Financial Assets @ January 2016

Equity Market Update - After good performance in 2014, Indian equity markets ended on a negative note in 2015. Globally also, barring DAX, CAC and Shanghai, all equity markets gave negative returns. The table below gives the details of the monthly and CY 2015 performance of key indices. FII’s were a net buyer of $3.2bn of Indian equities in 2015. The Rupee depreciated 4.9% versus the Dollar in 2015. Domestic Mutual funds continue to see healthy inflows. Equity mutual funds net inflows in November 2015 were Rs 6,073 crs. Total inflows so far in FY16 have been nearly Rs. 64,000 crs. and inflows in CY15 till November were Rs 82,000 crs. Commodities fell sharply in 2015. The table alongside gives the performance of key commodities in December and 2015.

In a widely expected move the US Federal Reserve raised the federal funds rate by 25 bps, from 0-25 bps range to 25-50 bps range during December. This was the first hike by the US Fed in over nine years. The uncertainty around expected US Fed rate hike is now behind us. There is a clear evidence of falling commodity prices working to India’s advantage. Further, low inflation, improving CAD and fiscal outlook and rising order backlogs in some key infrastructure related industries point to a steadily improving growth prospects of the economy, especially of the capex cycle. The policy direction is right and economy is making good progress on most fronts. Economy and equity markets appear to be in transition from consumption to capex. Improving margin outlook of corporates, likely lower interest rates, soft commodity prices and reasonable valuations lead to a positive outlook for equity markets over the medium to long term. In our opinion therefore, there is merit in increasing allocation to equities (for those with a medium to long term view) in a phased manner and to stay invested. Further, given the sharp outperformance of midcaps, Largecap / Multicap Funds should be preferred for fresh investment in our opinion. Debt-Market-Update - During the month of December 2015, the yield on 10-year benchmark Government bond (7.72% GoI 2025) ended at 7.76% as against 7.79% in end November 2015, down by 3 bps. The yield on 10-year AAA Corporate Bond ended the month at 8.37% as against 8.27% at the end of November 2015. Thus, corporate bond spreads during the month increased to 46 bps as against 33bps in the previous month. Liquidity conditions continued to remain negative during the month of December. As against ~Rs88,406 crs of average liquidity net injected by RBI during the month of November through various sources (Liquidity Adjustment Facility, export refinance, marginal standing facility and term repos/reverse repos), ~Rs.1,21,795 crs of liquidity was net injected by RBI during the month of December. The overnight rate ended at 7.03%, as against 6.84% at end November 2015. The INR appreciated to 66.15 against the US dollar as compared to 66.67 at the end of previous month. The net FII investment in equities & debt was an outflow of ~US$ 1.6 billion in December 2015. The net FII investment in equities & debt has been US$ 131.8 billion in calendar year 2015. The annual rate of inflation, based on monthly WPI, stood at -1.99% (provisional) for the month of November, 2015 (over November, 2014) as compared to -3.81% (provisional) for the previous month and -0.17% during the corresponding month of the previous year. CPI came in at ~5.4% YoY in November 2015, up from 5.0% in October 2015. Core CPI for October 2015 came in at ~4.3% as against 4.1% in October 2015. The US Federal Reserve raised the federal funds rate by 25 bps, from 0-25 bps range to 25-50 bps range in December. The Federal Open Market Committee (FOMC) also adopted a new conditionality for rate hikes in the future. The FOMC said that "in light of the current shortfall of inflation from 2%, the Committee will carefully monitor actual and expected progress toward its inflation goal." Thus inflation considerations will now take precedence over labor market conditions. Outlook With US rate hike behind us, anticipation of slow rise in US interest rates and high current spreads between India and the US 10 year yields, we feel Indian yields should head lower. It is interesting to note that the 10 year yields in India are back to where they were before the 50 bps repo rate cut by RBI in September 2015. The moderate pace of economic recovery, low commodity prices, relatively stable exchange rate vs other emerging market currencies and proactive measures by the government with regard to food supply management should help in containing inflation over the medium term. The recent hikes in excise duty on petrol and diesel will provide significant cushion to government to manage fiscal deficit against the additional burden of seventh pay commission and One Rank One Pension (OROP) in our opinion. Low inflation and benign inflation outlook, falling fiscal deficit and low Current Account Deficit (CAD) are all supportive of lower yields. As highlighted repeatedly over the past several months or so, we continue to recommend adding duration to fixed income portfolios. Source for various data points: Bloomberg, Reuters, www.sebi.gov.in, www.rbi.org.in and Central Statistics Office (CSO) & HDFC Mutual Fund