Equity and Debt Outlook. October 2018

Transcription

1 Equity and Debt Outlook October 2018

2 EQUITY MARKET

3 Global equity market snapshot: September 2018 Performance in September 2018 (local currency returns) Performance in September 2018 (US$ returns) PHILIPPINES % m-o-m (local currency terms) INDIA NIFTY SRI LANKA MSCI India INDIA NIFTY -2 PAKISTAN GERMANY MSCI EM INDONESIA % m-o-m (US$ returns) PHILIPPINES SRI LANKA MSCI India TAIWAN PAKISTAN INDONESIA GERMANY MSCI EM HANG SENG HANG SENG S&P TAIWAN KOREA S&P 500 UK FRANCE DOW JONES KOREA UK FRANCE BRAZIL DOW JONES CHINA JAPAN 3 3 CHINA JAPAN MSCI EM - EUROPE RUSSIA 5 6 BRAZIL MSCI EM - EUROPE 9 RUSSIA Performance YTD (local currency returns) PHILIPPINES % YTD (local currency terms) CHINA MSCI EM MSCI EM - EUROPE SRI LANKA HANG SENG INDONESIA GERMANY KOREA UK Performance YTD (US$ returns) PAKISTAN RUSSIA FRANCE TAIWAN PHILIPPINES % YTD (US$ returns) CHINA SRI LANKA BRAZIL INDONESIA MSCI EM MSCI EM - EUROPE PAKISTAN INDIA NIFTY GERMANY KOREA MSCI India HANG SENG UK INDIA NIFTY BRAZIL 0 FRANCE MSCI India 1 TAIWAN 3 RUSSIA JAPAN 5 JAPAN DOW JONES 7 DOW JONES 9 S&P S&P 500 Source: Bloomberg, SBIMF Research

4 Indian stock market snapshot: September 2018 Performance in September 2018 (local currency returns) 5 % m-o-m REAL ESTATE SMALL CAP TELECOM AUTO MID CAP BANKEX CONSUMER DURABLES CAP GOODS FMCG POWER PSU BSE 500 BSE 100 NIFTY SENSEX HEALTHCARE METALS OIL & GAS IT Performance YTD (local currency returns) TELECOM REAL ESTATE % YTD SMALL CAP PSU AUTO POWER MID CAP CONSUMER DURABLES METALS CAP GOODS OIL & GAS -4-3 BSE 500 BANKEX BSE 100 HEALTHCARE NIFTY SENSEX FMCG 39 IT Indian equity market delivered negative returns across most of the sectors (barring IT) in September. Real Estate and Telecom were the worst performers during the month. Sensex and Nifty were down by nearly 6% each during the month. Both Mid-cap index and small-cap index were down by 13% and 16% respectively. YTD, small and mid-caps have underperformed NIFTY. YTD, Nifty is up 4% and Sensex is up 6%. Sector-wise performance has been negative across most of the sectors on a YTD basis (barring IT, FMCG and Healthcare). Telecom and Real Estate are the laggards (down 39% and 35% respectively). Source: Bloomberg, SBIMF Research

5 Q1 FY19 GDP growth accelerated to 8.2% Q1 FY19 GDP growth robust at 8.2% y-o-y and GVA at 8.0% y-o-y Real GVA at basic prices (%y-o-y) Real GDP (% y-o-y) 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 Dec-17 Mar-18 Jun-18 Q1 FY19 GDP accelerated to 8.2% vs. 7.7% in 4Q FY18. Higher growth is explained entirely by improved consumption demand and lower subtraction of net exports from overall GDP. GVA growth rose to 8.0% against 7.6% in previous quarter. Agriculture and Industrial output picked up while services moderated, but remained above 7%. Source: CMIE economic outlook, SBIMF Research,

6 Economic activity moderated in August We see some signs of moderation in economic activity in July-August. Mining and electricity generation depicted a weaker growth in their latest data print. While the overall agriculture outlook remains strong, few of the rural oriented indicators such as 2-wheeler sales, tractor sales, fertilizer production showed 1 st sign of moderation (perhaps due to high base). On the positive side, barring steel production (perhaps due to limited free capacity), most infrastructure indicators are holding strong. Industrial activity picked up in July. Most consumption related indicators continue to hold as well. To sum, the breadth of economic strength is ebbing at the margin. As such, we expect Q3 FY19 growth to be lower than Q2 s. % growth Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 5yr average Indicators that are Robust Bank retail loans Currency in circulation Domestic air traffic Domestic capital goods production N/A 2.1 Imports of capital goods Domestic sale of commercial vehicles Foreign tourist arrivals Imports of consumption goods Services exports N/A 5.2 AUM of mutual funds Total freight handled Cement production Bitumen consumption Indicators that have recently turned positive Domestic industrial production N/A 4.2 Merchandise exports Indicators that have weakened in recent months Domestic sale of two-wheelers Domestic sale of passenger Cars Fertilizers production Mining production N/A 3.0 Tractor sales Electricity production Indicators that are weak for long Rural wage growth N/A N/A 6.1 Bank industrial credit Source: CMIE economic outlook, RBI SBIMF Research; NB: Pink highlighted cells denoted moderation in growth than previous month and Green denotes an improvement in growth than previous month.

7 Agriculture trends are healthy in FY18-19 South-West Monsoon 2018 witnesses below normal rainfall Region South-West Monsoon 2018 (% departure from normal) FY19 Kharif sowing likely to be 5.4% higher than last year despite the weakness in rainfall All India -9.4 North-West -2.0 East & North-East Central India -6.5 South Peninsular -1.6 Live storage in major reservoirs as on 27 th September is at 76% of the full reservoir level higher than 65% a year ago Reservoir level data - as on Sep 27 No. of reservoirs Live Storage Capacity (BCM) Current Storage (BCM) Avg of last 10 years (% of live storage capacity) Last year(% of live storage capacity) Current (% of live storage capacity) Northern Region Eastern Region Western Region Central Region Southern Region Total India South West monsoon in 2018 was below normal (-9.4% below the LPA). Out of 29 states, 19 states witnessed either deficient or below normal rainfall this season. Despite the weak rain, Kharif sowing was higher than last year and 1st Advance estimate of Kharif production indicates likelihood of 5.4% growth in output (when compared to 1st advance estimate of last year). Live storage in major reservoirs as on 27 th September is at 76% of the full reservoir level vis-à-vis 65% corresponding period last year. This portends well for the up-coming Rabi season as well. Source: CMIE Economic Outlook, imd.gov.in, pib.nic.in, cwc.gov.in, SBIMF Research

8 Rural demand moderated a bit in August but still healthy Two-wheeler and Tractor sales showing the nascent signs of growth moderation albeit over a high base FMCG Sales growth grew by 12.6% y-o-y in Q1FY19 vs. 8.9% y-o-y in Q4 FY Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 BSE 500: FMCG Sales growth (in %) Apr-14 Sep-14 Feb-15 Jul-15 Dec-15 May-16 Oct-16 Mar-17 Aug-17 Jan companies in BSE 500 Jun-18 Few of the rural oriented indicators such as 2-wheeler sales, tractor sales, fertilizer production showed 1st sign of moderation (perhaps due to high base) however, some of the other indicators like FMCG goods, lower end white goods continue to show an increase in the rural demand in last two-three quarters. Looking ahead, fourth consecutive season of higher agricultural output is leading to higher output. Along with this, due to preelection period, the focus on rural oriented construction activity, access to formal lending channel, better roads, electricity and internet penetration are leading to the pick-up in rural demand for the related sectors. Overall, the agricultural outlook remains strong. Source: CMIE economic outlook, Ministry of Agriculture, SBIMF Research

9 Aggregate commercial credit is picking up Aggregate commercial credit is picking up Bank credit growth is outpacing the deposit growth Retail lending dominates the bank lending growth Housing loans make the big share in personal loans space Aug-18 (% y-o-y) Average 3 mths (% y-o-y) % Share Personal Loans Housing Other Personal Loans Vehicle Loans Credit Card Education Loan against FD Consumer Durables Loan against Shares, bonds Source: RBI, CMIE Economic Outlook, SBIMF Research,

10 Improved capacity utilization yet to translate into fresh capex decisions Capacity utilization improved to 75.2% by FY18 end Auto, metals, food processing, and electronics sector show higher capacity utilization FDI inflows picked up to US$12 billion in Apr-Jul FY19 New project announcement is lack-lustre Source: RBI, FICCI, CMIE economic outlook, SBIMF Research,

11 Outlook: FY19 growth is expected to improve to 7.5% Growth is likely to improve further to 7.5% y-o-y in FY % growth FY13 FY14 FY15 FY16 FY17 FY18 FY19 E FY19 growth is expected to surge to 7.5% y-o-y. Looking ahead, higher oil and other commodity prices, widening of trade deficit and monetary tightening pose risks to a robust growth outlook, while government infrastructure push, fading away of GST-related disruptions and the seeping in of the productivity benefits, rising global growth and improved business sentiments will provide the positive support. Source: CMIE economic outlook, SBIMF Research,

12 FY19 earnings outlook Corporate profit as percentage of GDP is likely to have bottomed out 3.0 FY FY FY FY FY FY FY FY10 FY19 NIFTY EPS is expected to grow by 19% vs. 6% in FY FY FY12 FY FY FY15 Average of 5.1% 3.1 FY FY17 FY19 demand outlook for consumer oriented companies such as FMCG, auto, paints remain buoyed by the pick-up in rural demand. NBFCs too, are holding robust growth. Metal and Oil & Gas sectors are being supported by a recovery in global growth and pricing power. On the other hand, Bank earnings thus far have continued to be impacted by the recognition of impaired loans. EBITDA margin may remain under pressure for the quarters ahead as rupee slides, the raw material costs escalate and competitive pressures in some of the sectors (such as telecom, aviation, staples and auto) inhibits the capacity to take the parallel price hikes. Earnings have been revised downward. Financial Year-to- Date, we have seen 2-3% downgrade in NIFTY earnings. Corporate profit as percentage of GDP has hit an extremely low point and should logically mean revert. We expect FY19 earnings to grow by 19% (vs. 6% in FY18), aided by the growth tailwinds and favorable base. Earnings revival are absolutely critical for rich valuations to sustain. Source: MOSL, Capitaline, SBIFM Research;

13 Liquidity: FIIs pulled out while DIIs were net investors in September FIIs sold US$ 1.49 billion during the month Jul-15 Sep-15 Nov-15 Jan-16 Net FII Investment (US$ billion) Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Mutual funds continue to invest in Indian equities Insurance investors have been volatile in their equity investment trends 4 Net Domestic MF Investment (US$ billion) 1.0 Net Domestic Insurance Investment (US$ billion) 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 Jan-18 Mar-18 May-18 Jul-18 Sep 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 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Source: Bloomberg, SBIMF Research

14 Indian Equity Valuations relative to emerging markets India MSCI P/E compared to MSCI EM index is at 56% premium which is a relatively high and the relative return on equity (RoE) has fallen Source: Bloomberg, SBIMF Research,

15 Valuations have corrected in September Valuations have corrected across the capitalization curve Market Cap to GDP rose to eight year high Average of 78% for the period Valuations relative to bond market have also corrected to ~36% premium compared to +50% last month FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 Source: Bloomberg, MOSL, SBIMF Research,

16 Sector-wise valuations Barring IT and Materials, valuations have corrected across the sectors. Industrials and Utilities have gone below their long term average P/E (based on FY19 earnings*) Sectors Jan-18 Jul-18 Aug-18 Sep-18 Avg (20 years) NIFTY Index Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Services Utilities Green implies higher than long-term average Source: Capitaline, Bloomberg, NB: *FY19 Earnings are based on Bloomberg Consensus estimate

17 Equity Market outlook Indian equities have seen meaningful correction last month. NIFTY fell 6% during the month. YTD, while the index is up 4%, it is only a handful of stocks which is contributing to the rise. Barring IT all sectors delivered negative performance. Performance down the capitalization curve was worse with mid and small cap down 13% and 16% respectively. The fall in the market was triggered by the events of credit default in specific NBFC companies which led investors to extrapolate the risks on all NBFCs with asset-liability mismatch and the effect of NBFCs to the financial market in general. Further, the government s decision to make the OMCs take a rupee hit on the petrol and diesel prices bore a sniff of some reversal in deregulation efforts of the past. It wasn t perceived any pleasantly either. FIIs sold US$ 1.5 billion in the Indian equities though it was equally matched by the DII investors. Nifty is trading at ~17 times forward earnings SD -1 SD May-05 Jan-06 Sep-06 May-07 Jan-08 Sep-08 May-09 Jan-10 Sep-10 May-11 Jan-12 Sep-12 May-13 Jan-14 Sep-14 May-15 Jan-16 Sep-16 May-17 Jan-18 Sep-18 NIFTY 12M Fwd PE Ratio Mean Amidst macro headwinds (rising import bill, tightening liquidity, rising cost of funds and raw materials, fiscal pressure raising the probability of clamp-down on government capital expenditures) and upcoming political uncertainty, we remain cautious and focus on bottom-up stock selection. Notwithstanding the current hazy environment, the sharp sell-off has led valuations to correct, particularly sharply in the mid-and small cap names. It has created pockets in markets which have turned cheaper for investors with a long-term horizon. Source: Bloomberg, SBIMF Research

18 Fixed Income Market

19 Global developments weighing on EM Fixed Income US Actions Trade conflicts with China New NAFTA agreement is yet to strike the final chord. Sanctions on Iran Sanctions on Russia s trade of defense and intelligence sectors after Russia s annexation of Crimea Sanctions on Turkey: Announced a doubling of tariffs on US imports of Turkish steel and aluminum. Rising Crude Oil Prices Brent (US$/bbl.) moved up by 6.1% during the month, as the US sanctions on Iran led to a steep drop in Iranian oil. EM Specific Developments Pakistan could seek IMF bailout amid balance-of-payments crisis. Argentina is under the process of bailout from IMF. The bailout is likely to be $57.4 billion by the end of South Africa entered into recession after its economy shrank by 0.8% in Q Turkey: US sanctions on doubling of tariffs on Turkish steel and aluminum imports. Along with this, rising inflation, widening of CAD and a falling currency are stoking fears Turkey is on the verge of financial and economic crisis. Brazil is witnessing a political and fiscal risk which is acting as a catalyst for weakening of the real. Russia: Russian ruble is weakening on account of strong dollar, global trade tensions and the risk of new U.S. sanctions against Moscow bought dollars. However, higher oil prices are providing some support to the ruble. Political Developments in Eurozone New fiscal plans raised by Italian government would see government spending rise and put it in conflict with other Eurozone nations Global Monetary Tightening Developed markets are gradually increasing their policy rates. Gradual Quantitative tightening by Major Central Banks Source: Bloomberg, Various media reports, SBIMF Research

20 Developed Market Bond Yields: September Year Gsec Yield (% mth end) 2016 end 2017 end Jun-18 Jul-18 Aug-18 Sep-18 m-o-m change (in bps) 3m Change (in bps) % change in YTD (in bps) Developed market US Germany Italy Japan Spain Switzerland US bond yields inched up by 20bps in September YTD the US bond yields has risen by 66bps on account of robust US GDP data and Fed's rate hike. Fed indicated a possibility of three or more rate hikes in Barring Italy, bond yields for other key developed markets too inched up during the month. Bond yields in Italy fell on reports that Rome plans to cut the budget deficit faster than indicated, easing fears about the fiscal policy. Source: Bloomberg, SBIMF Research

21 Emerging market bond yields: September Year Gsec Yield (% mth end) Emerging Market 2016 end 2017 end Jun-18 Jul-18 Aug-18 Sep-18 m-o-m change (in bps) 3m Change (in bps) % change in YTD (in bps) Brazil China India Indonesia South Korea Malaysia Phillippines Russia Taiwan Thailand Bond yields in Brazil, Indonesia, Russia and Taiwan moderated during the month while, it rose for the other key emerging markets. YTD, bond yields have risen across all key emerging markets (except China, South Korea and Taiwan). Source: Bloomberg, SBIMF Research

22 Global policy rate snapshot Global policy rate is on the rise across most key economies Policy rate (in %), end period Mar-18 Jun-18 Sep-18 US Canada China Japan India Australia South Korea Indonesia Taiwan Thailand Malaysia Singapore Hong Kong Phillippines New Zealand Eurozone UK Switzerland Russia Turkey Saudi Arabia Poland South Africa Brazil Mexico Argentina Colombia Chile Source: Bloomberg, SBIMF Research; NB: * Indonesia had announced to use new policy benchmark i.e. 7-day reverse report rate as its benchmark policy rate in April 2016; Red highlighted cells indicates interest rate hike and green denotes a rate cut.

23 Tightening Global Liquidity can impact the FII flows in EMs Asset Purchase Programs contributed to US$ 11 billion increase in Central Banks balancesheet between Balance Sheet by Aug 2008 (US$ Bn) As % of GDP Balance-sheet by Dec 2017 (US$ bn) As % GDP Change US Fed , ,538 ECB 2, , ,242 BoE BoJ 1, , ,617 Total 4, , ,024 Quantitative tightening to begin from 2019 Balance-sheet by Expected Balance- Dec 2017 (US$ bn) Sheet by 2018 end 2018 minus 2017 Expected Balancesheet by minus 2018 US Fed 4,449 4, , ECB 5,368 5, , BoE BoJ 4,627 5, , Total 15,210 15, , QE had aided the FII inflows into Emerging Markets 3,500 US$ billion, 4Q rolling sum 3,000 2,500 2,000 1,500 1, Mar-01 Jan-02 Nov-02 Sep-03 Jul-04 May-05 Mar-06 Jan-07 Nov-07 Sep-08 Jul-09 May-10 Mar-11 Jan-12 Nov-12 Sep-13 Jul-14 May-15 Mar-16 Jan-17 Nov-17 Change in G4 central bank assets Total gross inflows into EM Source: Bloomberg, IMF, Respective central banks, SBIMF Research

24 India Rates Snapshot for September 2018 Dec-17 Jun-18 Jul-18 Aug-18 Sep-18 m-o-m change (in bps) Change in YTD (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 Overnight MIBOR Rate INR/USD # -12 # Crude Oil Indian Basket ** # 25 # Weighted Average Call money rate Indian bond yields continue to inch higher on account of deprecation in rupee and rise in crude prices. Money market rates, too, inched up during the month. Crude oil prices increased by 7% during the month. YTD, crude oil prices has risen by 25%. Rupee weakened by 2% during the month. YTD (till Sep end), rupee has depreciated by 12%. Source: Bloomberg, PPAC, RBI, 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

25 Robust GDP growth momentum Q1 FY19 GDP growth robust at 8.2% y-o-y and GVA at 8.0% y-o-y Source: CMIE economic outlook, SBIMF Research,

26 Inflation has moderated but upside pressures remain While both CPI and WPI moderated in July widening of input-output inflation gap poses pass-on risks Highest Kharif MSP rise in last six years though Rabi hikes were contained Rising crude prices coupled with sharp rupee deprecation poses risks to inflation Source: CMIE Economic Outlook, department of agriculture, ppac.org.in, SBIMF Research

27 Central Government Fiscal: Walking a tight-rope Apr- Aug FY19 fiscal deficit at 95% of BE similar to the levels seen till August last year Monthly run-rate of GST collections lower than required Actual (as % of BE)- April to July 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 Net tax revenue growth slipped, owing primarily to IGST settlements and higher refunds in corporate taxes Apr-Aug Cumulative (% y-o-y) Budgeted Growth (in %) Gross Tax Revenue Income Tax Corporate Tax Custom Excise duties Total Direct Total Indirect Tax Achieving fiscal deficit target of 3.3% looks difficult as: o GST collections are running behind the target o Disinvestment + Telecom targets appear tall o Higher MSP for Kharif demands additional cost o Recent Rs 1.5 excite cut on petrol & diesel entails further ~ Rs 10,000 crore of dent on fiscal account o Large materialization of pending refunds and limited areas of revenue bonanza elsewhere That said, even if centre were to slip by 20bps, it could finance it by higher recourse to higher short-term borrowings, small savings or run down of surplus cash balance. Source: pib.nic.in, CGA, SBIMF Research

28 Banking system liquidity tightening is likely to accentuate further Bank liquidity tightened rapidly in September after being near neutral until August Call money rate is anchored to the repo rate CIC leakage in 2H FY19 likely to be 1.5-2x of 1H FY19 We expect liquidity to tighten further in 2HFY19 and nearly Rs 2 trillion of OMO purchase in FY19 Source: RBI, SBIMF Research

29 Government raised import duty on 19 items; to have limited impact Trade deficit has widened as imports rising faster than exports Anatomy of India s trade deficit in US$ billion FY17 % Share FY18 % Share FY19 (till Aug) % Share India's Trade deficit Petroleum Deficit Gold Trade Deficit NONG Trade Deficit o/w Electronic goods To curb the increasing import bill, government raised import duties on 19 items by 2.5%-10% in September. These 19 items account for nearly 4% of total imports. These measures could only provide a marginal correction to import bill. Majority of trade deficit in India is owing to three key items Oil (48% of trade deficit), gold (18%) and electronic items (27%). India is resource starved in crude and gold and hence continue to remain dependent on imports. Imports of electronics is 37 times its domestic production- implying the sheer lack of domestic capacity. Coal, fertilizers, vegetables oil, chemicals, plastics and pearls & stones makes are other top contributors to trade deficit. Most of these items (i.e. barring chemicals & fertilizers) either run limited production capacity or is resource constrained. That said, owing to the sharp REER correction YTD and the cumulative impact of import duty hikes, we do expect some moderation in import growth in pockets where domestic substitution is possible and in segments where imports are price sensitive. Source: CMIE economic outlook, SBIMF Research

30 Current account deficit widened to 2.4% in Q1 FY19 Current account deficit widen to 2.4% of GDP in Q1 FY19 vs. 2.0% in Q4 FY18 Trade balance worsened sharply offsetting the rise in invisible surpluses Service Balance and Remittances are holding up The current account deficit (CAD) for Q1 FY19 stood at US$ 15.8 billion or 2.4% of GDP vs. 2.0% in Q4 FY18 and 2.5% in Q1 FY18. The widening of the CAD was primarily on account of a rising import bill and unmatched export buoyancy leading to higher trade deficit. There is some improvement in services receipts and remittances transferred to India which partially offsets the worsening merchandise trade figures. Looking ahead, we estimate CAD to increase further to nearly US$ 79 billion (~2.8% of GDP) in FY19. Source: CMIE economic outlook, CSO, SBIMF Research

31 Net FDI inflows picked up while FIIs witnessed net outflows Net FDI inflows are US$ 12 billion FYTD but FIIs witnessed net outflows of US$ 11 billion FYTD During April-July FY19, Net FDI inflows picked up to US$ 12 billion vs. US$ 11 billion during the same time last year. While the overall FDI momentum looks healthy for FY19, it may not be large enough to fully fund the current account deficit. Between FY15 to FY17, FDI inflows were sufficient to fund the CAD. But the dynamics have worsened in FY18 and FY19 where net FDI inflows aren t sufficient to offset the sharper rise in trade deficit. This makes Current Account Deficit heavily reliant on portfolio flows which has been choppy FYTD. At the same time, we have US$ 10 billion of NRI deposits maturing in 2H FY19. Source: CMIE economic outlook, RBI, SBIMF Research

32 BoP to be negative for first time in seven years implying FX fall Balance of Payment is likely to be negative in FY19 FX reserves have fallen by ~US$23 billion FYTD (till Sep 21) BoP surplus in FY18 stood at US$ 44 billion vs. US$ 22 billion in FY17. For FY19, we expect both current account deficit to widen and capital account inflow to reduce and consequently Balance of Payment to turn into a deficit of nearly US$ 25 billion for the first time in last seven years. RBI increased its FX reserves sharply to US$ 424 billion in FY18 vs. US$ 370 billion in FY17. In FY19 (till Sep 21), RBI has already sold nearly US$ 23 billion of FX reserves. Source: CMIE economic outlook, RBI, SBIMF Research

33 Rupee has depreciated against key global currencies Rupee vs. US$: 11.9% depreciation YTD Rupee vs. British Pound: 8.6% depreciation YTD 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 Dec-17 Mar-18 Jun-18 Sep-18 Rupees per US dollar 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 Dec-17 Mar-18 Jun-18 Sep-18 Rupees per Pound Sterling Rupee vs. Euro: 8.8% depreciation YTD Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Jan Jun-17 Nov-17 Apr Sep-18 Rupee vs. Yen: 11.1% depreciation YTD Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Jan-17 Jun-17 Nov Apr Sep-18 Rupee vs. Yuan: 7.0% depreciation YTD Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Jan Jun-17 Nov Apr-18 Sep-18 Rupees per Euro Rupees per Yen Rupees per Yuan Source: CMIE Economic Outlook, Bloomberg, SBIMF Research

34 Rupee has under-performed other emerging market currencies Dollar strengthened by 5.4% YTD (till Sep) Rupee has been an under-performer in the EM currency Basket YTD 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 Jan-18 May-18 Sep Turkey Lira Brazil Real African Rand Russian Rouble Indian Rupee Indonesian Rupiah Philippine Peso Hungarian Forint Polish Zloty Chinese renminbi Korean Won Taiwanese Dollar Malaysian Ringitt Japan Yen Colombian Peso Thai Baht Mexican Peso DXY Index % change YTD (till Sep end) Rupee touched one of its all time low during the month of September. In fact, post the RBI 4 th monetary policy statement, rupee recorded historical low and since then crossed 74 (as on 9 Sep). YTD (till Sep end), Indian rupee is one of the under-performer in the emerging market currency basket. Higher import bill (mainly on account of oil, gold, electronic items, coal and pearls & stones) and weakness in capital inflows (FIIs witnessed net outflows of US$ 11 billion FYTD) is putting pressure on rupee. Government s five-point action to contain the import bill and shore up the capital flows had limited impact Source: Bloomberg, SBIMF Research

35 Rupee near fair value; but near term pressure may continue REER today at 123 is at levels similar to FY11, FY12, FY16 and FY FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 Aug-18 When Rebased to FY11=100, Rupee seems fairly valued = Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 May-12 Oct-12 Mar-13 Aug-13 Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 Feb-16 Jul-16 Dec-16 May-17 Oct-17 Mar-18 Aug-18 Trade weights : 6 currency REER Trade weights : 6 currency REER Trade weights : 36 currency REER has corrected for most EM currencies and they look fair to undervalued Turkey Above 100 is overall valued; Below 100 is undervalued Argentina Brazil South Africa Russia Mexico Indonesia Hungary Malaysia Poland Colombia Chile India Philippines Thailand Taiwan Korea Peru China Rupee is trading closer to the longer-term trend and in-fact depicts some bit of under-valuation when adjusted for the productivity changes. That said, the valuations typically tend to work over a medium to long-term. In the near-term, further depreciation pressure on Rupee cannot be ruled out. BIS REER Value (as of Aug 2018) Source: BIS, CMIE Economic Outlook, SBIMF Research; NB: if Actual REER is higher than Equilibrium REER, it implies Rupee is over-valued and vice-a-versa.

36 Commodity: Prices of energy has risen while metals have fallen Energy prices have risen YTD Prices of precious metals have fallen YTD Brent Gas Oil WTI Heating Oil Palladium Gold % m-o-m % change in YTD Gasoline Uranium Coal Natural Gas % m-o-m % change in YTD Platinum Silver Prices of industrial metals have fallen YTD Iron Ore Sugar prices have fallen while wheat prices have risen YTD Wheat Nickel Tin Aluminium Copper Lead % m-o-m % change in YTD Cotton Corn Soybeans Coffee % m-o-m % change in YTD Zinc Sugar Source: Bloomberg, SBIMF Research

37 Debt Market Valuations Inflation adjusted returns at 4.3% in India are attractive Real rates Emerging Market 10 Year Gsec Yield (% mth end, Sep end) CPI Inflation - Aug Real Rate (in %) Sovereign Credit Rating by S&P Brazil BB- Russia BBB- Indonesia BBB- India BBB- Malaysia A- South Africa BB Colombia BBB- Mexico BBB+ China A+ Poland BBB+ Thailand BBB+ South Korea AA Hungary BBB- Phillippines BBB Turkey BB- Taiwan AA- Differential between 10-year yield and Repo rate is higher than average G-sec yield relative to equity earnings yield higher than long-term trend Sep-01 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 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-17 Mar-18 Sep-18 India 10 year minus Repo Rate (in bps) Long Period Average: Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 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-17 Mar-18 Sep-18 India 10 year Gsec yield (in %) India Earnings Yield (in %) Source: Bloomberg, SBIMF Research

38 Policy Rate Outlook RBI left the repo rate unchanged to 6.50% but changed the stance from neutral to calibrated tightening. The current inflation prints have surprised the central bank on the downside primarily due to softer than usual uptick in summer food prices. RBI has lowered its inflation projection and now expects inflation closer to its desired 4% level as against ~5% expected in the last policy. The lower inflation prints in the last two months as well as in the forward projections emanates primarily from ultra-low food inflation in India (2.4% FYTD). Fuel and core inflation are worrying with latest prints at 8.5% and 5.9% respectively. Even as the inflation projection has been marked down, the underlying trends continue to be worrying (rising crude, rupee weakness, closing output gap and higher pricing power to businesses). Perhaps, it is these worrying factors which have dictated the change in stance. The RBI has been sounding comfortable and confident on domestic growth trends, even as it flagged concerns on global growth owing to escalating trade tensions and tightening financial conditions. As such, FY19 growth projection has been retained at 7.4%. RBI kept the policy repo rate unchanged at 6.5% Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 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-17 Mar-18 Sep-18 Repo Rate (mth end, %) Even as RBI focuses on inflation in its monetary policy decision, rupee is also an extremely important variable which cannot be ignored. Indian rupee has depreciated 13% YTD. Continued weakness pressure can create financial market risks in India and may warrant monetary tightening by the central bank. As such, despite the muted headline inflation numbers, we expect an additional 25bps rate hike by the central bank over next six months in case external account pressure continues. Source: RBI, SBIFM Research

39 Debt Market Outlook Having delivered two hikes in successive meetings with a neutral stance, the RBI left the rate unchanged but moved the stance to calibrated tightening in its October policy meet. Bond markets reacted positively to the pause in rates. Yields corrected across tenors, with a larger move at the short end. However, the potential toleration for currency weakness has been under- appreciated. It opens up the possibility of additional policy tightening in the coming months. On the liquidity front, India has had benign liquidity over the last 3 years. All the drivers have reversed. Credit growth is picking up, demonetization impulse is behind us and RBI s intervention to reduce rupee volatility is squeezing liquidity. RBI s policy tilt is no longer accommodative. Recent liquidity squeeze is event-based but system liquidity is likely to deteriorate further led by higher currency withdrawals, cash build-up by government, and continued FX selling given external account pressure. We expect ~Rs. 2.0 trillion of OMO purchase in FY19 (Rs. 760 billion committed already). But even after accounting for the OMO, liquidity deficit is given. The reduced borrowing plan by the central government signaling the commitment to the 3.3% target, a tepid borrowing calendar by the states and RBI s OMO purchase announcements provided a temporary relief to the G-sec yields. While the OMO purchases are expected to provide some comfort to the bond market, elevated crude oil prices, weakening rupee, tight domestic and global liquidity and expectations of tighter monetary policy are expected to cap the gains. Valuations look attractive at G-sec vs. Repo rate Mar-11 Aug-11 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Jan-17 Jun-17 Nov-17 Apr-18 Sep year GSec yield (mth end, %) Repo Rate (mth end, %) We expect the benchmark 10-year to remain range bound. Investors should consider SIPs in fixed income funds as valuations are attractive and timing the market may not be easy. Source: Bloomberg, SBIFM Research

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41 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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