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From the MDs desk

Dear Friends,

The market is on the upswing this time round. And what a move this has been. In the 2017 Calendar year (up until May), the Sensex has moved up by around 17%. In the previous swing cycle, lasting from Sept-16 peak to December-16 bottom, the Sensex had declined by around 10%. Going ahead market will be volatile due to various local as well as global factors.

The current rally may be driven by combination of hope of earnings upgrade, liquidity and improving fundamental factors, despite the 6.1% GDP growth in Q4-FY17.

The market has seen strong buying support of around Rs 68000 cr during the current calendar year. To add to that, there is significant capital waiting on the side-lines for market dips, which is restricting the downslide. Mutual funds have a SIP book of more than Rs 4000 cr which they need to deploy each month. This will continue to provide depth and base to the market.

Moreover, the market is also buoyed by the fact that inflation rate has reached 2.99% (Apr-17) and many of the estimates suggest that it is likely to remain below the 3% level for most of H1-FY18. This effectively puts the real interest rates at around 3.5-3.8% (10 yr-CPI). As a result, an average Indian investor will find investing in financial assets more likely.

In fact the 12-15% yoy return in the last 3 years has created a satisfied investor class, who have become convinced on the wealth creating potential of equities. We therefore believe that increasingly higher number of investors would participate in the financial market over a period of time. Thus, there is a palpable liquidity surplus that is driving the market to newer heights.

Domestic liquidity inflows are also being supplemented by FIIs who have invested around US$ 10 bn in the Indian debt market and around US$ 7.8 bn in the equities market in the Jan-May period. With a normal monsoon outlook, the strengthening Rupee, and US Fed related risks moderating, the world increasingly sees Indian financial markets as a lucrative investment destination.

RBI may be increasingly inclined to change its position to benign and may augur rate cuts in the coming few quarters depending on continuity of softer inflation. This view takes even stronger ground when we notice that Rupee has been rising against most of the international currencies; and RBI may need to cut the interest rates to reduce the carry trade arbitrage. Having said that, the policy course would be majorly data dependent for next couple of months.

The 20 bps rally in 10 year gilt within a single month may have surprised many. We had recently given a call for increasing allocation to duration as we anticipated the rally to continue on the back of softer inflation. We remain of the view that a portion of allocation in duration is advisable throughout the rate cycle. The spread between the 10 and 30 year gilt has widened; and an adept fund manager may be able to generate alpha based on the rate outlook, curve movement and carry. We also believe that currently credit accrual funds provide better opportunity on a risk adjusted basis.

From equities view point, many retail investors may get discouraged when the volatility hits the market due to local & global factors. Regular & disciplined investing to capture this volatility will help investors utilise long term market opportunities to generate wealth.