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Dear Investors,

Broader markets rallied registering a new high during the month. Markets rallied by another 4% during the month of May, with year to day gains at 17%. FPIs reversed flows with net buying of USD 1.35bn in equities while mutual funds continued to be buyers with investment of USD 1.37bn during the month.

Key events, were announcement of GST rates by the GST council, satisfactory 4Q results and release of revised Index of Industrial Production (IIP) numbers. GST is to be rolled out from 1st July 2017. Government has announced GST rates for most of the goods and services. Most services have been placed at 18% rates and GST on most goods are in the range of 12-28%. These are largely on expected lines.

The Central Statistics Office (CSO) revised the base year for computing the IIP to 2011-2012 from 2004-2005 previously. Key changes in the new series is a higher weightage for manufacturing (77.6% vs 75.5%) and reduction in weight of Electricity. Weight for mining remains the same. As per data released, IIP rose to 5% in the financial year and 2.7% in March (1.9% for February). Under the old series with a 2004-2005 base year, IIP rose by a mere 0.7% in the full year and 2.5% in March.

CPI inflation dropped to 2.9% (3.9% last month) on the back of drop in both food and core inflation. Food inflation declined to 1.2% in April (2.5% in March) on the back of continuing drop in pulses prices, decline in cereals prices and also some base effects. Food inflation had averaged at more than 7% in Q1 FY 2017 after which it started to decline with absolute drops in pulses and vegetable prices. Pulses prices witnessed a drop of 2.2% month on month in April, leading to a -16% YoY number for the month. Food prices are likely to stay muted till the base effect reverses and pulses prices are normalised. Expected normal monsoons may also mute the rise.

The Indian Meteorological Department (IMD) announced an early onset of monsoon this year. IMD last month had forecasted a normal monsoon with forecast pegged at 96% of long period average. 

Inflation fell to 2.99% YoY in April as against market expectation of 3.3%. Food inflation softened to 1.2% YoY in April from the prior reading of 2.54% YoY mainly due to lower pulses and vegetable prices. Core inflation also softened due to softening of transportation and communication. Overall the inflationary pressure has receded and it may remain benign in next two months. Given the expectation, inflation is expected to significantly undershoot RBI’s first half inflation expectation of 4.5% YoY. In the second half inflation may move up sharply due to base effect and better growth prospect. In the next policy, RBI may tone down its hawkishness stance but unlikely to cut rates. RBI may be on a long pause however any future rate action depends on growth inflation dynamics. The rates may trade on softening bias in next two to three months on benign inflation readings.

Markets have rallied over the last two months. 4Q results seasons were largely satisfactory and with a normal monsoon, the buoyancy may continue. Key to watch would be GST implementation and how quick companies are able to adjust to the new taxation regime. We do anticipate some short term disruption in trade. This may impact the earnings for couple of quarters. With underlying demand being intact, we expect this to be transient. Structural growth story for India continues to be resilient and supported by strong liquidity-both domestically and from FII. We remain constructive on equities.

Sanjay Chawla
Chief Investment Officer
Source: Bloomberg, Economic Times
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