india insights february 2017 monthly update on indian · pdf fileindia insights monthly update...

For Professional Investors and Intermediaries only. Not for further distribution.

India InsightsMonthly update on Indian markets

Rates on hold, but transmission continues to unfold

The Reserve Bank of India (RBI) at its monetary policy committee (MPC) policy meeting held on 8 February,

surprised the market by keeping rates on hold at 6.25% and changing its policy stance from accommodative to

neutral, despite calls for the central bank to support economic activity following the demonitisation shocker

Though headline inflation has improved continuously towards 3.2% yoy (lower food inflation has offset increases in

transport/fuel inflation), core inflation has remained sticky in the 4.8-5% range. The RBI cited tightening financial

conditions by global central banks, geopolitical concerns as well as the hardening commodity prices as reasons for

its decision to hold rates

A neutral policy stance still gives the RBI the flexibility in calibrating policy rates, but it caps the possibility of further

easing unless inflation (and/or growth) slows significantly below the baseline scenarios

The MPC also sees the current deflationary impact of demonetisation as transitory. They set their durable inflation

target at 4% with inflation expected to be in the 4-4.5% range in 1HFY18 and 4.5-5% in 2HFY18. The market

perceives the 4% target to be a bit of a stretch at the current point in time

Investors reacted to the surprise change with bond yields rising around 40bps (10Y at 6.86% as on 16 Feb 2017),

but equity markets were largely unmoved after the unexpected announcement, though the decision came as a

disappointment to investors who were hoping for at least a quarter percentage point reduction to rates

While it is arguable that the central bank had enough room to act, the RBI saw reduced need for additional rate cuts

as banks have substantially slashed their lending rates in recent weeks after receiving a surge in deposits following

the currency ban in November

February 2017

Summary The Modi government announced its third Union Budget on 1 February 2017. For a full analysis on the event, please

refer to our special write-up on the Union Budget

The Reserve Bank of India (RBI) at its monetary policy committee (MPC) policy meeting held on 8 February,

surprised the market by keeping rates on hold at 6.25% and changing its stance from accommodative to neutral

The jump in the composite PMI in January suggests that production and business activity could recover sequentially

into Q4 FY17, as the impact from demonetisation starts to fade

The equity markets rebounded strongly in January and early February, with the latest quarterly earnings largely in-

line with expectations and amidst the lack of big negative surprises in the budget announcement

We expect government bond yields to be range bound. State government bonds could see an increase in supply and

spreads could stay supported at current levels of 75bps over government bonds

Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC accepts no

liability for any failure to meet such forecasts, projections or targets. For illustrative purpose only.

This publication is intended for Professional Clients and Institutional Investors only

and should not be distributed to or relied upon by Retail Clients. The information

contained in this publication is not intended as investment advice or

recommendation. Non contractual document.

http://www.hkinfo.assetmanagement.hsbc.com/marketinsights/articles.asp#Union_Budget_of_India_2017-18


Equity market

The equity markets rebounded strongly in January and early February, with the latest quarterly earnings largely in-line

with expectations and amidst the lack of big negative surprises in the budget announcement. This has helped improve

investor sentiment with the market currently trading at pre-demonetisation levels

Markets paused amidst disappointing quarterly earnings from a couple of index heavyweights but investors were mostly

relieved to note that the impact of demonetisation on the operating performance of the companies has been muted,

barring a few exceptions.

Cyclical recovery in India is gathering steam and will get a big boost from the fall in interest rates, the benefits of which

are yet to percolate through the economy. The government’s actions have been supportive and decisive, though not

always implemented as expected and we have tried to build this into our base case analysis

We are overweight industrials which we expect to slowly benefit from the pick up in investment cycle. The portfolio has

moved from underweight to neutral on the real estate and consumer staples sectors with the recent price correction in

these stocks making them relatively more attractive

In financials, we favour private banks with exposure to the infrastructure sector and select well-capitalised public sector

banks. We are also exposed to housing finance companies which are likely beneficiaries of the union budget’s focus on

affordable housing

Factors to watch include:

- Remainder of Q3 FY17 earnings season will scrutinise for the impact of demonetisation on quarterly numbers

- Elections in the key state of Uttar Pradesh, along with 4 others in February-March, 2017. This electoral process will be

keenly followed by market participants as India’s ruling party, BJP’s performance in this election will influence its ability

to roll out reforms at a national level in the next two years. State poll results will be announced on 11 Mar 2017.

- GST implementation schedule. Next GST council meet scheduled for 18 Feb 2017.

Source: Bloomberg, HSBC Global Asset Management as of February 2017



Investment involves risks. Past performance is not indicative of future performance.

Rates on hold, but transmission continues to unfold (contd)

Even though the RBI is on hold for now, we expect continued transmission of previous rate cuts to translate to lower

lending rates. Between January 2015 and October 2016, the RBI cut rates 175 basis points but the benefit of those

cuts had barely trickled down till a few weeks ago. The weighted average lending rates (WALR) have only come

down by 0.85-0.90% as of February 2017, according to the RBI

In January, India’s biggest lender reduced its lending rate by up to 90 basis points, enabled by the demonetisation-

led liquidity surge, and many other banks followed suit and cut rates, giving consumers a much-awaited break

Earlier in February, RBI governor Urjit Patel also urged banks to extend the benefit of lower interest rates beyond

the retail sector and pare the cost of loans for companies

Source: HSBC Global Asset Management as of February 2017

Non contractual document

Demonetisation impact on market short-lived

S&

P B

SE

SE

NS

EX


Sector WeightingIndustrials Overweight

Consumer Discretionary Overweight

Financials Overweight

Information Technology Overweight

Real Estate Neutral

Utilities Underweight

Energy Underweight

Consumer Staples Underweight

Healthcare Underweight

Telecom Underweight

Materials Underweight

For reference only and does not constitute any investment recommendation. The views and opinions expressed herein are subject to change at any

time. These views may not necessarily indicate current portfolios' composition. Individual portfolios managed by HSBC Global Asset Management

primarily reflect individual clients' objectives, risk preferences, time horizon, and market liquidity.

Sector views

Sector focus

While some consumer staples stocks were adversely affected by the currency ban, the impact is estimated to be one-

off and transitory in nature and expected not to extend beyond the January-March 2017 quarter

On the other hand, Consumer Discretionary companies held strong, even in the previous quarter, indicating that the

shift from unorganized to organized sector is already underway in some segments. Going forward, we expect the shift to

formal economy to hasten, driven by policy focus on incentivising and stimulating digital transactions

Consumer lending picked up in the period following November 8, as evidenced by the growth in the retail loan books of

Indian banks. The uptick was led by unsecured personal loans, automobile loans and credit cards

We continue to remain overweight consumer discretionary names that will benefit from lower lending rates and

improving urban incomes

Source: Credit Suisse, as of February 2017

Note: Bank Base Rate refers to base rate under the old methodology from December 2014-March 2016 and from there on it shows MCLR (marginal

cost of funds based lending rate), which is the new methodology adopted from April 2016 onwards



Chart in focus

Source: HSBC Global Asset Management as of end-January 2017.


Improving transmission of rate cuts


Fixed income

The Union Budget announcement was well received by the market. Moody’s also reacted favorably and announced

shortly afterwards that the budget was “fiscally prudent”. Subsequent to the announcement we have seen inflows

from foreign investors into the debt market

The central government set the fiscal deficit for FY17/18 at 3.2%, down from 3.5% in FY16/17, though it was higher

than the FRBM Committee recommendation of 3%, on account of ongoing implementations such as the GST bill.

The government also increased its reliance on small savings to fund the deficit. This has ensured that the gross

market borrowings at INR 5.8trillion for FY17/18 is relatively flat to the previous year compared to expectations. With

all government bond auctions complete for the current financial year, the bond market should have a good short term

technical backdrop

Given the inflation target, we expect policy to be on hold for the near future, at least till the MPC sees the outcome of

the monsoon, which is a factor for food inflation (although the supply side measures implemented by the government

have helped mitigate this over the last two years). We expect government bond yields to be range bound. State

government bonds could see an increase in supply and spreads could stay supported at current levels of 75bps over

government bonds

From a strategy standpoint, while we continue to be overweight in government bonds, we have reduced duration by

trimming holdings in the 15Y+ segment and switching into the belly of the curve. We are overweight liquid and high

quality INR corporate bonds as they provide additional carry under the current stable interest rate environment. We

also continue to be underweight in USD bonds given expectations of Fed rate hikes

Currency

The budget overall is generally positive for the INR, given positive equity market reaction

We expect the INR to move in line with the Asian currencies and to remain range bound going forward given

improving fundamentals and strong FX reserves. Over the long term, INR continues to look attractive, as India’s

current account deficit is expected to remain relatively narrow and is well supported by increasing foreign direct

investment inflows

Source: Bloomberg, data as of 16 February 2017. Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in

any way. HSBC Global Asset Management accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only and does not

constitute any investment recommendation in the above mentioned asset classes, indices or currencies.


5.81

4.76

2.632.29 1.93 1.88

1.46 1.25 1.080.63

-0.07 -0.44

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

KR

W

TW

D

JP

Y

TH

B

SG

D

CN

H

INR

CN

Y

IDR

MY

R

HK

D

PH

P

% change against USD

INR to remain range bound


Indicator Latest

data

Consensus

data

Previous

data

Analysis

PMI (Composite)

- Manufacturing

- Services

49.4 (Jan)

50.4 (Jan)

48.7 (Jan)

NA 47.6 (Dec)

49.6 (Dec)

46.8 (Dec)

The jump in the composite PMI suggests that production and business activity

could recover sequentially into Q4 FY17, as the impact from demonetisation

starts to fade. However, the index staying below 50 indicates still subdued

near-term growth momentum. The rebound in manufacturing PMI was driven

by improved new orders and output. Input cost inflation reached a 29-month

high on higher global commodity prices and continued to increase at a quicker

pace than output prices, indicating margin pressures for manufacturers.

Industrial

Production (IP)

(% yoy)

-0.4 (Dec) +1.2 +5.7 (Nov) Weaker manufacturing output overshadowed a pickup in mining output and

solid growth in electricity production. Consumer goods IP contracted 6.8% yoy

(durables -10.3%), led by weakness in motorcycles, gems and jewellery, and

rice production. Capital goods production growth also dipped into negative

territory led by a sharp decline in commercial vehicles production. Meanwhile,

core/infrastructure-related industries’ output held up. Overall, the weak IP data

likely reflected short-term demand disruption from demonetisation prompting

companies to cut production, but we expect the impact to be transitory.

Local passenger

vehicle (PV)

sales (units)

265,320

(Jan)

(+14.4%

yoy)

NA 227,824

(Dec)

(-1.4%

yoy)

The rebound in PV sales in January indicates the receding impact of de-

monetisation, which led to markedly lower sales figures during November and

December, and that pent-up demand came through. However, the recovery in

overall auto sales growth (including the two wheelers) will likely be gradual.

Exports (USD)

(% yoy)

+4.3 (Jan) NA +5.7 (Dec) The deceleration in export growth on the back of 29% yoy growth in petroleum

exports was mainly due to subdued non-commodity exports, led by a decline

in gems & jewellery exports.

Imports (USD)

(% yoy)

+10.7

(Jan)

NA +0.5 (Dec) The acceleration in import growth reflected the base effect and was led by a

jump in oil imports. However, gold imports declined YoY and non-oil non-gold

imports, an indicator of domestic demand, slowed, suggesting continued

weakness in activity post demonetisation.

Trade Balance

(USD)

-9.8bn

(Jan)

NA -10.4bn

(Dec)

Higher commodity prices and an expected recovery in domestic demand into

FY18 could widen the trade deficit but the deficit should remain manageable.

Inflation (% yoy)

- CPI

- WPI

3.17 (Jan)

5.25 (Jan)

3.24

4.35

3.41 (Dec)

3.39 (Dec)

Deceleration in headline CPI inflation continued to be driven by food prices,

mainly vegetables, pulses and eggs. However, transport and communication

costs accelerated further, to 5.4% from 4.0% in December, due to the rise in

diesel and petro prices. Non-food CPI ex. fuel-related items stayed relatively

high at 5.1%. Cash shortage and demand weakness due to demonetisation

likely kept inflation subdued, but the impact is expected to gradually dissipate

as economic activity starts to normalise. Good progress in the sowing of winter

crops and active food management by the government will likely keep (food)

inflation contained in the near term, but the RBI pointed out upside risks from

rising global oil prices; exchange rate volatility; and the fuller effects of house

rent allowances under the 7th Pay Commission award. We also need to watch

for the impact of pent-up consumption demand on remonetisation, a rise in

rural wages, and higher minimum support prices for the agricultural sector.

Policy repo rates

(%)

6.25 (8

Feb)

6.00 6.25 (7

Dec)

The RBI changed the monetary policy stance to neutral from accommodative,

given (1) its commitment to bringing headline CPI inflation closer to 4.0% on a

durable basis; (2) its focus on core/underlying inflation, which has been sticky;

and (3) global uncertainties (higher oil and commodity prices and FX volatility,

etc.). A neutral policy stance still gives the RBI the flexibility in calibrating

policy rates, but it caps the possibility of further easing unless inflation (and/or

growth) slows significantly below the baseline scenarios. The RBI said that

scope still exists for transmission of previous policy rate cuts to bank lending

rates and assessed that the impact of demonetisation is likely to be transitory.

GDP at market

prices (quarterly,

% yoy)

Gross value-

added (GVA) at

basic prices

(quarterly, %

yoy)

7.3 (Jul-

Sep)

7.5

7.3

7.1 (Apr-

Jun)

7.3 (Apr-

Jun)

GDP growth pick-up was led largely by private consumption – helped by 7th

Pay Commission awards, one rank one pension (OROP), and good monsoon.

Investment stayed sluggish. Higher summer crop output boosted agriculture

GVA growth, but non-agriculture growth decelerated. Demonetisation is

causing short-term disruptions to economic activity, but activity should

normalise once the cash shortage eases. In particular, consumption could

revive quickly on remonetisation. A improvement in tax revenue collection and

lower bank lending rates amid strong deposit growth could support growth.

Current Account

Balance (CAB)

(quarterly,

balance in USD

and % of GDP)

-USD3.4bn

-0.6 (Jul-

Sep)

+USD2.7bn

+0.5

-USD0.3bn

-0.1 (Apr-

Jun)

Current account deficit widened in July-September from the previous quarter

following an increase in core imports but it remained well below levels in 2015.

Despite the recent rebound in oil prices and an expected wider trade deficit in

H2 FY17, we expect the CAD to remain manageable at slightly below 1% of

GDP in FY17, a mild improvement from -1.1% in FY16.

Data watch

Indicates improved data on month-on-month/quarter-on-quarter/year-on-year basis

Indicates worsened data on month-on-month/quarter-on-quarter/year-on-year basis

Indicates no change in data on month-on-month/quarter-on-quarter/year-on-year basis

Source: Bloomberg, HSBC Global Asset Management, as of February 2017


liability for any failure to meet such forecasts, projections or targets. For illustrative purpose only. Non contractual document

7.1 (Jul-

Sep)


Important information

For Professional Clients and intermediaries within the countries set out below; and for Institutional Investors and Financial Advisors in

Canada. This document should not be distributed to or relied upon by Retail clients/investors.

The contents of this document may not be reproduced or further distributed to any person or entity, whether in whole or in part, for any purpose. All

non-authorised reproduction or use of this document will be the responsibility of the user and may lead to legal proceedings. The material contained

in this document is for general information purposes only and does not constitute advice or a recommendation to buy or sell investments. Some of

the statements contained in this document may be considered forward looking statements which provide current expectations or forecasts of future

events. Such forward looking statements are not guarantees of future performance or events and involve risks and uncertainties. Actual results may

differ materially from those described in such forward-looking statements as a result of various factors. We do not undertake any obligation to

update the forward-looking statements contained herein, or to update the reasons why actual results could differ from those projected in the forward-

looking statements. This document has no contractual value and is not by any means intended as a solicitation, nor a recommendation for the

purchase or sale of any financial instrument in any jurisdiction in which such an offer is not lawful. The views and opinions expressed herein are

those of HSBC Global Asset Management and are subject to change at any time. These views may not necessarily indicate current portfolios'

composition. Individual portfolios managed by HSBC Global Asset Management primarily reflect individual clients' objectives, risk preferences, time

horizon, and market liquidity.

The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested. Past

performance contained in this document is not a reliable indicator of future performance whilst any forecasts, projections and simulations contained

herein should not be relied upon as an indication of future results. Where overseas investments are held the rate of currency exchange may cause

the value of such investments to go down as well as up. Investments in emerging markets are by their nature higher risk and potentially more

volatile than those inherent in some established markets. Economies in Emerging Markets generally are heavily dependent upon international trade

and, accordingly, have been and may continue to be affected adversely by trade barriers, exchange controls, managed adjustments in relative

currency values and other protectionist measures imposed or negotiated by the countries with which they trade. These economies also have been

and may continue to be affected adversely by economic conditions in the countries in which they trade. Mutual fund investments are subject to

market risks, read all scheme related documents carefully.

We accept no responsibility for the accuracy and/or completeness of any third party information obtained from sources we believe to be reliable but

which have not been independently verified.

Source: MSCI. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be

used as basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute

investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI

information is provided as an "as is" basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each

of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively 'the MSCI Parties')

expressly disclaims all warranties (including, without limitation, all warranties of originality, accuracy, completeness, timeliness, non-infringement,

merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI

Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other

damages. (www.msci.com)

HSBC Global Asset Management is the brand name for the asset management business of HSBC Group. The above communication is distributed

by the following entities: in the UK by HSBC Global Asset Management (UK) Limited, who are authorised and regulated by the Financial Conduct

Authority; in France, Italy, Spain and Sweden by HSBC Global Asset Management (France), a Portfolio Management Company authorised by the

French regulatory authority AMF (no. GP99026); in Germany by HSBC Global Asset Management (Deutschland) GmbH which is regulated by

BaFin; in Austria by HSBC Global Asset Management (Österreich) GmbH which is regulated by the Financial Market Supervision in Austria (FMA);

in Switzerland by HSBC Global Asset Management (Switzerland) Ltd, and this document is intended exclusively towards qualified investors in the

meaning of Art. 10 para 3, 3bis and 3ter of the Federal Collective Investment Schemes Act (CISA); in Hong Kong by HSBC Global Asset

Management (Hong Kong) Limited, which is regulated by the Securities and Futures Commission; in Taiwan by HSBC Global Asset Management

(Taiwan) Limited, which is regulated by the Financial Supervisory Commission R.O.C. (Taiwan); in India by HSBC Asset Management (India) Pvt

Ltd. which is regulated by the Securities and Exchange Board of India; in Canada by HSBC Global Asset Management (Canada) Limited, which is

registered in all provinces of Canada except Prince Edward Island; in the United Arab Emirates, Qatar, Bahrain, Kuwait & Lebanon by HSBC Bank

Middle East Limited which are regulated by relevant local Central Banks for the purpose of this promotion and lead regulated by the Dubai Financial

Services Authority. In Oman by HSBC Bank Oman S.A.O.G regulated by Central Bank of Oman and Capital Market Authority of Oman.; in

Singapore by HSBC Global Asset Management (Singapore) Limited, which is regulated by the Monetary Authority of Singapore. HSBC Global Asset

Management (Singapore) Limited, or its ultimate and intermediate holding companies, subsidiaries, affiliates, clients, directors and/or staff may, at

any time, have a position in the markets referred herein, and may buy or sell securities, currencies, or any other financial instruments in such

markets. HSBC Global Asset Management (Singapore) Limited is a Capital Market Services Licence Holder for Fund Management. HSBC Global

Asset Management (Singapore) Limited is also an Exempt Financial Adviser and has been granted a specific exemption under Regulation 36 of the

Financial Advisers Regulation from complying with Sections 25 to 29, 32, 34 and 36 of the Financial Advisers Act, Chapter 110 of Singapore; and in

Australia, this document is issued by HSBC Global Asset Management (Australia), the sales and distribution arm of HSBC global funds for

Australian investors and a division of HSBC Bank Australia Limited ABN 48 006 434 162, AFSL 232595, for HSBC Global Asset Management

(Hong Kong) Limited ARBN 132 834 149 (“HSBC”). This document is not available for distribution to retail clients (as defined under the Corporations

Act). HSBC Global Asset Management (Hong Kong) Limited is exempt from the requirement to hold an Australian financial services licence under

the Corporations Act in respect of the financial services it provides. HSBC Global Asset Management (Hong Kong) Limited is regulated by the

Securities and Futures Commission of Hong Kong under the Hong Kong laws, which differ from Australian laws.

Copyright © HSBC Global Asset Management (Hong Kong) Limited 2017 All rights reserved. No part of this publication may be reproduced, stored

in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior

written permission of HSBC Global Asset Management (Hong Kong) Limited.

Expiry date: 31/05/2017


india insights february 2017 monthly update on indian · pdf fileindia insights monthly update...

Documents