Budget, Economy and Markets July 2019 Union Budget 2019-20 (Final) - - PowerPoint PPT Presentation

Budget, Economy and Markets

July 2019

Union Budget 2019-20 (Final)

Back drop

Source: SBIMF Research;

Clamor for fiscal policy support Weak tax revenue due to initial challenges in GST and weak economic activity Mounting subsidy payables Need for continued infrastructure support Need to address financial sector challenges Expectation of higher allocation in social sector schemes

Economic backdrop and market expectations ahead of Budget

Interim vs. Final budget: What Changed (and What not)

Source: indiabudget.nic.in, SBIMF Research; NB: RE is revised estimated and P is provisional

• The final budget for 2019-20 retained the fiscal deficit, aggregate receipts and expenditure target presented in interim budget.
• Nominal GDP projection has seen marginal upward revision, leading the fiscal deficit as (% of GDP) to come down to 3.3% vs.

3.4% during interim budget.

• Both the revenue and capital expenditure have been kept unchanged.
• The contours of receipts, however, has been changed. Tax collections have been revised down while non-tax revenue and

disinvestment targets for FY20 has been scaled up.

Budget in Charts

Fiscal deficit targeted at 3.3% in FY20 Revenue and primary deficit to be maintained at similar levels Optimistic receipts growth targets for FY20 Net market borrowings for dated securities broadly at similar levels since FY12 (nine years)

Source: indiabudget.nic.in, SBIMF Research

Receipts shortfall led to expenditure cut in FY18 and FY19

Source: indiabudget.nic.in, CMIE Economic Outlook, SBIMF Research

FY18 and FY19 saw significant shortfall in revenue… …leading to expenditure cut

• The shortfall in receipts is primarily emanating from weakness in indirect tax revenue
• Expenditure cuts are being met partly via postponing the subsidy dues

Actual minus Budgeted Receipts Actual minus Budgeted Receipts

Government resorts to non-tax means to garner revenue

Source: indiabudget.nic.in, CMIE Economic Outlook, SBIMF Research

Central Govt. tax buoyancy is falling short of the desired 12% (of GDP) seen in FY08 Disinvestment and dividend/profit transfer has increased

• Rs. 3.1 trillion has been collected via divestment between

FY15-FY19 vs. Rs. 2.1 trillion garnered between FY92 -FY14 Dividend and profit transfer has risen 3x since FY13

5 5 3 8 3 3 4 8 6 8 9 9 11 7 8 7 13 7 12 9 9 9 11 11 12 12 12 12 13 2 4 6 8 10 12 14 FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 BE Disinvestment & Dividend (% of Centre's Total Receipts)

LTA since FY92: 8.4%

FY20 final tax growth still a tad optimistic

Source: indiabudget.nic.in, CMIE Economic Outlook, SBIMF Research

Optimistic FY20 tax growth assumptions

• The tax assumptions for FY20 have been brought down (from

the interim budget) in income tax and GST by Rs. 510 billion and Rs. 979 billion respectively.

• The revised monthly run-rate for GST collection stands at Rs

1.03 trillion for remaining nine months, which is in line with Rs 1.05 trillion garnered monthly during April-June 2019. Total GST projection (SGST+CGST+IGST+Cess) for FY20 now stands at Rs. 12.4 trillion, 5.3% higher than Rs. 11.8 trillion collected in FY19.

• Excise collection targets have been pulled up on the back of

Rs.2/liter hike on petrol and diesel.

• Despite these sub-categories tinkering, 18% growth expected

for FY20 overall gross tax revenue looks a tad bit ambitious. Gross tax to GDP is projected at 11.7% in FY20 vs. 10.9% in FY19.

• There has been minor upward revision to dividend/profit

receipts (Rs. 1635 billion), but may be achievable. We expect RBI to make a dividend transfer of at least Rs. 1 trillion in this fiscal.

• To sum, the revenue assumptions are still on the ambitious

side.

• Markets’ hope hinges on improving the GST compliance. The

final decision on RBI capital reserves and the momentum in actual disinvestment will also be closely watched. GST assumptions brought down; Rs. 1.03 trillion needs to be collected on monthly basis for remaining nine months.

Expenditure (as % of GDP) lower compared to historic trend

Source: indiabudget.nic.in, SBIMF Research

Expenditure (as % of GDP) budgeted to increase marginally; though still lower when compared to historic trends Subsidy outgo kept unchanged in FY20 despite mounting Food Corporation of India (FCI) debt Interest Outgo sticky at 3.1-3.2% of GDP Capital expenditure (% of GDP) kept unchanged while revenue expenditure (% of GDP) increased

Expenditure through resources of PSEs

Source: indiabudget.nic.in, SBIMF Research

Extra budgetary sources are expected to fund expenditure summing to 2.5% of GDP vs. 1.8% five years back Expenditure (Budget and Resources of Public Sector Enterprises combined) is budgeted to come down

• Government has brought down its expenditure plans through internal and extra budgetary resources (IEBR) of PSEs. Most of the

reduction in final numbers is on account of reduced borrowing from FCI via others.

• This may be difficult to achieve given that no additional subsidy payment has been apportioned for FCI in the final budget.

Markets are facing higher borrowing from PSEs

Source: indiabudget.nic.in, SBIMF Research

Expenditure through resources of PSEs remains high Market borrowings from PSEs are high Internal resources of PSEs have decreased while borrowings via bonds, ECBs and other have increased sharply

Rural Oriented Social Sector Schemes

Source: indiabudget.nic.in, SBIMF Research;

Various rural oriented social sector schemes is projected to see an outlay of Rs. 3.2 trillion 29% higher than 2.5 trillion in FY19 RE, primarily due to Rs. 750 billion penciled for Farmer income support scheme in FY20 in Rs billion FY18 FY19 RE FY20 BE- Final Income Support Scheme

• 200 750

Mahatma Gandhi National Rural Employment Guarantee Program 552 611 600 National Health Mission - Rural 262 252 270 Pradhan Mantri Gram Sadak Yojna 169 155 190 Pradhan Mantri Awas Yojna (PMAY) - Rural 226 199 190 Interest Subsidy for Short Term Credit to Farmers 130 150 180 Crop Insurance Scheme 94 130 140 Green Revolution 111 118 126 National Rural Drinking Water Mission 70 55 100 Swachh Bharat Mission - Rural 167 145 100 Others 358 447 538 Total rural oriented social sector schemes 2,139 2,462 3,184 % growth 15.1 29.3

Infrastructure Oriented Spending

Source: indiabudget.nic.in, SBIMF Research; NB: * IEBR stands for Internal and Extra Budgetary Resources

Infrastructure spending is pegged at Rs. 6.4 trillion (adding both Budgetary support and IEBR) vs. 6.3 trillion in FY19* in Rs billion FY18 FY19 RE FY20 BE- Final Budgetary IEBR Total Budgetary IEBR Total Budgetary IEBR Total Ministry of Railways 452 586 1,038 551 858 1,409 680 941 1,621 Ministry of Road Transport and Highways 610 505 1,115 786 620 1,406 830 750 1,580 Ministry of Housing and Urban Affairs 401 189 590 430 197 627 480 194 674 Ministry of Power 140 594 734 156 732 888 159 424 583 Rural-Housing 226 73 299 199 146 345 190 262 452 Telecom (ex-establishment expenditure) 123 118 242 92 157 249 145 139 284 Department of Atomic Energy 151 66 217 170 78 248 169 82 251 PMGSY (Part of Rural roads allocation) 169 - 169 155 - 155 190 - 190 Ministry of Drinking water and sanitation 239 - 239 200 150 350 200 - 200 Ministry of New and Renewable Energy 36 105 141 51 108 160 53 124 176 Others 165 145 310 267 184 451 213 210 423 Total Infrastructure spending 2,712 2,382 5,094 3,057 3,230 6,288 3,309 3,125 6,434 % growth 11.9 18.4 14.9 12.7 35.6 23.4 8.2

• 3.3

2.3

Financing of Fiscal Deficit

Source: indiabudget.nic.in, SBIMF Research;

Government kept gross and net borrowings unchanged from interim budget

• The government kept the fiscal deficit target unchanged in absolute terms and hence, gross and net market borrowing were also

kept unchanged at Rs. 7.1 trillion and Rs. 4.2 trillion (as were projected in interim budget). Thus, 60% of fiscal deficit will be financed via long-term market borrowing. Short term borrowings is pegged at a net of Rs 250 billion (4% of fiscal deficit).

• Net government borrowing (summing both dated and short-term) has been hovering around Rs. 4.5 trillion since FY12 (nine years)

even as absolute fiscal deficit has risen from Rs. 5.2 trillion to 7 trillion during the same time. This is primarily due to increased recourse to Small savings as state gave up their rights to borrow from NSSF pool and NSSF pool itself started to show handsome growth in AUM (~12%) since FY16 vs. ~5% during FY10-FY15.

• Small savings fund will finance another 18% of fiscal deficit (Rs. 1.3 trillion)
• Public account and cash drawdown is expected to fund 8% and 7% of fiscal deficit respectively.
• Budget proposed the idea of financing a part of fiscal deficit through dollar bonds. While market awaits more clarity on this decision

and the borrowings for FY20 does not pencil any foreign currency borrowings as yet, it would have positive implications once

• implemented. It can take some pressure off the domestic supply and bring about more discipline on the dynamics of fiscal deficit.

National Small Saving Funds

Source: indiabudget.nic.in, SBIMF Research;

Aggressive projections in National Small Saving Funds (NSSF) AUM growth in FY20 Since FY17, centre and other agencies are making increasing use of NSSF funds as states relents its ability to borrow from NSSF NSSF Application of Funds- Rs. Billion FY17 FY18 FY19 BE FY19 RE FY20 BE Centre 674 1,026 750 1,250 1,300 State

• 324 -314 -316 -305 -310

Other Agencies 700 920 1,001 1,227 1,095 Total Application of Funds 1,050 1,632 1,435 2,172 2,085

Key measures of the budget (1/2)

Source: indiabudget.nic.in, SBIMF Research;

Key measures Highlights Measures to attract foreign capital

Simplification of KYC documentation, allowing FIIs in listed debt securities raised by REITs and InvITs, proposal for dollar bonds by sovereign, proposal to ease norms for FDI in sectors like single brand retail, aviation and media, and tax incentives for large manufacturing

Recapitalization of PSU banks

Proposal to provide Rs 700 billion of recapitalization for state-owned banks (via the issuance of re-cap bonds)

Liquidity support for NBFCs

Government to give 10% first loss guarantee for 6 months to PSU banks for ‘highly-rated’ pools of ‘financially sound’ NBFCs

Housing finance companies (HFC)

Moving regulation and supervision of HFCs from National Housing Bank to RBI.

Buyback of shares

Imposing a tax of 20% on buyback of shares in line with dividend distribution tax (DDT)

Float recommendations to SEBI

Proposal to increase public shareholding threshold from 25% to 35% for listed companies. SEBI to consider this proposal.

Affordable Housing

Additional income tax deduction of Rs 150,000 (over and above Rs 200,000 currently) for interest paid on loans borrowed up to 31st March, 2020 for purchase of an affordable house valued up to Rs 4.5 million

Measures for external account

The budget resorted to import substitution measures (by raising import duties) and incentivized new-age manufacturing (such as in electric vehicles). Intentions were announced to develop tourism and attracting foreign students as a means to improve foreign receipts

Proposal on disinvestment

Proposed to relax the minimum threshold requirement of 51% Government ownership for a PSU

Key measures of the budget (2/2)

Source: indiabudget.nic.in, SBIMF Research;

Key measures Highlights Hike in import duty

Proposal to increase a). customs duty on gold and other precious metals to 12.5% from 10%, b). 5% customs duty on imported books and increase in duty

• n auto parts, synthetic rubber, PVC, vinyl flooring and tiles, c). withdrawal of

duty exemption on certain electronic items now manufactured in India, d). customs duty was reduced on certain raw materials used in artificial kidney, disposable sterilized dialyzer, and fuels for nuclear power plants.

No meaningful monetary out-go on rural consumption

Budget refrained from any significant boost to rural spending capabilities.

Excise duty hike

Rs 2/ litre hike on petrol and diesel which will now apply on nine months of FY20 and help with an additional revenue of Rs. 225 billion (Rs. 1/litre hike on petrol and diesel leads to an annual excise duty gain of Rs. 150 billion) .

Increased Surcharge on income tax

Increased surcharge leading to effective tax rise of 3% on individuals with taxable income between Rs. 20-50 million and a of 7% for those with income above Rs. 50 million. Peak income tax at 42.7% for taxable income above 50 million (highest since 1992).

EQUITY MARKET

Global equity market snapshot: June 2019

Source: Bloomberg, SBIMF Research

Performance in June 2019 (local currency returns) Performance Year-to-Date (local currency returns) Performance in June 2019 (US$ returns) Performance Year-to-Date (US$ returns)

Indian stock market sector-wise returns: June 2019

Source: Bloomberg, SBIMF Research

• Nifty and Sensex were down nearly 1% each during the month. In June, returns across the capitalization curve were negative.
• On YTD basis, both Nifty and Sensex were up 9%. Large caps have outperformed the mid caps and small caps thus far.
• Consumer durables and power were sector outperformers while oil and gas and healthcare were sectoral laggards during the
• month. On YTD basis, consumer durables and real estate are sector outperformers while auto and healthcare are sectoral

laggards. Performance in June 2019 (local currency returns) Performance Year-to-Date (local currency returns)

Source: CMIE economic outlook, SBIMF Research; NB: 1. Green denotes improvement in the growth and Pink indicates a

• moderation. 2. We use some subjectivity in categorizing the data by looking at both the trends in the recent months as well as

trends relative to long term average. 3. We have shifted to steel consumption data from steel production data since Jan 2019.

High frequency activity indicators continue to remain weak

Source: IMD, CMIE economic outlook, SBIMF Research; NB: Dark blue (Large Excess 60% or more), Blue (Excess 20% to 59%), Green (Normal -19% to 19%), Red (Deficient -59% to -20%), Yellow (Large Deficient -99% to -60%)

Sharp deficiency in Monsoon (21% below normal)

As of 7rd July, 23 out of 36 states and UTs i.e. 64%

• f the country is witnessing deficient rainfall

Weak monsoon is leading to slow progress in sowing The total sown area as on 5 July 2019 - in Lakh hectare Crop Area sown in 2019-20 Area sown in 2018-19 %y-o-y Rice 52 69

• 24

Pulses 8 28

• 72

Coarse Cereals 37 51

• 26

Oilseeds 34 59

• 43

Sugarcane 50 51

• 3

Jute & Mesta 7 7

• 5

Cotton 46 55

• 16

Total 234 320

• 27
• Amidst deficient rainfall (21% below normal), Kharif sowing declined

by 27% y-o-y as of 5th July. Sowing for all Kharif crops are lower than the corresponding period last year. Pulses are notably weak.

• We have penciled mean-reversion in food prices, however, if the

sowing remains weak through-out the season, it can lead to sharper than expected price rise in some crops (especially, pulses).

• That said, most of the other crops (particularly, cereals) have ample

stock with the government and in the market and hence, the net impact on the farm income may be negative.

• In addition, poor spatial distribution may affect the yield of the crops

which may also adversely affect the overall farm income.

Consumption demand continues to stay weak in April-May

Source: CMIE Economic Outlook, Capitalline, SBIMF Research

Domestic sales of two-wheelers and cars, which act as a good gauge for rural and urban demand, have been moderating Domestic air traffic growth has moderated recently; partly also due to supply side shocks FMCG Sales growth moderated to 9.7% y-o-y in Q4FY19

• vs. 12.5% y-o-y in Q3 FY19

Domestic production growth of both consumer durables and non-durables have softened

Industrial output weaker than trend

Source: CMIE Economic Outlook, SBIMF Research

Domestic industrial production has moderated primarily due to softer manufacturing sector growth June PMI raises concerns in both manufacturing and service sector Exports growth has plunged sharply as compared to FY18 and FY19 levels Non-Oil Non-Gold imports growth is moderating on account of weak domestic demand

Improvement in capacity utilization: one positive element

Source: RBI, FICCI, SBIMF Research: *NB: CU for March 2019 values is based on the early results of RBI’s OBICUS as mentioned in the 2nd monetary policy statement 2019-20; **Green indicates capacity utilization is higher than long term average (LTA), yellow indicates similar to long term average (+/- 2 LTA) and red indicates lower than LTA

Capacity utilization improved to 77% by Q4 FY19 end; higher than its long period average* FICCI survey suggests relatively broad-based improvement in capacity utilization in Q4 FY19 (barring leather) **

• There are signs of softness in investment related activity in the recent months which tests our expectation of pick-up in investment

activity in 2019.

• A part of softness can be due to election related factors (slowdown in government infrastructure related orders ahead of election,

postponement of business capital spending plans). As the election is over, some of these shelved spending should come back.

• Some other key investment related indicators are encouraging. Capacity utilization (CU) has improved.
• As per the FICCI, capacity utilization has improved across multiple sectors in Q4 FY19. Paper, metals, electronics & electrical,

auto and cement have seen particularly sharp rise in utilization levels.

• The deleveraging exercise undertaken for last three years (FY16-FY18) has put the corporate balance-sheet in a relatively better

place to undertake capacity expansion. Now, it all hinges on improvement in the economic cycle. Capacity Utilization (in %) Avg since FY13 Q3 FY19 Q4 FY19 Auto 75 80 80 Capital Goods 71 74 74 Cement 74 60 80 Chemicals & Fertilizers 79 74 77 Textiles 81 80 82 Electronics & Electricals 67 68 72 Leather & Footwear 66 60 60 Metals 75 74 88 Textiles Machinery 59 60 60 Paper 83 80 95

Source: CMIE economic outlook, SBIMF Research,

Growth momentum unlikely to see any sharp recovery in FY20

FY20 GDP growth is expected to be around 6.5-6.8%

• India’s economic activity has moderated and may remain so in

1H 2019.

• In recent months, the negativity around India’s growth outlook

has stepped-up. It stems from a) Signs of slowdown in global growth, b) Strains in government’s finance which inhibits government’s ability to provide any major stimulus, c) Evidences of weaker sale in various consumption items (such as auto sales, domestic air travels, FMCG, textiles and other discretionary), d) Weakening non-oil non gold imports which is closely linked to domestic industrial/ investment activity and, e) Challenges in the NBFCs which has affected the fund availability in the wholesale loans and real estate segment.

• India’s growth may remain below potential in the near term, but

some pick-up is likely by the year-end helped by: a) We expect investment activities to pick now that election is

• ver.

b) Mainstream banks have stepped up to offset some of the growth drag from the NBFCs. c) The reforms, regulation and time correction in real estate prices over last five years have now created a favourable base for some pick-up in demand. d) The effects of monetary easing starts should start to kick in

• Economic activity needs to be closely watched to ascertain

the recovery expected in 2H FY20.

Source: Capitaline, SBIFM Research;

Earnings are likely to recover in FY20 led by financials

Amidst gradual economic growth, earning are expected to recover in FY20 led by financials

• The revival in economic growth is likely to be gradual, given limited policy levers. Budget corroborates this view.
• That said corporate earnings are recovering, led by financials.
• Earnings (for NIFTY) is expected to grow by +20% in FY20.
• The pace and quantum of downgrades have moderated.
• Earnings growth would be critical for markets to move higher from these levels.

Liquidity: Both FIIs and DIIs invested in Indian equity in June 2019

FIIs continued to invest in India in June. YTD FII inflows sum to US$ 11.3 billion

Source: Bloomberg, CEIC, SBIMF Research

DIIs were also net investors for second consecutive month. During May-June, they have invested US$ 1.3 billion in total

Valuations

Valuations across the capitalization curve

Source: Bloomberg, SBIMF Research,

Valuation of MSCI India saw sharp corrections vis-à-vis MSCI EM since January 2019; getting closer to long-term average NIFTY 12m Fwd. P/E is trading at 24% premium to 10 year G-sec (vs. the long term average premium of 16%)

Equity Market outlook

Nifty is trading at 18 times forward earnings

Source: Bloomberg, SBIMF Research

• Equity market reaction to the budget was a tad underwhelming. NIFTY fell by 3%

post the budget.

• Couple of proposals in the Budget, such as proposal to increase minimum public

shareholding in listed companies and relaxing the Government ownership criteria in PSUs to enable disinvestment, if implemented, could potentially increase the supply of equities.

• Further, imposition of 20% tax on buybacks (in line with 20% dividend distribution

tax) and the absence of any sharp growth stimulus measures were also taken unfavorably by the equity market investors.

• However, in totality, it appeared to be well-intentioned budget which tries to

adhere to fiscal prudence and attempts to attract more external capital while jumpstarting the domestic financial sector.

• Implementation of these proposals would have to be adept and therefore

execution holds the key.

• Market (NIFTY) had rallied by 9% between Jan-June 2019 (now 6% YTD as of

8th July), in response to favorable election outcome and positive sentiments around emerging market equities in general.

• Revival in economic growth likely to be gradual, given limited policy levers.

Budget corroborates this view. That said, corporate earnings are recovering, led by financials. NIFTY earnings is expected to grow by +20% in FY20. The pace and quantum of downgrades have moderated.

• Current valuations command premium and appears limited scope for re-rating.
• Earnings growth is critical for markets to move higher.

Fixed Income Market

Bond yields in key developed markets: June 2019

Source: Bloomberg, SBIMF Research

• 10-year bond yields moderated across all the key developed markets in June due to uncertainty around trade dispute,

downbeat outlook on growth, low inflation and expectations of broad-based easing by central banks across the world.

• Even on the year-to-date basis, 10-year bond yields are easing across the key developed markets.
• US 10-year yield softened by 12 bps during the month as Fed signaled rate cuts amidst uncertainties surrounding growth.

US Fed in its latest policy kept rates unchanged (2.25-2.50%). However, one of the FOMC member voted for a 25bps rate

• cut. Fed dot plot highlighted that eight members favored one rate cut in 2019.
• Italian 10-year bond yield rallied 57 bps after the country’s populist government revised its spending plans in an attempt to

damp budget tensions with European Union, reducing the anxiety amongst the investors over the country’s debt burden. 10 Year Gsec Yield (% mth end) 2015 end 2016 end 2017 end 2018 end Apr-19 May-19 Jun-19 m-o-m change (in bps) Change in 2019 (in bps) Developed market US 2.27 2.44 2.41 2.68 2.50 2.12 2.01

• 12
• 68

Germany 0.63 0.21 0.43 0.24 0.01

• 0.20
• 0.33
• 13
• 57

Italy 1.60 1.82 2.02 2.74 2.56 2.67 2.10

• 57
• 64

Japan 0.27 0.05 0.05 0.00

• 0.04
• 0.09
• 0.16
• 6
• 16

Spain 1.77 1.38 1.57 1.42 1.00 0.72 0.40

• 32
• 102

Switzerland

• 0.06
• 0.19
• 0.15
• 0.25
• 0.30
• 0.48
• 0.53
• 5
• 28

UK 1.96 1.24 1.19 1.28 1.19 0.89 0.83

• 5
• 44

Bond yields in key emerging markets: June 2019

Source: Bloomberg, SBIMF Research

• 10-year bond yields eased or stayed flat in June for most of the key emerging markets.
• Brazilian10-year bond yields eased by 100 bps supported by passage of pension reform in the country, weakness in

growth coupled with benign inflation.

• 10-year Turkish bond yields rallied 212 bps primarily on account of liquidity easing by the central bank.

10 Year Gsec Yield (% mth end) 2015 end 2016 end 2017 end 2018 end Apr-19 May-19 Jun-19 m-o-m change (in bps) Change in 2019 (in bps) Emerging Market Brazil 16.51 11.40 10.26 9.24 8.98 8.45 7.45

• 100
• 178

China 2.86 3.06 3.90 3.31 3.40 3.30 3.24

• 6
• 7

India 7.76 6.52 7.33 7.37 7.41 7.03 6.88

• 15
• 49

Indonesia 8.69 7.91 6.29 7.98 7.80 7.93 7.34

• 59
• 63

South Korea 2.09 2.09 2.47 1.96 1.85 1.67 1.60

• 7
• 36

Malaysia 4.19 4.23 3.91 4.08 3.79 3.80 3.64

• 16
• 44

Phillippines 3.95 4.64 4.93 7.01 5.92 5.54 5.04

• 50
• 197

Russia 9.62 8.36 7.49 8.70 8.13 7.91 7.42

• 50
• 128

Taiwan 1.03 1.22 0.98 0.83 0.83 0.83 0.83 Thailand 2.50 2.65 2.32 2.48 2.44 2.36 2.12

• 24
• 36

Turkey 10.74 11.39 11.67 16.42 19.95 18.85 16.73

• 212

31 Mexico 6.28 7.44 7.66 8.66 8.10 8.02 7.59

• 43
• 107

Poland 2.94 3.63 3.30 2.83 3.01 2.64 2.39

• 25
• 44

South Africa 9.80 8.92 8.72 8.72 9.13 9.12 8.84

• 29

11 Colombia 8.66 7.11 6.48 6.75 6.84 6.64 6.14

• 50
• 61

Hungary 3.33 3.16 2.02 3.01 3.27 2.95 2.63

• 32
• 38

India Rates Snapshot: June 2019

Source: Bloomberg, PPAC, RBI, CEIC, SBIMF Research; NB: **Crude oil price is average $/barrel for the month, rest of the data are % month end; *Corporate bond rate is for AAA rated bonds ,*** Refers to PSU Banks’ CD rate; # INR and Oil price changes are % change; @ March end MIBOR has been taken for 28th March, just for a day MIBOR rose to 8.8% on 29th March

• 10-year G-Sec rallied 15 bps in June driven by 25 bps rate cut along with change in stance to accommodative by RBI, global

developments tilting towards monetary easing and improvement in banking system liquidity. It rallied another 18 bps during first week of July led by favourable FY20 final budget (government adhered to fiscal consolidation despite the pressure for fiscal stimulus, kept the market borrowings unchanged from interim budget and initiated a proposal to finance a part of fiscal deficit via dollar bonds).

• Money market rates also eased in June 2019 helped by the sharp improvement in interbank liquidity situation.
• Crude oil prices fell 11% during the month. However, year-to-date, crude price has risen by 8%.
• Rupee appreciated nearly 1% during the month. Even on YTD basis, rupee has appreciated by 1%.

2017 end 2018 end Mar-19 Apr-19 May-19 Jun-19 m-o-m change (bps) Change in 2019 (bps) 3M T-Bill 6.20 6.65 6.31 6.44 6.19 6.03

• 17
• 62

1 Yr T-Bill 6.40 6.94 6.39 6.51 6.30 6.16

• 14
• 77

10 year GSec 7.33 7.37 7.35 7.41 7.03 6.88

• 15
• 49

Overnight MIBOR Rate 6.20 6.73 6.28 6.20 6.00 5.97

• 3
• 76

Weighted Average Call money rate 5.99 6.57 6.35 6.16 5.90 5.72

• 18
• 85

3M CD*** 6.38 7.05 7.25 7.25 6.85 6.45

• 40
• 60

12M CD*** 6.75 8.08 7.48 7.73 7.18 7.18

• 90

3 Yr Corp Bond* 7.66 8.50 7.97 7.98 7.82 7.74

• 9
• 77

5 Yr Corp Bond* 7.68 8.43 8.10 8.30 7.92 7.96 3

• 47

10 Yr Corp Bond* 7.90 8.51 8.52 8.54 8.17 8.07

• 10
• 45

1 Yr IRS 6.44 6.56 5.92 6.12 5.80 5.63

• 17
• 93

5 Yr IRS 6.75 6.62 5.94 6.35 5.86 5.67

• 19
• 95

INR/USD 63.9 69.8 69.2 69.6 69.7 69.0 1# 1# Crude Oil Indian Basket** 62.3 57.8 66.7 71.0 70.0 62.4

• 11#

8#

Central banks across the world are turning dovish

Source: Bloomberg, SBIMF Research; NB: * Indonesia had announced to use new policy benchmark i.e. 7-day reverse report rate as its benchmark policy rate in April 2016; Red highlighted cells indicates interest rate hike and green denotes a rate cut.

The direction of the global policy rate is tilting towards hold or easing

Policy rate (in %), end period 2015 2016 2017 2018 2019 (till June) US 0.50 0.75 1.50 2.50 2.50 Canada 0.50 0.50 1.00 1.75 1.75 China 4.35 4.35 4.35 4.35 4.35 Japan 0.10 0.10 0.10 0.10 0.10 India 6.75 6.25 6.00 6.50 5.75 Australia 2.00 1.50 1.50 1.50 1.25 South Korea 1.50 1.25 1.50 1.75 1.75 Indonesia 4.75 4.25 6.00 6.00 Taiwan 1.625 1.375 1.375 1.375 1.375 Thailand 1.50 1.50 1.50 1.75 1.75 Malaysia 3.25 3.00 3.00 3.25 3.00 Singapore 0.08 0.08 0.08 0.08 0.08 Hong Kong 0.75 1.00 1.75 2.75 2.75 Phillippines 4.00 3.00 3.00 4.75 4.50 New Zealand 2.50 1.75 1.75 1.75 1.50 Eurozone 0.05 0.00 0.00 0.00 0.00 UK 0.50 0.25 0.50 0.75 0.75 Switzerland

• 0.75
• 0.75
• 0.75
• 0.75
• 0.75

Sweden

• 0.35
• 0.50
• 0.50
• 0.25
• 0.50

Norway 0.75 0.50 0.50 0.50 0.50 Russia 11.00 10.00 7.75 7.75 7.50 Turkey 7.50 8.00 8.00 24.00 24.00 Saudi Arabia 2.00 2.00 2.00 3.00 3.00 Poland 1.50 1.50 1.50 1.50 1.50 South Africa 6.25 7.00 6.75 6.75 6.75 Brazil 14.25 13.75 7.00 6.50 6.50 Mexico 3.25 5.75 7.25 8.25 8.25 Argentina 21.00 26.00 26.75 50.00 59.50 Colombia 5.75 7.50 4.75 4.25 4.25 Chile 3.50 3.50 2.50 2.75 2.50

Source: CMIE economic outlook, SBIMF Research,

Indian growth-inflation dynamics favor monetary easing by RBI

CPI inflation likely to stay range-bound through out FY20 GDP growth has moderated to 6.6% and is likely to remain sub- 7% for the next 1-2 quarters

• Indian growth-inflation dynamics are favorable for monetary accommodation. GDP growth has moderated to 5.8% in Q4 FY19

and is likely to remain sub- 7% for the next 1-2 quarters. CPI inflation likely to stay within RBI’s comfort zone through out most parts of 2019.

• The trends in monsoon as well as global crude price movement will be closely watched. Further, while we have penciled the

mean-reversion in food prices (particularly vegetables, oilseeds, pulses and cereals), the quantum of the rise cannot be predicted with certainty.

Source: pib.nic.in, mospi, CMIE Economic outlook, SBIMF Research,

Muted rise in Kharif MSP: no material impact on inflation

CPI weighted Kharif price rise in 2019-20 comes to 3%

• Government has released the 2019-20 minimum support price (MSP) for the Kharif crops. The price rise were muted and ranged

between 1-9% across 14 Kharif products. In simple average terms , Kharif MSP were hiked by 4.0% in 2019 (vs. 24% in 2018). Kharif MSP related crops have 7.7% pt. weight in CPI basket. Weighted for CPI, the MSP hike comes to 3.1% vs. 13.8% in 2018.

• During 2018 budget, government had announced to re-calibrate MSP calculation as 50% higher than cost of production.

Consequently, we saw a sharp jump in MSP (one of the highest since FY09). For FY20 as well, government stuck to the same formula.

• The MSP announcement is broadly a non-event. We do not see any impact on CPI.
• MSP price hike and CPI inflation has decoupled since FY16. MSP hikes had averaged around 7% between FY16 to FY18 (both

Rabi and Kharif weighted for the share in CPI basket). On the other hand, CPI had moderated and averaged around 4% over the last four years. In fact, food CPI fell to as low as 0.1% last year despite such high MSP hikes last year. This is primarily because, except for cereals (and there too paddy and wheat) and cotton last year (owing to robust procurement by state), prices of other products are dictated by demand supply dynamics. Government procurement in rest of the items are miniscule. MSP price hike and CPI inflation has decoupled since FY16

Source: RBI, CMIE Economic Outlook, SBIMF Research; NB: * CAD stands for current account deficit,

Q4 FY19 CAD touched a two year low of US$4.6 billion i.e. 0.7% of GDP (vs. US$ 17.8 billion; 2.7% of GDP in Q3 FY19)* FII inflows surged sharply due to favorable sentiments for emerging market and clarity on election outcome by Feb end

External account improved in 4Q FY19

FDI inflows remain contained during Q4 FY19 ECB inflows improved owing to favorable change in ECB regulation and RBI’s FX swap measures

Rupee has been broadly stable Year-to-Date

Source: Bloomberg, CMIE Economic Outlook, SBIMF Research

Year-to-date, rupee has been broadly flat and the performance vs. other EM currency is in the middle Rupee appreciated marginally by ~1% in June and hovered around ~69-70/US$ levels during the month Rupee is fairly valued on trade weighted REER basis Rupee is fairly valued on productivity adjusted REER basis

Banking system liquidity to stay in surplus in current quarter

Source: RBI, SBIMF Research; NB: *We have left FY18 in our study as system witnessed currency leakage post demonetization

Inter-bank liquidity eased in June; Liquidity surplus likely to stay above Rs. 1 trillion during July-September… …helped by low currency leakage and scheduled RBI dividend transfer in August*

• We expect inter-bank liquidity to post a liquidity surplus above Rs. 1 trillion during the current quarter even if there are no OMO

purchases during the quarter. The favorable liquidity outlook is supported by seasonally lower currency leakage, higher government spending and scheduled RBI dividend transfer in August.

• During Q1 FY20, system witnessed a lower currency leakage of Rs 528 billion. Typically, during the July-September quarter,

currency return to the banking system, this will keep the durable liquidity comfortable.

• Now that the final FY20 budget has been laid out, the central government spending should ramp up.
• Impact from the outcome of Bimal Jalan’s committee has not been considered so far.

Policy Rate Outlook: We expect further rate cut

Source: RBI, SBIFM Research

RBI cut the policy rate by 75bps to 5.75% in the current easing cycle

• RBI eased Repo rate by 25bps to 5.75% in line with expectation and

changed the stance from ‘neutral’ to ‘accommodative’. All members

• f the monetary policy committee (MPC) unanimously voted for both

the rate cut and stance change.

• Between the April and June policy meeting, both global and domestic

growth outlook has weakened considerably.

• The central bank has lowered its FY20 growth expectations by 20bps

to 7.0% while inflation projection remains broadly unchanged (inflation projection for 1H FY20 revised up by 10bps to 3.0-3.1% and projection for 2H FY20 revised down by 10bps to 3.4-3.7%). With these projections, inflation is a non-issue for this year. While food inflation has bottomed out and should climb higher, weakening demand and favourable base is likely to keep core inflation under check.

• India’s growth momentum is weakening and is in need of policy
• support. As of now, owing to weak revenue buoyancy, fiscal is

relatively hand tied, unless of course the finance ministry is ready to accommodate some slippage or the Jalan committee comes out with some material bonanza from RBI in June. Against this backdrop, RBI was expected to take the lead in supporting growth.

• We believe the central bank will remain biased towards monetary

easing for remainder of the year. While in terms of rate cut, we have pencilled one more 25bps rate cut (perhaps as soon as in the August policy), the support may continue to come in the form of easy liquidity and macro-prudential measures.

Valuations are attractive

Source: Bloomberg, SBIMF Research

CPI Inflation adjusted real rate in India at 3.8% G-sec is trading at 113bps spread to the Repo vs. LPA

• f 87bps

Valuations vs. US yield are attractive

Debt Market Outlook

Source: Bloomberg, SBIFM Research

Valuations look attractive at G-sec vs. Repo rate

• Fixed income market has cheered the budget as the government

adhered to fiscal consolidation despite the pressure for fiscal

• stimulus. Market borrowings projection of Rs. 7.1 trillion (on gross

basis) and Rs. 4.2 trillion (on net basis) had been adhered to. Further, apart from petrol and diesel excise duty hike, no measures in the budget stoke any inflationary fears.

• G-sec has rallied 15bps in June to 6.88%, and further rallied post
• budget. The 10 year G-sec rate stands at 6.56% as of 8th July 8,
• 2019. YTD, 10 year G-sec has rallied 80bps with both global and

domestic developments tilting towards monetary easing, and sharp improvement in domestic interbank liquidity situation.

• We expect additional 25bps rate cut in 2019 (75bps delivered so

far).

• We expect the inter-bank liquidity to post a liquidity surplus to the

north of Rs. 1 trillion, helped by seasonally lower currency leakage, higher government spending and scheduled RBI dividend transfer in August.

• The budget proposed the idea of financing a part of fiscal deficit

through dollar bonds. While the market awaits more clarity on this decision and the borrowings for FY20 does not pencil any foreign currency borrowings as yet, it would have positive implications once

• implemented. It can take some pressure off the domestic supply

and bring about more discipline on the dynamics of fiscal deficit.

• The valuations still allow further upside in the fixed income space.

Thank you

Disclaimer

This presentation is for information purposes only and is not an offer to sell or a solicitation to buy any mutual fund units/securities. These views alone are not sufficient and should not be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. All opinions and estimates included here constitute our view as of this date and are subject to change without notice. Neither SBI Funds Management Private Limited, nor any person connected with it, accepts any liability arising from the use of this information. The recipient of this material should rely on their investigations and take their own professional advice. Mutual Funds investments are subject to market risks, read all scheme related documents carefully. Asset Management Company: SBI Funds Management Private Limited (A joint venture with SBI and AMUNDI). Trustee Company: SBI Mutual Fund Trustee Company Private Limited.

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