Review of Key Macros & Market Outlook: October ‘18

Inflation

The critical CPI number slowed down for the second consecutive month, hitting a 10-month low of 3.7% year-on-year in Aug'18 from 4.2% in the previous month. It’s worth noting that retail inflation had peaked at 4.9% in Jun ‘18. The headline inflation has fallen below RBI's mid-term target of 4% for the first time this year, despite burgeoning crude prices. Food inflation fell to a low of 0.3% YoY in Aug'18, the lowest it has been for over a year. Further, all the other groups recorded moderation in inflation. Clothing, housing and miscellaneous groups moderated as well. Core inflation, although having moderated, still remains elevated – which is a definite concern for the central bank.

Having been at the receiving end from the opposition in lieu of rising oil prices, the broad slowdown in inflation comes at an opportune time for the current government. The RBI still faces a challenge though – with core inflation remaining high at 6%, despite it already having effected two rate hikes in quick succession this year. The central bank is widely expected to take a pause for the next couple of policy meets, before deciding upon further cuts.

Fiscal Deficit

The central government's gross fiscal deficit rose to Rs. 5.9 lakh crores or 94.7% of the budget estimate (3.2% of GDP). This is close to the government's 3.3% of GDP target for the fiscal, and only slightly lower than Rs.5.2 lakh crore or 96.2% of the budget estimate during the same period last year.

Total expenditure reached Rs 10.7 Lakh crore during the April – August period (43% of the budget expenditure) which is in line with the previous year. The government continued step up capital expenditure with an overall spend of 44% of the budgeted amount – broadly in sync with the budget commitment that was made towards infrastructure. Cumulative revenue receipts reached Rs.4.6 lakh crores – more or less exactly the same as last year’s figure of 27% of budget expenditure at this stage.

Non-tax revenue receipts have continued to show healthy growth, but tax revenue receipts slowed down - reaching 24.7% of budgeted expenditure, which is low compared to last year. Additionally, GST revenue collections declined in Aug'18 (Rs. 0.93 lakh score), the lowest number this year so far. These do not bode well for the fiscal deficit number.

Non-Food Credit

Non-food bank credit is on a definitive uptick - It grew at 12.4% year-on-year (YoY) in Aug'18, more than double the 5.5% YoY growth in Aug'17 and the highest in as many as four years. The main drivers have been the credit to services (26.7% YoY growth) as well as personal credit growth. Additionally, credit to industries hit an 8-month high in August, which augurs well for corporate growth.

The housing recovery theme appears to be playing out nicely, with a lot of developers reporting growth in pre-sales numbers. Overall, housing loans grew by 17% YoY, while vehicle loans grew by 11.1%. Loans for consumer durables fell massively, though.

Trade Balance

The domestic deficit narrowed down to USD 17.4 billion in Aug’18, owing to a rise in exports, which grew by 20.1% YoY in Aug’18 to USD 27.8 billion, compared to USD 23.6 billion in Aug’17. This rise can likely be attributed to the drastic fall in the rupee to below 72 levels. 

India’s import bill continued to stay elevated, increasing 25.5 % YoY in Aug’18. In fact, non-oil imports grew from 31.3 Bn USD to 33.4 Bn USD on a month on month basis. Oil imports, on the other hand, fell by USD 0.6 Billion in August, to 11.8 Billion.

Equity & Debt Market Outlook: October ‘18

September was a harrowing month for investors across asset classes. The bellwether NIFTY index fell by a steep 6.4%, dropping below the pivotal 11,000 mark. The Bank NIFTY witnessed a double-digit percentage correction and the NIFTY Midcap index fell by as much as 13.3%. Small caps fared even worse – the NIFTY small cap index broke decisively below its lower Bollinger Band on Friday, crashing over 5% in the month’s last session alone. To top it off, bond yields continued to rise despite having already risen over 3% in August. Credit markets were spooked by the IL&FS default, and liquidity went for a toss – resulting in negative returns from short term debt funds too. The NIFTY fell below its 20-week moving average mark, signalling continued bearishness. The pace of the fall has been quite disconcerting for investors – particularly unadvised ones who entered into direct plans of mutual funds without properly understanding the nature of the equity markets.



Things are looking far worse for mid caps than for large caps at the moment. The Midcap 50 index slipped all the way down to 4622, an outcome we had predicted in our report last month. It has consistently been making lower highs and lower lows since it peaked out in January around the 5,700 mark (a 1,000+ point drop has ensued since that time).

End Note: Unfortunately, the woes are far from behind us at the moment for the equity markets. If anything, this appears to be the start of a deeper than expected cut for mid-caps and small caps, which may undergo a technical bounce of 6% to 8% (not to be misconstrued as the resumption of a bullish trend!) in October before resuming their fall. The NIFTY correcting below its 20-week moving average this month, indicates that it’ll probably fall further before taking some kind of support around the 10,500 mark. Bond yields are unlikely to harden too much this month, as a lot of poor outcomes are already priced into current yields. Broadly speaking, we may witness a choppy month of consolidation for the equity markets (with a technical bounce likely), and a flattish month for bond yields.

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