Indian equities continued to outperform the Emerging Markets (EMs) beating concerns over increasing COVID-19 cases and building inflationary pressure.
Markets started on an upward trend led by supportive global cues. However, performance was choppy later as markets traded in line with global markets
on worries over increasing bond yields.
MSCI India (USD) rose 2.2% in March and significantly outperformed peers MSCI APxJ (-2.3%) and MSCI EM (-1.7%). Nifty50 and S&P BSE Sensex ended the month of March with 1.1% and 0.8% returns, respectively. Midcaps and Smallcaps outperformed the Largecaps by 0.2% and 1.6%, respectively in March.
Among broader markets, the Midcap index outperformed the Largecap index by 20 bps while the Smallcap index outperformed the Largecap index by 160 bps. BSE Midcap and BSE Smallcap indices ended the month of March with 1.0% and 2.5% returns, respectively.
Global equities traded higher but exhibited divergent regional trends. EM equities underperformed
(MXEF - 1.7%) as the resurgence of a virus outbreak and rising US yields wore down risk appetite.
In the developed space, European equities (SXXP +6.1%) outperformed relative to their US peers (SPX +4.2%). Bond yields continued to advance higher on accelerating growth/inflation expectations and positive economic data, despite downside surprise on US core inflation.
Worldwide, major indices saw positive trends except for Hang Seng. Euro Stoxx was the outperformer with 7.8% returns, followed by Dow Jones (+6.6%) and FTSE (+3.6%). Nikkei and Hang Seng were the worst performers with +0.7% and -2.1% respective returns.
Indian equity markets outperformed MSCI Emerging Market Index. IT, FMCG and Metals outperformed while Realty and Oil & Gas were notable laggards in March.
IT was the best performing sector with 8.7% returns outperforming Sensex by 7.8%. FMCG (7.6%), Metal (4.6%), Consumer Durables (3.4%), Power (2.3%) and Healthcare (2.3%) outperformed the Sensex.
Capital Goods (-2.0%), Auto (-3%), and Bank (-3.7%) underperformed Sensex. Realty and Oil & Gas were the worst performing sectors with (-4.2%) and (-4.7%) returns, respectively.
FIIs recorded monthly inflows of US$2.6 bn into Indian equities in the month of March vs. inflows of $3.0 bn in February taking FY21 net inflows to $37.8 bn. This is the 6th consecutive month of inflows.
DIIs turned net equity buyers in March post a five-month consecutive outflows streak with inflows of US$756 mn in March vs. outflow of US$986 mn in February taking the FY21 tally of outflows to $18.2 bn.
Within DIIs, both Mutual funds and insurance funds were net sellers. Mutual funds were net equity sellers at $17 mn while insurance funds sold $331 mn of equities in March. Mutual fund and insurance fund flow data is as of March 16, 2021.
Headline CPI for February at 5% was in-line but the composition is becoming uncomfortable from a policy perspective, with easing in food inflation being offset by firmer core inflation. Food prices rose 0.1% MoM in Feb on the back of contraction last month. Core-Core momentum (core inflation-ex-gasoline and diesel) remained sticky and elevated at 0.5% MoM both in January and February. Composite PMI increased for a second straight month, rising by 1.5 pt MoM to 57.3 in Feb. The increase was led primarily by a sharp rise in services (+2.5 pts), which printed at 55.3, the highest in a year. The manufacturing index retreated gradually (-0.2 pts), but off a high base and still printed at 57.5. With the link between mobility (activity) and virus proliferation breaking down as consumers continue to normalize, services activity is mean-reverting. Forward-looking new orders also remained strong across both manufacturing and services.
IIP printed below expectations coming at -1.6% YoY for Jan. While it was a downside surprise, sequentially IP still rose 0.7% MoM on the back of the upwardly revised 2.1% increase last month. In level terms, industrial production continued to inch up and was 97% of its pre-pandemic level in January compared to 96% in December. Production for consumer durables (99%) is close to pre-pandemic level and non-durables (93%) has fallen behind pre-pandemic levels.
The trade deficit narrowed to US$12.6 bn in February, from US$14.5 bn last month. While domestic demand continues to firm, external demand appears to be consolidating after a sharp run-up. India’s FX reserves are close to their all-time peak at $582 bn as of March 19, 2021. FX reserves have decreased by US$1.6 bn in the last 4 weeks. INR gained 0.5% and ended the month at 73.11/$ in March.
Benchmark 10-year treasury yields averaged at 6.19% in Mar (11 bps higher vs. Feb avg.). US 10Y yields are at 1.74% (34 bps MoM, +107 bps YoY). Brent oil price fell 3.1 % MoM in Mar after a remarkable 17.5% MoM gain in February.
Fiscal deficit for Apr-Feb came at INR 14.1 tn or 76% of the budgeted FY21 deficit (INR 18.5 tn). This compares to 111% reached during the same time frame in FY20.
MSCI India outperformed MSCI EM by 3.9 ppts and ranked 10 performance-wise in the EM cohort. This was on the back of a strong performance seen in the previous month. India’s performance rank in EM stood at 10th (among 27 EMs) vs. 6th in February. The BSE Sensex continued to underperform the broader market in March, while the MSCI India Growth index underperformed the Standard and Value indices for the 4th month in a row.
The daily number of new cases (7DMA) has increased from 11k in mid-February to 62k now. The first wave peaked at 93k in mid-September. The positivity rate (new cases per 100 tests) has more than tripled over the last 6 weeks from 1.6% in mid-February to 5.9% now. Up to now, there does not appear to be a material impact on national mobility and activity. Ramping up the vaccination drive could effectively break the link between mobility/activity and the proliferation of COVID-19 cases.
Improvement in economic activity is reflected in GST collections as March witnessed all-time high GST revenue at Rs 1.24 tn mark. This was the 6th consecutive month with collections of more than Rs 1 tn. The sustained GST collection and several other data points show the economy moving close to normal across most segments. Other high-frequency data points for March also reflect sustained growth in YoY terms, indicating a favorable growth outlook in the near terms. E-way bill for March has achieved a new milestone of 7.12 cr. This is the highest number of e-way bills generated in any month during last three years journey of E-way bill system. Overall, the recent surge in COVID-19 cases are less likely to impact the growth momentum, which should strengthen further, supported by normalization of economic activity, helped by the pickup in the vaccination drive. Apart from a boost from normalization in activity levels, the policy mix (monetary/fiscal) is supportive of growth, which, coupled with a positive outlook for global growth, bodes well for growth recovery to broaden and continue. Overall, we are at the cusp of the economic recovery cycle given the government efforts towards capex targeted through both Budget 2021 and PLI schemes rolled out for 13 sectors.
Volatility across asset classes, both globally and in domestic markets continued. Fed kept policy rates and the pace of asset purchase program unchanged. However, they
acknowledged pick-up in both growth and inflation. With markets wary of higher inflation, US Treasury yields saw a sharp movement upwards. The 10-year benchmark moved
up by around 30-35 bps over the month. Crude prices after a sharp rise in February remained broadly range-bound in March.
On the domestic front, headline inflation inched higher to 5.03% vs 4.06% the previous month. Core inflation continued to remain sticky at 5.9% vs 5.7% the previous month. The inflation targeting regime, which was due for a review at the end-March, has been retained at 4% (+/-2%) for the next five years. The CRR dispensation of 1% which was provided last year, has been partially pulled back with Banks required to keep CRR at 3.5% currently. However, this might open up more room for OMO purchase by RBI. The 10-year G-Sec moved from 6.23% to 6.18% over the month. The Government cancelled the last scheduled auction in March (due to high cash balance position), which resulted in 10-year yields falling to 6.12% in the interim.
The government announced the borrowing calendar for H1 FY2022, where gross borrowing for H1 FY2022 was estimated at INR 7.24 lakh Crs (~60% of the budgeted target for FY2022). The supply in the 10-year segment was on expected lines, however, supply in the longer end was higher than expected, keeping that segment under pressure. With a sharp rise in COVID cases recently, expectations have built of the accommodative stance to remain longer than earlier expected. This led to short end rates falling in the recent past. With supply-side pressures on long tenor Corporate bonds abating and heavy investments by long only investors in year-end, spreads of long tenor Corporate bonds vis-à-vis G-Sec also compressed.
The 10-year benchmark G-Sec yield closed at 6.18%, down by 5 bps from its previous close of 6.23% while that on the short-term 1-year bond ended 5 bps lower at 3.85%. In the corporate bond segment, yields fell across the yield curve over the month. The 10-year AAA bond yield ended 27 bps lower at 6.85%, while the short-term 1-year AAA bond yield ended 15 bps down at 4.20%. The spread between 1-year and 10-year, AAA bond narrowed. Within the short-term segment, the yield on 3-month commercial paper (CP) was down 10 bps to 3.5% while 1-year CP yield was down 5 bps at 4.25%.Monetary Policy
The Monetary Policy Committee (MPC) came out with their bi-monthly policy statement today.
Some of the key announcements are as follows:
• The MPC members unanimously voted for keeping the policy rates unchanged
• The MPC also unanimously decided to continue with an accommodative stance as long as necessary to sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remained within the target going forward
• As a fall out of the growth-driven Budget by the Government, demand has picked up. However, the recent surge in COVID infections has added uncertainty to the growth outlook. To counter spillovers to the economy at large, fiscal and monetary authorities will stand ready to act. Considering these factors, the MPC has retained its expectation of real GDP growth at 10.5% for FY2022
• The projection for CPI inflation has been revised to 5% for Q4 FY2021, 5.2% in H1 FY2022, 4.4% in Q3 FY2022 and 5.1% in Q4 FY2022
Unlike previous policies where the MPC gave a time-frame based guidance on accommodative stance, this time around they have dropped the time frame based guidance, and given more outcome-based guidance, possibly because of the uncertainty around the evolving impact of the pandemic on growth.
The Governor also made two very important announcements in his address today:
• Given the success of the Variable Rate Reverse Repo (VRRR) auctions and the rising surplus liquidity in the system, RBI announced to further conduct VRRR auctions of longer maturity. However, the RBI reiterated that this should not be considered as liquidity tightening
• The Governor announced a secondary market G-Sec acquisition program (G-SAP 1.0), where the RBI will upfront commit to a specific amount of open market purchases of G-Sec in order to ensure orderly evolution of yield curve. For Q1 FY2022, G-SAP of INR 1 lakh Crs will be conducted, the first of which will be conducted for an amount of INR 25,000 Crs on April 15, 2021. Separately, the RBI will continue to use other tools under LAF, long term repo/reverse repo auctions, FX operations, OMOs and special OMOs as and when required
The G-SAP program is essentially a commitment from the RBI to provide durable liquidity to the system irrespective of market conditions.
Some of the other non-policy related announcements are as follows:
• The on-tap TLTRO scheme provided to Banks to lend to specific sectors which were allowed till March 31, 2021, has been extend by a period of 6 months
• Special liquidity facility worth INR 50,000 Crs will be provided to All India Financial Institutions (NABARD, NHB and SIDBI) for FY2022
• Bank lending to NBFCs (for on-lending to Agri/MSME/Housing) which were allowed under PSL will be extended till Sep 30, 2021
The Governor reiterated that RBI stands committed to ensuring ample system liquidity in consonance with the accommodative stance of the MPC, and RBI will continue to preserve financial stability and insulate domestic financial markets from volatility arising from global spillovers.
Post policy, G-Sec upto 5-year segment remained neutral to negative, however beyond 5 yr segment, yields were down by 3-7 bps. Money market papers were up ~10 bps, 2-3 yr Corporate bonds were up 5-10 bps, however, the 5-10 yr segment was down by up to 5bps. With longer tenor VRRR pushing short end rates higher and G-SAP program providing predictability on G-Sec supply absorption by RBI and in turn supporting longer end rates, markets are now expecting the yield curve to flatten. However, it will have to be seen how the G-SAP is conducted and which segments on the curve does the RBI target.
Overall, the RBI governor has been very articulate in his communication that the RBI and MPC stand ready to support growth in the face of the second wave of the pandemic, and will ensure that the bond market functions in an orderly manner, with adequate provision of liquidity. While this does provide much-needed comfort to market participants, especially for yields at the longer end of the curve via the newly announced GSAP 1.0 the program, the announcement regarding the longer tenor ariable rate reverse repos (VRRR) does suggest that RBI is moving in a calibrated manner towards nudging up levels at the shorter end of the curve. Yields at the extreme short end have been trading close to the reverse repo rate with hardly any reward in the 0-6 month part of the curve. Effective implementation of the VRRR can gradually push up the term premia in the money market part of the curve, leading to a gradual flattening of the yield curve, which so far has been extremely steep.
Yields in the short to medium (2-3 years) part of the curve have moved higher over the past few months, thereby offering better value for investors looking for some yield pickup over other money market segments. For investors with a long term horizon of 3 years and more, the steepness of the curve – especially between the 3-year and 7-year segment of the curve – is very attractive, and yields in the 7-year segment (where L&T Triple Ace Bond Fund is positioned) offer a substantial cushion to be able to offset the impact from the upward move in rates which is likely over the coming few years. Spreads on less liquid AAA securities and some of the good quality AA securities still remain attractive, and in an environment of interest rates trending higher, a strategy that delivers better yield pickup through judicious exposure to such securities, while still keeping duration moderate – are well suited for investors with a 3 year + horizon. L&T Resurgent India Bond Fund is well-positioned in this segment.
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