Economy and Markets

June 2019

EQUITY MARKET

Global equity market snapshot: May 2019

Source: Bloomberg, SBIMF Research

Performance in May 2019 (local currency returns) Performance Year-to-Date (local currency returns)

Performance in May 2019 (US$ returns) Performance Year-to-Date (US$ returns)

Indian stock market sector-wise returns: May 2019

Source: Bloomberg, SBIMF Research

• Nifty and Sensex were up nearly 1% and 2% respectively during the month. In May, the rally was seen across the capitalizationcurve.

• On YTD basis, both Nifty and Sensex were up 10%. Large caps have outperformed the mid caps and small caps thus far.

• Capital goods and real estate were sector outperformers while healthcare and metals were sectoral laggards during the month.On YTD basis, real estate and consumer durables are sector outperformers while auto and metals are sectoral laggards.

Performance in May 2019 (local currency returns) Performance Year-to-Date (local currency returns)

NDA gets fully majority in 2019 general election

Source: Election Commission, SBIMF Research; NB: INC: Indian National Congress, UPA: United Progressive Alliance

• The full majority gives BJP led NDA government a significant political capital.

Bharatiya Janata Party (BJP) led National Democratic Alliance (NDA) won the 2019 general elections with even more seats than 2014 general elections

Market cheered the 2019 election outcome

Source: Bloomberg, CEIC, SBIMF Research;

• Continuity of reforms-oriented policies

• Expansion of social security net while containing thewasteful expenses

• Fiscal prudence

• Keeping inflation under check

• Pro-growth measures – Infrastructure thrust tocontinue

• Addressing the financial sector issues

• Revving up tax collections (GST leakages to beplugged)

• Addressing challenges in the real estate sector

Expectations from the governmentMarket reactions during the election month

Equity MarketNIFTY rallied b y 1.5% in May. Gains were seen across the

capitalization curve.

Fixed Income

10 year G-sec was down by 38bps in May,

Similar gains were also realized in SDL and AAA corporate bonds space

GDP growth moderates to five year low

Source: CMIE Economic Outlook, SBIMF Research;

Q4 FY19 Real GDP growth slowed significantly to 5.8% vs. 6.6% in previous quarter

Overall FY19 GDP growth moderated by 40bps to 6.8%

Broad based weakening in economic output and demand

Source: CMIE Economic Outlook, SBIMF Research; NB: Green denotes improvement in the growth and Pink indicates a moderation

• Q4 FY19 GDP growth slowed down significantly to 5.8% (vs. 6.6% in Q3 FY19). While both private consumption and investmentgrowth moderated, slowdown in investment was much sharper. In addition, moderation in exports growth was much higher thanimports softness. On the other hand, government spending picked up in Q4 and helped to partly offset the growth moderation.

• On the supply side, GVA growth softened to 5.7% (vs. 6.3% in Q3 FY19) owing to declining agriculture growth and moderatingindustrial activity. Weakness in industrial activity was manufacturing and utilities led. On the other hand, services held strong.

Both consumption and investment weakened on demand side; declining agricultural growth and moderating industrial activity pulled down the economic output

Growth (% y-o-y) % of GDP FY17 FY18 FY19 1QFY19 2QFY19 3QFY19 4QFY19

Real Gross Value Added and its componentsGVA at basic price 7.9 6.9 6.6 7.7 6.9 6.3 5.7Agriculture 18 6.3 5.0 2.9 5.1 4.9 2.8 -0.1Industry 31 7.7 5.9 6.9 9.8 6.7 7.0 4.2

Mining and quarrying 3 9.5 5.1 1.3 0.4 -2.2 1.8 4.2Manufacturing 17 7.9 5.9 6.9 12.1 6.9 6.4 3.1Electricity gas and water supply 2 10.0 8.6 7.0 6.7 8.7 8.3 4.3Construction 9 6.1 5.6 8.7 9.6 8.5 9.7 7.1

Services 51 8.4 8.1 7.5 7.1 7.3 7.2 8.4Trade, hotels, transport, storage and communication 19 7.7 7.8 6.9 7.8 6.9 6.9 6.0Financial services, real estate and business services 19 8.7 6.2 7.4 6.5 7.0 7.2 9.5Public administration, defence and other services 13 9.2 11.9 8.6 7.5 8.6 7.5 10.7

Real gross domestic product by expenditureGDP at market price 8.2 7.2 6.8 8.0 7.0 6.6 5.8Private final consumption expenditure (PFCE) 57 8.2 7.4 8.1 7.3 9.8 8.1 7.2Government final consumption expenditure (GFCE) 11 5.8 15.0 9.2 6.6 10.9 6.5 13.1Gross fixed capital formation (GFCF) 32 8.3 9.3 10.0 13.3 11.8 11.7 3.6Net exports

Exports 21 5.1 4.7 12.5 10.2 12.7 16.7 10.6Imports 25 4.4 17.6 15.4 11.0 22.9 14.5 13.3

India’s unemployment rate stands high at 6.1% in 2017-2018

Source: pib.nic.in, SBIMF Research;

• Government of India has released employment-unemploymentsurvey for the year 2017-18. The survey was conducted by NSSOduring the period July 2017-June 2018. Prior to this, the lastemployment/unemployment is available for 2011-12.

• Survey brings out significant drop in India’s Labor force participationrate, particularly due to drop in female labor force participation. Laborforce participation rate is defined as percentage of population in thelabor force (i.e. working or actively seeking work).

• Despite the fall in labor force participation, unemployment rate inIndia is as high as 7%.

• Agriculture continues to be the main employment provider with 44%of employment despite it contributing only 16% of GVA.

India’s unemployment rate is as high as 6.1% in 2017-2018

Unemployment rates(in %) - FY18 Rural Urban All India

Male 5.8 7.1 6.2

Female 3.8 10.8 5.7

Total 5.3 7.8 6.1

Labor force participation rate dropped led by drop in female labor force participation

Agriculture continue to be the major employment provider while its contribution to GVA is the lowest

Sector Employment (% share) % share in GVA

Agriculture 44 16

Industry 25 30

Services 31 54

Source: CMIE economic outlook, SBIMF Research; NB: 1. Green denotes improvement in the growth and Pink indicates a moderation. 2. We use some subjectivity in categorizing the data by looking at both the trends in the recent months as well as trends relative to long term average. 3. We have shifted to steel consumption data from steel production data since Jan 2019.

High frequency activity indicators have moderated during 2019• Growth in high frequency activity indicators has been moderating .

• Most recent is moderation in consumption demand (2-wheelers andcar sales, FMCG products or sale of discretionary products).Consequently, domestic production and imports of consumer goodshave moderated.

• Investment related indicators and overall industry activity softenedduring Jan-Apr 2019. Growth in eight core industries deceleratedsharply in April, pulled down largely by coal, crude oil, fertilizers andcement.

• Exports were unable to sustain the growth of 11.8% observed inMarch 2019 and slowed materially to 0.6% in April 2019

• There is likely to be some revival in economic activity as the electionnow ends and we may see the resumption in spending/ capex plansthat were temporarily shelved.

• On the supply side, the IMD has revised up its forecast for Summermonsoon and now sees marginally higher probability of normalmonsoon in 2019. At the same time, it also expects the spatial andgeographical distribution of the monsoon to be favorable.

• But Industrial output growth continues do drag down. Apart frominfrastructure output (production, bitumen, steel and cement), outputacross all the use based categories have softened.

• Services indicator depict mixed signals. While PMI servicesmoderated, survey portrays positive outlook. Services exports growthhave moderated. AUM growth of mutual fund has slowed down.

Consumption demand is weakening

Source: CMIE Economic Outlook, Capitalline, SBIMF Research

Domestic sales of two-wheelers and cars, which act as a good gauge for rural and urban demand, have been moderating

Domestic air traffic growth has moderated recently; partly also due to supply side shocks (cancelling of the flights)

FMCG Sales growth moderated to 9.7% y-o-y in Q4FY19 vs. 12.5% y-o-y in Q3 FY19

Domestic production growth of both consumer durables and non-durables have softened

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BSE 500: Avg cost per Employee (% change)

Factors weighing on consumption demand

Source: CMIE Economic Outlook, Capitalline, SBIMF Research

Depressed farm prices led to weakness in Agriculture Nominal GDP growth (hence farm income)

Even urban wage growth has softened

Rural wage growth has been depressed for long

• Other factors affecting the consumption demand:

o Moderation in NBFC loan disbursement (particularlyin the wholesale segment)

o GST impact on informal segmento Sand mining ban in select stateso Weakness in real estate prices for longo Weak labor participation in recent years

Domestic industrial activity moderated in recent months

Source: CMIE Economic Outlook, SBIMF Research

Domestic industrial production has moderated primarily due to softer manufacturing sector growth

Construction related indicators are holding healthy as evidenced in cement production and steel consumption

Investment related indicators (such as capital goods production and imports) showing signs of softness • The overall industrial activity has moderated in the recent

months.

• While the construction related indicators are holding healthyas evidenced in cement production and steel consumption,investment related indicators (such as capital goodsproduction and imports) showing signs of softness.

• A part of the slowdown can be due to election relatedfactors (slowdown in government infrastructure relatedorders ahead of election, postponement of business capitalspending plans). As the election is over, some of theseshelved spending should come back. Even after accountingfor it, analysis of the underlying data point to a slowdown ingrowth momentum.

Manufacturing PMI improved in May led by domestic factors

Source: CMIE Economic Outlook, Markiteconomics, SBIMF Research

• Manufacturing PMI improved to 52.7 in May vs. 51.8 in April as companies responded to improvement in output, new ordersand employment. Business sentiment improved during the month.

• Interestingly, as per the PMI survey, improvement was also seen in the consumer goods output. While on the other hand, thenew orders build-up are primarily exports related.

• Price pressures remained relatively muted, with goods producers leaving selling prices unchanged on the back of a mild risein overall cost burdens.

• PMI services fell to 50.2 in May vs. 51 in April as disruptions arising from the elections in the earlier part of the monthhampered growth of new work intakes. However, there were signs that the slowdown may prove temporary as companiesstepped up hiring and became more confident about future prospects. Firms were also helped by a lack of inflationarypressures in the sector.

Manufacturing PMI improved in May due to expansion in output and order books

Services PMI moderated in May as the sector still reeled under the disruptive effects of election during the month

Capacity utilization improving; bodes well for investment

Source: RBI, FICCI, SBIMF Research: *NB: CU for March 2019 values is based on the early results of RBI’s OBICUS as mentioned in the 2nd monetary policy statement 2019-20; **Green indicates capacity utilization is higher than long term average (LTA), yellow indicates similar to long term average (+/- 2 LTA) and red indicates lower than LTA

Capacity utilization improved to 77% by Q4 FY19 end; higher than its long period average*

FICCI survey suggests relatively broad-based improvement in capacity utilization in Q4 FY19 (barring leather) **

• There are signs of softness in investment related activity in the recent months which tests our expectation of pick-up in investmentactivity in 2019.

• A part of softness can be due to election related factors (slowdown in government infrastructure related orders ahead of election,postponement of business capital spending plans). As the election is over, some of these shelved spending should come back.

• Some other key investment related indicators are encouraging. Capacity utilization (CU) has improved.

• As per the FICCI, capacity utilization has improved across multiple sectors in Q4 FY19. Paper, metals, electronics & electrical,auto and cement have seen particularly sharp rise in utilization levels.

• The deleveraging exercise undertaken for last three years (FY16-FY18) has put the corporate balance-sheet in a relatively betterplace to undertake capacity expansion. Now, it all hinges on improvement in the economic cycle.

Capacity Utilization (in %) Avg since FY13 Q3 FY19 Q4 FY19Auto 75 80 80Capital Goods 71 74 74Cement 74 60 80Chemicals & Fertilizers 79 74 77Textiles 81 80 82Electronics & Electricals 67 68 72Leather & Footwear 66 60 60Metals 75 74 88Textiles Machinery 59 60 60Paper 83 80 95

FDI inflows can improve going ahead

Source: CMIE economic outlook, Various media reports, SBIMF Research

India has witnessed net FDI inflows of US$ 35 billion in FY19 vs. US$ 30 billion in FY18

• India has witnessed net FDI inflows of US$ 35 billion during FY19 which is marginally higher than US$ 30 billion seen duringFY18.

• As per recent media reports, FDI inflows can improve going ahead. A couple of large-ticket deals have been announcedwhich can lead to higher FDI inflow going ahead.

Bank industrial credit picking up while non-bank credit moderating

Source: RBI, CMIE Economic Outlook, CRISIL, SBIMF Research

Bank Industrial credit growth has started to pick-up, but still lower than the growth in the personal loan segment

Bank industrial credit is flowing mainly to large industries , they remain muted for small enterprises

Corporate bonds issuances have moderated After being >1 since 2H FY16, debt weighted credit ratio (fell to 0.89 in 2H FY19 implying more downgrades than upgrades

Source: CMIE economic outlook, SBIMF Research,

Growth momentum unlikely to see any sharp recovery in FY20

FY20 GDP growth is expected to be around 6.8-7.0%

• India’s economic activity has moderated and may remain so in1H 2019.

• In recent months, the negativity around India’s growth outlookhas stepped-up. It stems froma) Signs of slowdown in global growth,b) Strains in government’s finance and the rising clamour around

social and income support measures which inhibitsgovernment’s ability to continue with the infrastructuresupport,

c) Evidences of weaker sale in various consumption items (suchas auto sales, domestic air travels, FMCG, textiles and otherdiscretionary),

d) Weakening non-oil non gold imports which is closely linked todomestic industrial/ investment activity and,

e) Challenges in the NBFCs which has affected the fundavailability in the wholesale loans and real estate segment.

• India’s growth may remain below potential in the near term, butsome pick-up is likely by the year-end helped by:a) We expect investment activities to pick up post election.b) Mainstream banks have stepped up to offset some of the

growth drag from the NBFCs.c) The reforms, regulation and time correction in real estate

prices over last five years have now created a favourablebase for some pick-up in demand.

d) The effects of monetary easing starts to kick in

• We expect annual FY20 GDP growth rate to be around 6.8-7.0%. Economic activity post election needs to be closelywatched to ascertain the recovery expected in 2H FY20.

Source: Capitaline ,SBIMF Research,

4Q FY19 BSE 100 Earnings: Sharp moderation in Sales growth

• BSE 100 sees sharp and a broad-based moderation in sales growth.

• 14 out of 19 sectors saw moderation in top line, with automobiles, NBFC and infrastructure posting a decline.

• Oil & Gas, automobiles and utilities explains majority of the revenue growth moderation in BSE 100.

4Q FY19 sales growth moderated sharply to 11% Oil & Gas, automobiles and utilities explains majority of the moderation in BSE 100 sales growth

% p.t contribution to growth to BSE 100 sales growth Dec-18 Mar-19NBFC 0.4 0.0Automobiles 0.9 0.0Infrastructure 0.0 0.0Media 0.0 0.0Retail 0.1 0.1Utilities 0.7 0.1Consumers 0.5 0.3Metals 0.7 0.3Capital Goods 0.7 0.4Healthcare 0.4 0.4Others 0.3 0.4Cement 0.5 0.5Telecom 0.5 0.5Banks- PSU 0.9 0.9Technology 1.3 1.1Banks- Private 1.8 1.3Oil & Gas 11.5 4.1TOTAL BSE 100 21.4 10.5

Source: Capitaline ,SBIMF Research,

EBITDA and PAT margin fell compared to a year ago

• EBITDA margin has shrank by 285 bps y-o-y and wassharpest in metals, media, utilities and telecom. On theother hand, cement, healthcare and infrastructure sawimprovement in their margins.

• PAT margins improved from the December quarter butfell 240 bps in y-o-y terms.

BSE 100 (ex financial and oil marketing companies) EBITDA margin declined compared to a year ago

PAT margin improved from the previous quarter but fell on y-o-y basis

Metals, media, utilities and telecom witnessed the sharpest decline in EBITDA margins

Sector-wise EBITDA Margin (in %) Mar-18 Mar-19Automobiles 13.9 12.4Capital Goods 17.6 18.2Cement 18.4 22.1Consumers 27.4 26.7Healthcare 20.4 24.4Infrastructure 63.3 77.3Media 40.5 30.4Metals 39.4 23.3Retail 11.0 10.5Technology 27.3 26.8Telecom 35.9 31.2Utilities 29.4 22.2BSE 100 ex financials ex OMC 22.9 20.0

Source: Capitaline ,SBIMF Research,

NIFTY: 4QFY19 PAT growth driven by handful of companies

• NIFTY witnessed sharp moderation in revenue (10% inQ4 FY19 vs. +20% in the previous three quarters).

• EBITDA growth stayed muted at 6% in Q4 FY19 (vs.5% in Q3 and 14-28% growth in the earlier fivequarters).

• PAT growth improved to 15.8% but 62% of the PATgrowth came on the back of SBI alone. Ex of threecorporate banks, which are witnessing an improvementin their balance-sheet as the NPA issue subsides, PATgrowth was muted at 1.7% y-o-y (vs. -2% in theprevious quarter).

• For FY19 as a whole, NIFTY PAT grew by 11%

4Q FY19 sales growth moderated to 10%

PAT growth improved to 16% but led by a handful of companies

EBITDA growth stayed muted

Source: Capitaline, SBIFM Research;

Trend in earnings revision remains that of downgrades

Earnings downgrade continued for eighth straight year

NIFTY 50 posted a marginal improvement in an EPS growth during FY19 (6.7% vs. 6.1% in FY18)

• Some of the key trends observed from the Q4 FY19 result were:o Financials, particularly the corporate banks, drove the

earningso Asset quality for corporate banks has improved leading to

improvement in their profitabilityo NBFCs are faced with rising cost of funds. Barring select

players, liquidity remains a key challenge for most players.While the companies have managed the liquidity situation,they have been curtailing disbursements. Demand for autoloan has slowed while home loan demand stays healthy

o Consumption has witnessed a broad-based slowdown duringthe quarter and companies foresee weakness in ruraldemand going ahead, in line with the high frequencyeconomic data

o Weakness in auto sales for at least 1-2 next quarterso For the capital goods sector, order inflow had moderated

during the quarter ahead of the election, but is expected toimprove going ahead as the election factor subsides and thegovernment gets back into action

o Improvement top-line for cement companies helped by thevolume growth, hence leading to improved capacityutilization. The price hike taken in April will help to sustain theimprovement in top-line for coming quarters.

o Weakness in the refining and petrochemical margino Healthy top-line growth in IT services but challenges ahead

• The trend in earnings revision remains that of downgrades.NIFTY posted an EPS growth of ~7% in FY19. It is likely topick-up to +20% in FY20.

Liquidity: Both FIIs and DIIs invested in Indian equity in May 2019

FIIs invested for the 4th consecutive month in May 2019 to the tune of US$ 1.1 billion

Source: Bloomberg, SBIMF Research

Domestic institutional investors turned positive on equities in May (US$ 750 million) after three months of selling

Valuations are richValuations across the capitalization curve

Source: Bloomberg, SBIMF Research,

Valuation of MSCI India vis-à-vis MSCI EM improved in May 2019. That said, it is still lower than the January 2019 levels

NIFTY 12m Fwd. P/E is trading at 29% premium to 10 year G-sec (vs. the long term average premium of 16%)

Equity Market outlook

Nifty is trading at ~18 times forward earnings

Source: Bloomberg, SBIMF Research

• Indian equity market continued to move up for the third consecutive monthin May and has risen 9.8% YTD.

• While FIIs have been a net investor in Indian equity since February andhave invested US$ 11.4 billion YTD, Domestic institutional investors turnedpositive on equity market in May (US$ 750 million) after three months ofsell. Portfolio inflows should continue in the near-term. A strong and stablegovernment is positive for the market especially as the government couldpush through pro-growth policies with greater ease.

• For the foreign investors, India also provides an added advantage of beinga natural hedge against the adverse growth impact of US- China tradedispute.

• Coming to the earnings, last five years saw corporate earnings growing at asub-optimal rate, given the backdrop of structural and disruptive macroreforms.

• India’s corporate profit to GDP ratio has moderated from 5.7% in FY10 to2.8% in FY19 and likely to sub 2% in FY18. However, now the corporateearnings cycle appears to be bottoming out.

• With a revival in asset quality of corporate banks and likelihood of pro-growth policies by the government, FY20 looks poised for +20% earningsgrowth.

• However, there is a limited room for any re-rating for the markets, given thecurrent valuations (NIFTY 12m fwd. PE at 18.3x).

• As we look towards easing of interest rate conditions, the interest sensitivesectors should see gains. We are biased towards domestic cyclicals.

Fixed Income Market

Bond yields in the key developed markets

Source: Bloomberg, SBIMF Research

• 10-year bond yields across the key developed markets (barring Italy) moderated during the month of May amidst globaltrade war concerns and fear of global growth slowdown. Even on the year-to-date basis, the movement is a fall in 10-year bond yields across all the key developed markets.

• US 10-year bond yields eased by 38 bps in May 2019 on account of rising concerns of trade tensions between US-China (US indicated to increase the tariffs on US$ 200 billion worth of Chinese goods) and US-Mexico (US announced5% tariffs on Mexican imports). In addition, an indication by one of the FOMC’s voting member (James Bullard) for arate cut in CY19 also weighed down on the US 10-year bond yields.

• On the other hand, 10-year bond yields in Italy inched higher by 12 bps during May as risks continued to prevail onweak fiscal and high government debt which is keeping the Italian bond yield higher than its European peers.

10 Year G-sec Yield (% mth end) 2015 end 2016 end 2017 end 2018 end Mar-19 Apr-19 May-19

m-o-m change (in bps)

3m Change (in bps)

Change in 2019

(in bps)

Developed market US 2.27 2.44 2.41 2.68 2.41 2.50 2.12 -38 28 -56

Germany 0.63 0.21 0.43 0.24 -0.07 0.01 -0.20 -22 13 -44

Italy 1.60 1.82 2.02 2.74 2.49 2.56 2.67 12 -18 -7

Japan 0.27 0.05 0.05 0.00 -0.08 -0.04 -0.09 -5 1 -10

Spain 1.77 1.38 1.57 1.42 1.10 1.00 0.72 -29 38 -70

Switzerland -0.06 -0.19 -0.15 -0.25 -0.38 -0.30 -0.48 -18 10 -23

UK 1.96 1.24 1.19 1.28 1.00 1.19 0.89 -30 11 -39

Bond yields in the key emerging markets

Source: Bloomberg, SBIMF Research

• 10-year bond yields in the key emerging markets eased or stayed flat in May for most key emerging markets (barringIndonesia).

• Indonesian 10-year bond yields moved up as sharp fall in commodities had led to a sharp decline in Indonesia's terms oftrade and keeps the country’s current account deficit in pressure.

Commodity market snapshot

Source: Bloomberg, SBIMF Research

Most of the agri prices increased in May 2019; barring cotton, palm oil and sugar

Energy prices witnessed broad-based easing during the month of May 2019

Except gold, prices of precious metals declined during the month of May 2019

Prices of iron ores and aluminum increased in May while the other industrial metals inched higher

India Rates Snapshot: May 2019

Source: Bloomberg, PPAC, RBI, CEIC, SBIMF Research; NB: **Crude oil price is average $/barrel for the month, rest of thedata are % month end; *Corporate bond rate is for AAA rated bonds ,*** Refers to PSU Banks’ CD rate; # INR and Oil price changes are % change; @ March end MIBOR has been taken for 28th March, just for a day MIBOR rose to 8.8% on 29th March

• During the month of May, Indian 10-year G-Sec bond yields eased by 38 bps owing to ‘market favored’ 2019 electionoutcome and sharp slowdown in the growth and muted inflation strengthening the case for a rate cut. In line with themarket expectations, on 6th June 2019, the central bank delivered a 25 bps rate cut and changed the stance to‘accommodative’. As a result, 10 year G-sec rallied by 7bps post policy to 6.93%.

• Money market rates also moderated in May 2019 as the inter-bank liquidity improved by end of May.

• Crude oil prices fell by 1.4% during the month. However, year-to-date, crude price has risen by 21.2%.

• Rupee depreciated marginally by 0.2% in May. YTD, rupee has appreciated marginally by 0.1%.

Dec-17 Dec-18 Feb-19 Mar-19 Apr-19 May-19 m-o-m change (in bps)

Change in 2019 (in bps)

3M T-Bill 6.20 6.65 6.40 6.31 6.44 6.19 -25 -461 Yr T-Bill 6.40 6.94 6.55 6.39 6.51 6.30 -22 -6410 year GSec 7.33 7.37 7.41 7.35 7.41 7.03 -38 -34Overnight MIBOR Rate 6.20 6.73 6.35 6.28 6.20 6.00 -20 -73Weighted Average Call money rate 5.99 6.57 6.36 6.49 6.50 6.39 -23 -643M CD*** 6.38 7.05 7.10 7.08 7.25 7.25 0 2012M CD*** 6.75 8.08 7.93 7.73 7.48 7.73 25 -353 Yr Corp Bond* 7.66 8.50 8.18 7.97 7.98 7.82 -16 -685 Yr Corp Bond* 7.68 8.43 8.45 8.10 8.30 7.92 -38 -5110 Yr Corp Bond* 7.90 8.51 8.73 8.52 8.54 8.17 -37 -351 Yr IRS 6.44 6.56 6.24 5.92 6.12 5.80 -32 -765 Yr IRS 6.75 6.62 6.31 5.94 6.35 5.86 -49 -76INR/USD 63.9 69.8 70.7 69.1 69.6 69.7 -0.2# 0.1#

Crude Oil Indian Basket** 62.3 57.8 64.5 66.7 71.0 70.0 -1.4# 21.2#

Global signs of monetary easing

Source: Bloomberg, SBIMF Research; NB: * Indonesia had announced to use new policy benchmark i.e. 7-day reversereport rate as its benchmark policy rate in April 2016; Red highlighted cells indicates interest rate hike and greendenotes a rate cut.

The direction of the global policy rate appears to be tilting towards hold or easing

Policy rate (in %), end period 2015 2016 2017 2018 2019 (till 6th June)

US 0.50 0.75 1.50 2.50 2.50Canada 0.50 0.50 1.00 1.75 1.75China 4.35 4.35 4.35 4.35 4.35Japan 0.10 0.10 0.10 0.10 0.10India 6.75 6.25 6.00 6.50 5.75Australia 2.00 1.50 1.50 1.50 1.25South Korea 1.50 1.25 1.50 1.75 1.75Indonesia 4.75 4.25 6.00 6.00Taiwan 1.625 1.375 1.375 1.375 1.375Thailand 1.50 1.50 1.50 1.75 1.75Malaysia 3.25 3.00 3.00 3.25 3.00Singapore 0.08 0.08 0.08 0.08 0.08Hong Kong 0.75 1.00 1.75 2.75 2.75Phillippines 4.00 3.00 3.00 4.75 4.50New Zealand 2.50 1.75 1.75 1.75 1.50Eurozone 0.05 0.00 0.00 0.00 0.00UK 0.50 0.25 0.50 0.75 0.75Switzerland -0.75 -0.75 -0.75 -0.75 -0.75Sweden -0.35 -0.50 -0.50 -0.25 -0.50Norway 0.75 0.50 0.50 0.50 0.50Russia 11.00 10.00 7.75 7.75 7.75Turkey 7.50 8.00 8.00 24.00 24.00Saudi Arabia 2.00 2.00 2.00 3.00 3.00Poland 1.50 1.50 1.50 1.50 1.50South Africa 6.25 7.00 6.75 6.75 6.75Brazil 14.25 13.75 7.00 6.50 6.50Mexico 3.25 5.75 7.25 8.25 8.25Argentina 21.00 26.00 26.75 50.00 65.00Colombia 5.75 7.50 4.75 4.25 4.25Chile 3.50 3.50 2.50 2.75 3.00

Source: CMIE economic outlook, SBIMF Research,

Indian growth-inflation dynamics favor monetary easing by RBI

CPI inflation likely to stay range-bound through out FY20GDP growth has moderated to 6.6% and is likely to remain sub-7% for the next 1-2 quarters

• Indian growth-inflation dynamics are favorable for monetary accommodation. GDP growth has moderated to 5.8% in Q4 FY19and is likely to remain sub- 7% for the next 1-2 quarters. CPI inflation likely to stay within RBI’s comfort zone through out mostparts of 2019.

• The trends in monsoon as well as global crude price movement will be closely watched. Further, while we have penciled themean-reversion in food prices (particularly vegetables, oilseeds, pulses and cereals), the quantum of the rise cannot bepredicted with certainty.

Source: RBI, CMIE Economic Outlook, SBIMF Research

Balance of Payments is expected to move back to surplus in Q4 FY19 and FY20 after 3 quarters of deficit helped by…

FDI inflows are hovering around US$ 30-35 billion since FY15 Recent deals pipeline showing optimism in FDI outlook

…improved FII sentiments; RBI’s measure (via VRR & FX swap) has helped to attract other capital inflow

External account dynamics have stabilized

Improved capital inflow helped RBI to recoup the FX reserves. India’s FX reserves stands at US$ 422 billion as of May end

Source: RBI, CMIE Economic Outlook, SBIMF Research

CAD is expected to see an improvement in Q4 FY19. We now expect FY19 CAD at 2.0-2.1% of GDP (vs. 2.5-2.6% initially)…

…as both lower oil bill and reduced Non-Oil Non Gold imports (helped by higher duties) will improve trade balance

Current Account balance is expected to see an improvement

• Balance of Payments is expected to move back to surplus in Q4 FY19 and FY20 after 3 quarters of deficit. We have revised ourQ4 BoP numbers positively. The narratives that we expected to pan out in FY20 has kicked in earlier.

• Capital inflows into India have improved since February end helped by shift of FII investment in the emerging markets and RBI’smeasure to attract capital inflows.

• We have also lowered our current account deficit numbers as non-oil non gold imports in January and February has been lowerthan expected. It has been due to dual impact of higher import duties imposed in later half of 2018 (import substitution measuresby the government) and moderation in select sectors (such as auto).

• Our FY20 assumptions has Current Account Deficit at US$ 65 billion, 1.9% of GDP, Capital account US$ 85 billion (2.2% of GDP),Balance of Payment Surplus at US$ 20 billion (0.6% of GDP). As long as Crude prices stay contained (by which we mean lessthan US$ 75 per barrel) and any sharp risk aversion against emerging markets assets does not develop, rupee is likely to remainrange bound and gyrate around 69-72 against US$.

Rupee has been broadly stable Year-to-Date

Source: Bloomberg, CMIE Economic Outlook, SBIMF Research

Year-to-date, rupee has been broadly flat and the performance vs. other EM currency is in the middle

Rupee depreciated marginally by 0.2% in May and hovered around ~69-70/US$ levels during the month

Rupee is fairly valued on trade weighted REER basis

Banking system liquidity conditions improving

Source: RBI, SBIMF Research;

Inter-bank liquidity tightness is easing We expect Rs ~1.5 trillion of OMO purchases in FY20 (Rs. 400 billion already committed).

• Banking system liquidity eased in May 2019 (average deficit of Rs 360 billion vs. Rs 723 billion in April 2019). The banking systemliquidity deficit gyrated from an average deficit of Rs 433 billion during the first three weeks of May to Rs 66 billion in the last weekof the month. In fact, since 30th May, liquidity has turned to surplus.

• Part of the liquidity deficit during the first three weeks of the month was frictional owing to central government spending less thanits revenue collection during the election period.

• The seasonal factors of weak currency outflow till August and resumption of government spending as the election (now) ends willturn inter-bank liquidity into the surplus. However, even beyond these one-off/seasonal factors, the recent communication from theRBI indicates that the central bank may continue to keep the liquidity in the marginal surplus on a more sustainable basis.

Policy Rate Outlook: We expect further rate cut

Source: RBI, SBIFM Research

RBI cut the policy rate by 25bps to 5.75%

• RBI eased Repo rate by 25bps to 5.75% in line with expectation andchanged the stance from ‘neutral’ to ‘accommodative’. All membersof the monetary policy committee (MPC) unanimously voted for boththe rate cut and stance change.

• Between the April and June policy meeting, both global and domesticgrowth outlook has weakened considerably.

• The central bank has lowered its FY20 growth expectations by 20bpsto 7.0% while inflation projection remains broadly unchanged(inflation projection for 1H FY20 revised up by 10bps to 3.0-3.1%and projection for 2H FY20 revised down by 10bps to 3.4-3.7%).With these projections, inflation is a non-issue for this year. Whilefood inflation has bottomed out and should climb higher, weakeningdemand and favourable base is likely to keep core inflation undercheck.

• India’s growth momentum is weakening and is in need of policysupport. As of now, owing to weak revenue buoyancy, fiscal isrelatively hand tied, unless of course the finance ministry is ready toaccommodate some slippage or the Jalan committee comes out withsome material bonanza from RBI in June. Against this backdrop, RBIwas expected to take the lead in supporting growth.

• We believe the central bank will remain biased towards monetaryeasing for remainder of the year. While in terms of rate cut, we havepencilled one more 25bps rate cut (perhaps as soon as in the Augustpolicy), the support may continue to come in the form of easyliquidity and macro-prudential measures.

Valuations are attractive

Source: Bloomberg, SBIMF Research

CPI Inflation adjusted real rate in India at 4.1% G-sec is trading at 112bps spread to the Repo vs. LPA of 87bps

Valuations vs. US yield are attractive

Source: RBI, Bloomberg, SBIMF Research,

SDL and PSU bonds offer attractive spreads

Spreads between 10-year SDLs and G-Sec are high when compared to its long term average

Spreads of 10 year Corporate bonds vis-à-vis G-sec is at 114 bps vs its long term average of 111 bps

• The demand supply dynamics and valuation comfort are relatively better 10 year AAA corporate bonds and SDL as compared tothe G-sec

• The spreads of 10 year Corp bonds and SDL vis-à-vis G-sec has closed down considerably in last few months but they stillcommand some premium compared to their 5 and 10 year average.

Source: CMIE economic outlook, pib.nic.in, SBIMF Research;

May 2019 GST collections at Rs 1 trillion vs. Rs 1.14 trillion in April 2019…

… May collection grew by 6.7% over the year (vs. 10.1% in April), much below the asking growth rate of 16.2%

GST monthly collections are below the required run-rate

• May 2019 GST collection was at Rs. 1.00 trillion vs. Rs. 1.14 trillion in April 2019. This means, May GST collections grew by6.7% y-o-y which is lower than the growth rate seen in the previous month (10.1% y-o-y) and required growth of 16.2% in FY20.

• FY20 aggregate collection is budgeted at Rs. 13.7 trillion and warrants 16.2% growth in GST revenues.

• While moderating economic activity brings some risk to collection buoyancy, it is achievable if the government increasescompliance.

• It has become absolutely pertinent for the government to improve the compliance on GST

Source: CMIE economic outlook, SBIMF Research;

In FY19, central government met the revised fiscal deficit target of 3.4% but faced massive shortfall in its tax collection

• The central government met the revised FY19 fiscaldeficit target of 3.4% of GDP but, faced massive shortfallin its receipts collection. Consequently, expenditure cutwas required to meet the fiscal deficit target.

• Total FY19 receipts grew by mere 7% vs. the revisedtarget of 18%. Even as the disinvestment and non-taxrevenue were in line with the target, tax revenue fell shortby Rs. 1.6 trillion.

• Tax shortfall was seen across each and every direct andindirect tax items, but maximum shortfall was seen inincome tax (Rs. 673 billion) and GST (Rs. 600 billion).

• Consequently both revenue and capital expenditure hadto be pruned proportionately.

• A part of expenditure cut is by mere postponement ofpayables as eventual food and fertilizer subsidy paymentwas ~Rs 400 billion and Rs 200 billion respectively lesserthan the revised estimates.

• Looking ahead for FY20, center has placed the revenuetarget at Rs. 21 trillion, which looks extremely tall (25%growth vis-à-vis FY19 actual).

• Centre is expected to place the final FY20 budget on 5thof July. The government should try and make realisticassumptions in revenue and should also accommodatesome slippage, given the growth needs.

Central government finances are weak; which keep fiscal risks alive

Debt Market Outlook

Source: Bloomberg, SBIFM Research

Valuations look attractive at G-sec vs. Repo rate

• We had turned positive on Indian bond market since March 2019.As fundamentals and valuation looked positive, we believed it couldcreate new demand (from sources such as FIIs) once the electionoverhang was over. This has played out particularly sharply post‘market favored’ outcome in 2019 general election.

• G-sec has rallied by 30bps in May, while SDL and Corporate Bondshave rallied by 56 bps and 43bps respectively between March toMay.

• The continuity of government has alleviated the concerns of sharpfiscal slippage and hence higher G-sec supply. That said,fundamentally a weak tax collection for the central governmentcontinues to be a concern and that still keeps the risk of 10-20bpsfiscal slippage in FY20 alive.

• As such we still remain concerned on fiscal and consequently, theoverall sovereign and quasi-sovereign bond supply for FY20. Somerisks also remain from the uncertainty around oil prices.

• Despite the fiscal and oil risks, we continue to be positive on fixedincome duration. While the valuation attractiveness has partlymaterialized, the spreads are still higher than long-term trends andcan further narrow, particularly when we expect easing monetaryconditions in India.

• We expect additional 25bps rate cut in 2019 (75bps delivered sofar) and liquidity to turn to neutral/ surplus by June end. Creditspreads have widened significantly and risk-reward looks favorablein that space.

Thank you

Disclaimer

This presentation is for information purposes only and is not an offer to sell or a solicitation to buy anymutual fund units/securities. These views alone are not sufficient and should not be used for thedevelopment or implementation of an investment strategy. It should not be construed as investmentadvice to any party. All opinions and estimates included here constitute our view as of this date and aresubject to change without notice. Neither SBI Funds Management Private Limited, nor any personconnected with it, accepts any liability arising from the use of this information. The recipient of thismaterial should rely on their investigations and take their own professional advice.

Mutual Funds investments are subject to market risks, read all scheme related documentscarefully.

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