Review Of Key Macros & Market Outlook: November ‘18

Inflation
The all-important CPI number slightly went up only slightly on a month to month basis, rising from 3.7% in August to 3.77% in September. The good thing is that the headline retail inflation figure remained below the central bank’s ambitious target of sub-4% for the second time in a year. Considering the multitude of headwinds in the form of rising crude and the depreciating rupee, this slight increase may be considered a positive outcome.

Food Inflation also rose marginally, to 0.5% YoY in Sep'18 from 0.3% YoY in Aug'18. Fuel and power inflation numbers stayed more or less unchanged, resulting in core inflation moderating to a 6-month low of 5.8% YoY. However, upside risks to core inflation continue to exist, as the beleaguered rupee stays put at an all time low of 74, and monsoon distribution remains uneven. These risks suggest that a dovish stance from the central bank may not be adopted any time soon.

Stung by stubbornly high global crude prices, the WPI rose to a two-month high of 5.1% n Sep'18 compared to 4.5% YoY in the previous month. However, the core WPI (inflation excluding food and fuel) saw a slight decline to 4.9% in the month of September.

Fiscal Deficit
The central government’s revenue receipts came in at Rs. 6.91 Lakh Crore for th 6-month period ending September. The budgeted target for the fiscal was Rs. 17.25 Lakh Crore, and the current collection marks 40% of the target. September witnessed only lukewarm growth in tax revenue collections, with direct tax collections improving but indirect tax growth not pitching in.  Non-tax revenues hit 44.5% of the budget estimates, reaching Rs.10.8 lakhs crores at the end of September.

The fiscal deficit situation seems to have worsened considerably year on year, mainly attributable to the frontloading of government expenditures. With the government hitting 95.2% (Rs. 5.95 Lakh Crores) of its fiscal deficit target in the second quarter of this fiscal year, the ambitious target of 3.3% of GDP for the current fiscal seems a long shot right now. AT this time last year, the central government’s fiscal deficit stood at 91.29% of the budgeted target or Rs. 4.9 lakh crores. Total expenditure in Q2FY19 has been in line with the previous year, reaching Rs.13 lakh crores. The rising capital expenditure number augurs well for the growth of the infrastructure sector.

Trade Balance
With both imports and exports slowing down on a YoY basis, India's trade deficit witnessed a welcome contraction to USD 13.9 billion in Sep'18 from USD 17.4 billion in Aug'18, hitting a 5-month low. Export growth reduced 2.5% to USD 27.95 billion on a YoY basis – a figure mainly attributable to the base effect of September ‘17’s stellar growth figure which resulted from the impact of the reduction of pre-GST rates that had driven up export growth. With the Government hiking custom duties to curb nonessential imports, we witnessed a slowdown in imports growth from 25.4% YoY in August, to just 10.45% in September. However, this is quite likely to be just a temporary phenomenon, as crude prices continue to stay elevated and exert pressure on the import bill.

Equity & Debt Market Outlook: November ‘18
As anticipated, October turned out to be a month of consolidation for the markets. The bellwether NIFTY index, although down nearly 5% intra-month, found its feet in the last few trading sessions of the month, rising quite spectacularly and bouncing off the strong support of 10,000. Banks fared better, with the Bank NIFTY closing flat on a point to point basis. With crude prices falling nearly $12 from their intra recent high of USD 86, bond markets heaved a sigh of relief and yields fell by an impressive 2.36% within the month, resulting in impressive gains for medium to long term debt funds.



Having been in a free fall of sorts since their January peak, Midcaps consolidated strongly this month, with the index finding its feet at the lower Bollinger band on the weekly charts. The stochastic oscillator completed a bullish crossover, signalling that a choppy rise may be in the offing.

End Note: This continues to be one of the trickiest phases for the equity markets in recent years. The US markets have begun a phase of correction or consolidation, resulting in collateral damage to emerging markets globally – India included. Crude has taken a breather but conditions remain ripe for a rise from current levels – hurting domestic macros. Results have been tepid to good, but a lot of that has already been priced in. Core inflation remains a concern and has left no room for dovish moves from the central bank. Valuation multiples have fallen, but still remain above their historical averages – however, domestic liquidity continues to prop up markets. With no immediate drivers in sight, we’re possibly starting at an extended lock-down in the 10,000 – 11,000 range for the NIFTY. November is quite likely to be a bullish month across market caps as the index inches towards its next resistance level of 11K.

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