkles to iron out gradually and the consumption demand to improve on back of easier access to financing and three consecutive seasons of healthy agriculture output. Government consumption too moderated as the revenue weakness led the government to cut expenditure in Q2 relative to Q1. On the supply side, Q2 FY18 GVA growth improved majorly helped by sharp rise in industry sector. Improvement in the industry sector helped offset the moderation of services and agricultural sector. While the growth numbers show some improvement, a broad based strength is lacking. The higher private investment growth (in demand side) and manufacturing growth (in supply side) may more be a reflection of some mean-reversal post GST and early arrival of festivities. Source: CMIE economic outlook, SBIMF Research

6 Agriculture: Nascent signs of risks to Rabi Output in st Advance estimate for Kharif production indicates fall in output Shortfall in rabi crops sowing data than previous year Rabi crop Sowing (in 000 hectare) as of 8 th December Area sown in Area sown in %y-o-y Rice 1, Wheat 19,087 20, Coarse Cereals 4,413 4, Pulses 12,762 11, Oilseeds 6,779 7, Total 44,229 44, Total Kharif production during FY18 (as per 1st Advance estimates) stands at 155 million tonnes vs. 161 million tonnes in FY17 indicating a slight fall compared to last year. Area under Rabi crop sowing fell by -1.5% till December 8. Given that rabi contributes 50% of the total food grains production during the year, any shortfall in the sowing data poses downside risks to the outlook for agriculture. Having said that, both Kharif output and Rabi sowing numbers are relatively better than the drought years of FY14 and FY15 and bodes well for overall agricultural revenue. On the positive side, we expect the rural demand to be healthy. Real rural wages too are depicting an improvement. Source: CMIE, pib.nic.in, SBIMF Research, NB:* data is the 4 th Advance estimate and, is 1 st Advance Estimate

7 Industry: gradually recovering but lacks broad-based strength PMI Mfg. rose to 52.6 in November vs in October, indicating expansion in manufacturing activity Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 PMI Mfg above 50 indicates expansion IIP manufacturing depicting gradual improvement May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 IIP: Manufacturing (%y-o-y) Core industries index grew by 4.7% y-o-y in October Eight core industries (% y-o-y) May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Overall index Coal Crude oil Natural gas Refinery products Fertilizers Steel Cement Electricity Source: CMIE, Bloomberg, Philip Capital, SBIMF Research,

8 Services paints a mixed picture Services PMI posted contraction in the month of November Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Services PMI Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul Sep Domestic sales of CV & MU vehicles decelerated while, domestic passengers handles at the airport expanded* % y-o-y Domestic Real Sale of CV & Credit Multi-utility to vehicles Trade Tourist Total arrivals freight ('000) handled at rail, ports & airways Domestic Services Real AUM Passengers Exports Bank of handled at airport Credit MFs growth Real central govt revenue spending Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct November Services PMI contracted for the first time in last 3 months on account of sluggish demand and lower customer turnout. The input prices increased during the month on account of higher food and fuel prices. On the employment front, service providers continued to add to their workforce. That said, employment growth eased to a modest pace. Services related indicators reflect weakness in auto sales, tourist arrivals, total freight handled at rail, ports and railways, bank credit growth and AUM of MFs. On the other hand, credit to trade, domestic passengers handled at the airports, services exports and central government revenue expenditure posted a healthy growth. Source: Philip Capital, RBI, CMIE, SBIFM Research; NB: * Green: denotes improvement or unchanged; Pink: denotes deterioration

9 Reforms: GST council slashed tax rates on 177 items GST Council slashes tax rates on 177 items from 28% to 18% offering relief to consumers and businesses The 23rd GST Council meeting held on 10 November 2017 drastically pruned the list of goods and services in the highest slab of 28% (from ~230 to 50) The meeting also reduced compliance burden on the SME sector (extended the filing dates and increased the threshold of revenue on enterprises under the composition scheme from Rs10mn to Rs15mn and lowered tax rate for the companies under such a scheme to 1% from 2%). Some products and services in other rate buckets also saw reduced incidence. The tax reduction came into effect from 15th November. The reduction in tax rate is likely to increase demand in the longer-term but may have a near-term adverse impact on government revenue. Source: Mint, SBIMF Research,

10 Growth is likely to fall in FY18, but improve in FY % growth FY18: 6.6% FY13 FY14 FY15 FY16 FY17 1H FY18 2H FY18e FY19e Real GDP India has seen a host of pertinent structural reforms in last couple of years such as wide-scale implementation of direct benefit transfer, GST, crack-down on black money, RERA, Insolvency and Bankruptcy Code and so forth. They were much needed reforms to bring in productive efficiency and ensure more efficient utilization of resources. But in the interim, it has undeniably disrupted the operating template of the Indian businesses and led to a deeper growth shock than anyone would have anticipated. At the same time, policy makers are still grappling to resolve the twin balance sheet issues of high corporate leverage and non-performing assets. We expect India s growth to weaken to 6.6% in FY18 owing to recent signs of weakness in consumer sentiments, lingering challenges in private investment, and limited fiscal space to stimulate the economy. However, hopefully by next year, initial wrinkles in reforms such as IBC, GST and RERA should iron out over the next year and place India on a higher productive potential. Accordingly, we expect FY19 growth to revive to 7.4% as the system gains some bit of normalcy. Source: CMIE, SBIMF Research,

11 Earnings: Improved in 2Q FY18 Earnings for FY18 downgraded while markets continue to expect 20% EPS growth for FY FY03 FY04 FY05 FY06 FY07 FY08 FY09 Nifty EPS FY10 FY11 FY12 FY13 FY14 YoY, RHS FY15 Corporate profit as percentage of GDP FY16 Average of 5.4% FY17 FY18e 580 FY19e 40% 30% 20% 10% 0% % -20% The earnings outcome for Q2 FY18 suggests some reversal in the profit growth (PAT improved by 13%) along with improved operating profit (10.2%% EBITDA growth). That said, few companies (Tata Steel, HDFC Bank, IOCL, and Reliance) accounted for most of the earnings growth and broad based recovery is yet to be seen. The results suggests that GST-related hiccups (destocking) have waned in Staples, but have persisted for Durables and Electricals. Higher NPA issues and sector specific challenges in IT and Pharmaceuticals are taking longer to mend. Impact of hardening commodity costs is evident, with corporates hinting at ensuing price increases to offset the input cost inflation in 2HFY18. On positive note, Consumer and Auto companies are relatively positive on rural demand. In BFSI, private banks reported strong loan growth and largely stable margins, whereas NBFCs delivered strong results on most fronts. Corporate profits as percentage of GDP has hit an extremely low point and logically should mean revert. Earnings revival is absolutely critical for such rich valuations to sustain. FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Source: MOSL, Antique, SBIFM Research

12 Valuations Valuations across the capitalization curve are rich when compared to history SD Sensex 1Y fwd PE +1 SD Mean: 16 May-06 Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Sep-11 May-12 Jan-13 Sep-13 May-14 Jan-15 Sep-15 May-16 Jan-17 Sep S&P Mid Cap 1Y Sep-11 Dec-11 Apr-12 Jul-12 Oct-12 Jan-13 May-13 Aug-13 Nov-13 Mar-14 Jun-14 Sep-14 Dec-14 Apr-15 Jul-15 Oct-15 Feb-16 May-16 Aug-16 Nov-16 Mar-17 Jun-17 Sep S&P Small Cap 1Y fwd PE May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 But looks reasonable when looked at other parameters Mkt Cap / GDP (%) FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E Sensex 1Y fwd P/B Aug-05 Jan-06 Jun-06 Nov-06 Apr-07 Sep-07 Feb-08 Jul-08 Dec-08 May-09 Oct-09 Mar-10 Aug-10 Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Mar-15 Aug-15 Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 Source: Bloomberg, MOSL, SBIMF Research,

13 Indian Equity Valuations relative to emerging markets India s valuations relative to other EMs in line with historical 5 year average Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 MSCI India's P/E prem. wrt MSCI EM Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 and the relative RoE remains healthy 14.0% MSCI India ROE Relative to EM 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% 01/Oct/95 01/Jan/97 01/Apr/98 01/Jul/99 01/Oct/00 01/Jan/02 01/Apr/03 01/Jul/04 01/Oct/05 01/Jan/07 01/Apr/08 01/Jul/09 01/Oct/10 01/Jan/12 01/Apr/13 01/Jul/14 01/Oct/15 01/Jan/17 Source: Morgan Stanley, SBIMF Research,

14 Liquidity: Both FIIs and Domestic Mutual fund poured money FIIs invested US$ 2.95 billion in November 0.9 Sep US$ billion Dec Mar Jun Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec Mar Jun Sep Domestic Mutual Funds, continue to witness robust inflow in the equity segment Sep-14 US$ billion Dec Mar Jun-15 Sep-15 Dec Mar Jun Sep Dec Mar-17 Jun-17 Sep-17 Insurance companies were net seller after a brief span of inflow in last two months US$ billion Sep-14 Dec-14 Mar Jun-15 Sep-15 Dec-15 Mar Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep Source: MOSL, SBIMF Research

15 Equity Market outlook Indian equity market fell in November. Sensex was down by -0.2%, while NIFTY returns fell by 1% during the month. MSCI India (US$) was down 0.8% in November, while MSCI- EM was up 0.15%. Small and mid-caps continued to outperform the broader market. BSE small cap index was up 3.6%, and the mid-cap index was up 2.0%. November witnessed FPI flows to the tune of US$3.0bn into equities, the second consecutive month of inflows, and for the first time in seven months FPI inflows into equity outpaced debt. Although sentiment remains largely positive, both in India and globally, Indian equity markets will closely watch the outcome of the Gujarat elections. Sustained domestic flows should continue to provide support. On the growth front, GDP growth reversed a five quarter declining trend and rose 6.3% y-o-y in 2Q FY18. GVA growth rose 6.1% y-o-y in 2QFY18, up from 5.6% in the previous quarter. But nominal GDP continued to stay sub-10% and will accordingly have its bearing on the corporate earnings performance. On the other hand, one can argue that corporate profitability at 2.9% of GDP (vs. the historical average of 5.4%) has hit its rock bottom and should only mean-revert from here on. Earnings recovery is absolutely critical for the rich valuations to sustain (Sensex at 21 times 1 year fwd earnings). In the present scenario we remain cautious and would continue to focus on bottom-up stock picking. Valuations are at 21 times on 1 year forward earnings SD Mean: 16-1 SD Sensex 1Y fwd PE May-06 Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Sep-11 May-12 Jan-13 Sep-13 May-14 Jan-15 Sep-15 May-16 Jan-17 Sep-17 From a longer-term perspective, India growth story remains intact. Initial wrinkles in reforms such as IBC, GST and RERA should iron out over the next year and place India on a higher productive potential. Higher growth on the back of the productivity gains resulting from structural reforms should be longer lasting. Source: Bloomberg, SBIMF Research

16 FIXED INCOME MARKET

17 Global bond yields: November Year G-sec Yield (% mth end) 2015 end 2016 end Aug-17 Sep-17 Oct-17 Nov-17 3m Change (in bps) % change in 2017 YTD (in bps) Developed market US Germany Italy Japan Spain Switzerland UK Global economy has been depicting synchronized improvement in growth and gradual fall in unemployment rate. Global monetary policy normalisation continues as the Fed is poised to hike rates for the third time this year at its December meeting. US bond yields have inched up by 29bps in last three months. Bank of England raised interest rates by 25bp to 0.5% in November, the first time since November 2007, as pound depreciation on account of Brexit related uncertainties pushed up inflation beyond its 2% target. Within Asia, Korea stood to be the harbinger of rate hike cycle (increased policy rate by 25bps to 1.5% in November). Improving growth, tight labor markets and rising commodity prices may continue to take policy rates and global bond yields upward. Source: Bloomberg, SBIMF Research

18 Emerging Market Bond yields: November 2017 Most emerging market are witnessing the rise in bond yields, particularly in last three months 10 Year G-sec Yield (% mth end) 2015 end 2016 end Aug-17 Sep-17 Oct-17 Nov-17 3m Change (in bps) % change in 2017 YTD (in bps) Emerging Market Brazil China India Indonesia Korea Malaysia Philippines Russia South Africa Taiwan Thailand Source: Bloomberg, SBIMF Research

19 India Rates Snapshot : November 2017 Sep-17 Oct-17 Nov-17 m-o-m change (in bps) Change YTD (in bps) 1 Yr T-Bill M T-Bill year Gsec M CD*** M CD*** Yr Corp Bond* Yr Corp Bond* Yr Corp Bond* Yr IRS Yr IRS INR/USD # 5.4 # Crude Oil Indian Basket** # 16.4 # Indian bond yields rose in November as the market broadly builds the case of a long-pause on the rate front and remain focusedon rising crude prices and likely deteriorationin government bond demand-supply dynamics. Money market, too inched up marginally as higher currency leakage starts to pull down the surplus liquidity. Crude oil prices rose sharply by 9.4% over the month. Rupee appreciated marginally (0.4%) during the month. YTD, the appreciationin rupee stands at 5.4%. Source: Bloomberg, PPAC, CCIL, 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

20 Global policy rates: End of monetary easing cycle US, UK and Korea have commenced the rate hike cycle. Barring Russia, Africa and some Latin American economies, most countries on a long pause or contemplating a rate hike (green denotes cut, red a hike) US Policy rate (in %, end period) China Japan India Australia South Korea Taiwan Thailand Malaysia Hong Kong Philippines Eurozone UK Russia Turkey Brazil * Source: Bloomberg, SBIMF Research; NB: *Data till 7 Dec 2017.

21 Commodities prices inching upward Commodity prices increased by 14% since Dec Feb-01 Dec-01 Oct-02 Aug-03 85% rise Jun-04 Apr-05 Feb-06 Dec-06 Oct-07 Aug-08 Jun-09 85% rise Apr-10 Feb-11 CRB Cmdt index Dec-11 Oct-12 Aug-13 Jun-14 Apr-15 Feb-16 14% rise Dec-16 Oct-17 Brent prices rose nearly 8% this year supported by OPEC production cuts and rising demand Jan-14 Apr Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct Jan-16 Apr-16 Jul-16 Brent (US$ per barrel) Oct-16 Jan-17 Apr-17 Jul Oct-17 Global growth is pulling the commodity prices up, particularly in metals space. Agri-commodity prices are still soft % change YTD in 2017 Natural Gas Sugar Coffee Iron Ore Wheat Corn Tin WTI Soybeans Platinum Heating Oil Gasoline Silver Gas Oil Nickel Cotton Brent Gold Copper Aluminium Zinc Uranium Lead Coal Palladium

22 India growth: Q2 GDP lower than expected Q2 FY18 GDP growth improved but lacks strength Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Real GVA at basic prices (%y-o-y) Real GDP (% y-o-y) Q2 FY18 growth improved on the back of investment recovery (demand side) and higher industry output (supply side). The improvement was weaker than expected. Higher oil prices and shortfalls in kharif production and rabi sowing pose downward risk, while likely credit recovery post bank recapitalization and improved business conditions may provide the positive support. We expect FY18 growth to be at 6.6% (GDP) and 6.4% (GVA). This is lower than RBI s expectation of 6.7% (GVA) for FY18.

23 CPI inflation has bottomed out October CPI rose to 3.6% y-o-y vs. 3.3% in September Food (esp. veggies) and fuel driving up the prices CPI target range 4% + 2% 10 8 % y-o-y Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Apr-17 Aug Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 CPI % y-o-y Core CPI (CPI ex food ex fuel ) CPI Food CPI: Fuel and Light Higher vegetables and fuel prices drove the October CPI to 3.58% y-o-y. Looking ahead, fall in vegetables prices thus far is less than the usual seasonal pattern. While tax cuts by government kept the lid on petrol and diesel prices, the impact of higher crude coupled with phasing out of government subsidy is likely to drive up the LPG and kerosene prices. 7PC effect on Housing CPI is there to stay up until December, thus taking the Housing inflation higher. GST rate reductions during mid-november can lead to softening in the inflation prints of some goods and services in the nearterm. We expect CPI inflation to average at 4.5% in 2H FY18 and 3.4% for the full year. Source: CSO, SBIMF Research

24 Centre s fiscal: Walking a tight rope Key Fiscal Indicators - Central Government Finances Actual (as % of BE)- April to October Non-debt Receipts a. Tax Revenue (Net) b. Non-tax Revenue c. Non-Debt Capital Receipts Expenditure a. Revenue Account b. Capital Account Fiscal Deficit Revenue Deficit Primary Deficit Net Market Borrowing Fiscal deficit climbed up in October owing to resumption of expenditure. Cumulative fiscal deficit reached 96% of BE (vs. 91% up until September). In the receipts, direct tax collection and disinvestments receipts are holding up, while non-tax revenue is weak and indirect tax collection is cloudy (GST effects). Overall, centre is walking a tight-rope if it has to meet its 3.2% fiscal deficit target without any expenditure cut. Source: CMIE, SBIMF Research,

25 States fiscal position is healthy Cumulative Fiscal deficit (as % of BE) Cumulative (as % of BE) Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Andhra Pradesh Bihar Chattisgarh Gujarat Haryana Karnataka Madhya Pradesh Maharashtra Manipur Meghalaya Mizoram Nagaland NA Odisha Punjab Rajasthan Sikkim Telangana Uttar Pradesh Uttarakhand Agg 19 states NB: Negative implies fiscal surplus; Calculated using the changed BE as per monthly documents 19 out of 29 states release the monthly data on their fiscal situation. Aggregate States fiscal deficit for these 19 states is trending in line with assumptions made by the state authorities in their respective budget. Their cumulative fiscal deficit at 31% of the BE in 1H FY18, broadly in line with trend seen in last three years. Barring a few states, revenue receipts have been buoyant for most states despite the delay in complete devolution of IGST and compensation cess from the centre. Overall expenditure growth, at 9.1%, is marginally lower than the budgeted growth of 10.7% for these 19 states. While the revenue expenditure is in line with the budgeted growth, capex outlay has declined by -16% in 1H FY18 compared to 1H FY17, with realizations merely 27% of the BE. Going forward, as the center starts to devolve states complete share, overall tax collection for states should further improve. This may, in turn, lead the capital expenditure for states to improve in 2H FY18. Data for Meghalaya and Nagaland are available till August Source: CEIC, State budgets, SBIMF Research,

26 Government bond supply: risks overdone Total gross government borrowing by centre + state in FY18 (till Nov) stands at 7.2 trillion 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 1,114 1,117 1,358 1,710 2,210 2,435 4,610 4,500 4,410 4,560 4,600 4,760 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 Nov-17 Gross Market Borrowings by GoI (in Rs. bn) Gross Market Borrowings by State Govts (in Rs bn) YTD (till November end), government s (Centre and States combined) gross borrowing stands at Rs 7.2 trillion from the market (5.7% higher than corresponding period last year) and net borrowings stands at R 5.6 trillion (2.3% higher than corresponding period last year). Central government runs a risk of fiscal slippage owing to tepid non-tax revenue and uncertainty around GST collection. That said, as the disinvestment receipts are holding strong this year, we do not expect fiscal slippage to be greater than 30bps (if any). We expect either higher T-bill or cancellation of buybacks to finance the possible fiscal slippage. SDL supply have reduced in last couple of months. Between August to November 2017, Gross SDL issuances have been Rs trillion vs. Rs. 1.5 trillion in the corresponding period last year. Buoyant revenue collections is likely to have helped the states. Going forward, SDL supply can increase in Q4 FY18 due to impending SDL maturities (Rs. 300 billion of SDL is due for maturity in Q4 FY18). Further, states like Bihar are yet to borrow from market this year. That, the healthy state finances alleviates the risk of sharp jump in SDL supply. We expect SDL issuances to total to Rs trillion in FY18 (vs. 3.7 trillion in FY17). Source: RBI, SBIMF Research,

27 Banking system liquidity: reduced sharply in November Banking system liquidity surplus averaged at Rs. 660 billion in November vs. 1.4 trillion in October as Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 CIC continues to approach the pre-demon levels (currently, ~92% of pre-demon level) 39,000 34,000 29,000 24,000 19,000 14,000 9,000 4,000-1,000-6, During Nov 2016, due to de-mon, currency leakage was Rs 589, Banking System Liquidity (Rs. Billion) Central government starts to spend less relative to its receipts 150, ,000 50, , ,000 Apr May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov Currency leakage in Nov (Rs. Crore) Central Govt. Cash Balance with RBI (Rs. crore) Source: RBI, SBIMF Research

28 Credit growth shows some signs of recovery Credit growth has started to picking up Personal loans is driving the credit growth Bank Credit (% y-o-y) Jan/13 Apr/13 Jul/13 Oct/13 Jan/14 Apr/14 Jul/14 Oct/14 Jan/15 Apr/15 Jul/15 Oct/15 Jan/16 Apr/16 Jul/16 Oct/16 Jan/17 Apr/17 Jul/17 Oct/17 Growth (% y-o-y) Last 3 yrs average Last 3 mth average Sep growth Oct growth Non-Food Credit Agriculture & Allied Activities Industry Services Personal Loans Priority Sector Non-food credit growth accelerated to 6.6%. Retail decelerated to 16% with mortgage growth falling to 11.4%. Industry contraction continued (-0.2%) while services growth inched up further to 9.4% and agri stable around 5.5%. Two of the fastest growing segments are credit cards and personal loans. The pace of credit recovery needs to be watched closely as this can limit banks appetite for government securities going ahead. Source: RBI, SBIMF Research

29 Current account deficit widened Trade deficit surged to US$ 14 billion in October FY18 CAD to likely be around 2% of GDP Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Merchandise Exports (% y-o-y) Merchandise Imports (% y-o-y) Current A/c Balance (US$ billion) (as % of GDP) Merchandise exports plunged to -1.1% y-o-y in October after a small recovery in the last two months. Imports, too, softened to 7.6% y-o-y after recording a double digit growth in last nine months. October trade numbers are likely reflecting the delayed imprints of exporters struggle post GST. Industries were facing the working capital crunch due to non-payment of input tax credit by the government. Given that the government has initiated the refund process for the export community starting October, we expect some restoration of export activities in the coming months. Looking at the imports, petroleum imports bill rose, likely reflecting the impact of rising crude prices. We expect it to rise further in line with the higher crude prices. The trends in trade activity in the first seven months of the fiscal suggests the FY18 CAD to likely be around 2% of GDP. Source: CMIE, SBIMF Research,

30 But overall external account stays healthy Net FDI inflows during Apr-Oct 2017 stands at US$ 22.4 billion vs. US$ 25 billion in Apr-Oct ,300 7,300 6,300 5,300 4,300 3,300 2,300 1, Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct FIIs increased to US$ billion during Apr-Nov 2017 vs. US$ 1.17 billion during Apr-Nov Oct-13 USD mn Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Net FDI inflows (USDmn) Net FDI inflows (% y-o-y growth) Total (Equity + Debt) FII Investment FX reserves at US$ bn as of 1 st December and is sufficient to finance 11.1 months of import Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul FX reserves (USD bn)- LHS Import Cover (in months)-rhs Source: CMIE, RBI, SBIFM Research

31 Currency: Most EM currencies appreciated in 2017 Most emerging market (EM) currencies appreciated against US$ in November (Rupee appreciated 0.4% in November) Turkey Lira Russian Rouble Brazil Real Indonesian Rupiah Chinese renminbi Indian Rupee Taiwanese Dollar Colombian Peso Hungarian Forint Thai Baht Philippine Peso Mexican Peso Korean Won Polish Zloty African Rand Malaysian Ringitt % change YTD % change m-o-m US$ Dollar Index (DXY) depreciated by 2.1% in November Rupee continues to hover around levels Jun/16 Jul/16 Aug/16 Sep/16 Oct/16 Nov/16 Dec/16 Jan/17 Feb/17 Mar/17 Apr/17 May/17 Jun/17 Jul/17 Aug/17 Sep/17 Oct/17 Nov/17 Dec/17 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 DXY Index INR/USD (mth end) Source: Bloomberg, SBIMF Research

32 Policy Rate Outlook In line with our and market expectation, the Monetary Policy Committee (MPC) of RBI maintained status quo, keeping for the repo rate and the neutral stance unchanged. 5 out of 6 members voted for in favor of the decision, while one member (Dr. R. Dholakia) voted for a 25bps rate cut. The MPC has noted that 2Q FY18 GDP growth was slightly lower than expected but it has kept its full year FY18 growth projection unchanged at 6.7% on GVA basis. The MPC has slightly revised upwards its inflation projection by 10bps to 4.3% to 4.7% for 4Q. The MPC s growth projection is higher than our GVA estimate (6.4%) while its inflation projection is in line with our estimate. Bottoming out of Indian inflation, the rising crude and the global rates would make the central bank fidgety. That said, we do not expect the central bank to embark on a rate hike cycle anytime soon. India s growth is yet not out of woods and credit demand is still to see the desired pace of growth. Accordingly, we expect a long pause and the bond market movements to be dictated by other factors such as domestic fiscal developments and global crude and rate cycle Nov-05 Jul-06 Mar-07 Nov-07 Jul-08 Mar-09 Nov-09 Jul-10 Mar-11 Nov-11 Jul-12 Mar-13 Nov-13 Jul-14 Mar-15 Nov-15 Jul-16 Mar-17 Repo Rate (mth end, %) Source: RBI, CSO, SBIFM Research

33 Debt Market Outlook Indian bond yield (10 year G-sec) has inched up further in November to 7.06% and stands at 7.17% as of 11 th December as FIIs exhausted their buying limit, RBI continues its neutral stance, fiscal concerns have come to the fore and crude prices inched higher. RBI during its last monetary policy meeting in December left the repo rate unchanged and maintained its neutral stance. While the domestic growthinflation mix warrants a continued monetary support, the rising crude and the global rates would make the central bank fidgety. Crude prices have inched up in last two months and Brent stands at US$ 64 per barrel. A country with nearly 1.5 billion barrel of annual crude import, and petroleum related government revenues nearly at 1.5% of GDP, rising crude has the potential to disturb both external and fiscal deficit. This, in turn, may have its additional bearing on the overall macro-stability.. Further, the rising risk of fiscal slippages (from Centre) and impending clarity on SDL supply is making the market concerned on the deterioration of demand-supply dynamics. We expect fiscal related pressures to gradually dominate market moves Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep year GSec yield (mth end, %) Repo Rate (mth end, %) Purely from the valuation point of view G-Sec at around 7.25% looks attractive even if we price new 10 year 10-15bps lower. We had tactically reduced the duration in our fixed income portfolios but have been building the exposure now given that yields above 7% look attractive. Source: Bloomberg, SBIFM Research

34 Thank you

35 Disclaimer This presentation is for information purposes only and is not an offer to sell or a solicitation to buy any mutual fund units/securities. These views alone are not sufficient and should not be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. All opinions and estimates included here constitute our view as of this date and are subject to change without notice. Neither SBI Funds Management Private Limited, nor any person connected with it, accepts any liability arising from the use of this information. The recipient of this material should rely on their investigations and take their own professional advice. Mutual Funds investments are subject to market risks, read all scheme related documents carefully. Asset Management Company: SBI Funds Management Private Limited (A joint venture with SBI and AMUNDI). Trustee Company: SBI Mutual Fund Trustee Company Private Limited.

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