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Dear Investors,

The stock markets rallied by 4% during the month of January’17. Finally, the Sensex closed above pre demonetisation levels led by encouraging results by few sectors. Most emerging markets rallied during the month, with Brazilian markets up 13% during the month.

Globally, US president Trump was sworn in as the 45th president of the United States. The first week, saw Trump signing executive orders for building a wall on the Southern US border, pulled US out of the Trans Pacific Partnership trade pact and banned entry of residents from seven countries. From an India perspective, Trump policies on H1B visa is something to be watched for and could weigh on the IT sector performance here.

FIIs remained marginal net sellers in Jan with $152mn of outflows. Domestic investors continued to be buyers in the month, with net inflows of ~$697mn. Among DIIs, Mutual Funds led the buying with ~$803mn of inflows while Insurance companies accounted for ~$106mn of outflows.

The IIP in Nov’16 grew 5.7% vs. -1.8% in Oct’16. Manufacturing grew 5.5% vs contraction of 2.4% in Oct’16. Mining growth turned positive 3.9% after three months. Electricity recorded the best figure 8.9% in seven months. After having been negative for 12 months, capital goods grew 15%. Consumer durables continued to be healthy 9.8% and consumer non-durables grew 2.9%.

CPI inflation for Dec’16 fell further to 3.4% vs. 3.6% in Nov’16. Food inflation was 1.4% in Dec’16 vs. 2.1% the month prior, once again largely due to pulses and vegetable inflation. Vegetables and pulses were in deflation, at -14.6% and -1.6%, respectively. Fuel inflation hardened to 3.8%, from 2.8% the preceding month. Services inflation continued to rise at 4.6% in Dec’16. Core inflation was unchanged at 5% for a second month in a row. Both urban and rural inflation cooled to 2.9% and 3.8% respectively.

We expect the ultra-short term rates to trade in softening bias due to ample liquidity in the system and accommodative stance by RBI. However, the short term rates may harden in March due to redemption from money market funds and increase in supply of CP/CDs.  The CPI may stay below RBI’s projection of 5% by end of FY 17. However, the core inflation may remain sticky. Higher crude and commodity prices may pose upside risk to inflation whereas demonetization may help in softening it. We are expecting the yield curve to move down marginally. We do not expect a sharp rally across the curve. The interest rate is likely to trade in a narrow range. At best, RBI may deliver one rate cut in CY 17 due to lower growth.  The key risk to the bond market may be hike in US interest rate. If the US economy does well and FED hikes the rate faster than anticipated, it may cause disruption in the emerging markets including India. Risk may arise out of sharp increase in global crude and commodity prices.

The Election Commission announced the dates and phases of election for five states- Uttar Pradesh, Punjab, Uttarakhand, Manipur and Goa. UP, the most populous state will have polls conducted between 11th Feb and 8th March, Uttarakhand will go to polls on 15th Feb and Manipur between 4-8th March.  We had a good start. The quarter ahead will be dictated by the Union Budget and outcome of elections in UP and Punjab. Happy investing.
Sanjay Chawla
Chief Investment Officer
Source: Bloomberg, Economic Times
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