Economy and Markets - Mutual Fund India - SBI Mutual Fund, … presentation_april 2020.pdf · COVID-19 cases in India rise sharply in the last few days Source: WHO, as of 6thh April

Economy and Markets

April 2020

Coronavirus outbreak becomes pandemic

Source: WHO, as of 6th April 2020

Total number of confirmed cases

stands at 12,10,956 as of 6th April 2020(Source : WHO)

• Mortality rate has increased from 2.1% on 20th Jan 2020 to 5.6% as on 6th April 2020.

(Source : WHO)

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No. of confirmed cases (Globally)

COVID-19 cases in India rise sharply in the last few days

Source: WHO, as of 6thh April 2020;

• Cases in India stands at 4,067 (as on 6th April 2020)• Mortality rate in India: 2.7% as of 6th April 2020.

Source: WHO

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No. of new cases (India) No. of cumulative cases (India) - RHS

Worst affected countries with COVID-19 cases

Source: WHO

US has the highest share of confirmed COVID-19 cases (25% of the total cases) followed by Spain and

Italy (11% each) , Germany (8%) and China (7%)Source: WHO

As of 6th April 20203

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No. of confirmed cases

GLOBAL ECONOMIC RESPONSES TO THE SITUATION

Global central banks deliver sharp rate cuts

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;

• Host of global central banks reacted promptly by reducing rates in order to support growth

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Policy rate cut (YTD change - in bps)

Other monetary measures undertaken by Global Central Banks

Source : IMF, SBIMF Research; *As of 23rd March 2020

Countries Other monetary policy measures announced

United States • US$700bn of QE (US$500bn of treasury securities and US$ 200bn of mortgage backed securities)

which has now been extended to the ‘amounts needed’. Commercial mortgage backed agency

securities have also been included in purchases.

• Announced a primary dealer credit facility and money market mutual fund liquidity facility (MMLF).

• Supporting the flow of credit to employers, consumers, and businesses by establishing new

programs that, taken together, will provide up to US$300 billion in new financing which include:

o The Department of the Treasury, using the Exchange Stabilization Fund (ESF), will provide US$30

billion in equity to these facilities.

o Establishment of two facilities to support credit to large employers – the Primary Market Corporate

Credit Facility (PMCCF) for new bond and loan issuance and the Secondary Market Corporate

Credit Facility (SMCCF) to provide liquidity for outstanding corporate bonds.

United Kingdom • Announced QE of GBP 200bn (9% of GDP).

• Reduced counter-cyclical capital buffer to 0% from 1%.

• Introduced term funding schemes for SMEs.

China • Increased OMO after CNY: RMB 3trn in February (net -380bn, better than last year's -1.3trn).

Targeted RRR cut for banks that met "inclusive finance" threshold in 2019 on March 16, releasing

liquidity of RMB 550bn.

• On-lending and Re-lending facilities: RMB 300bn for corporates related to virus control (interest

subsidized by Ministry of Finance) and RMB 500bn for SMEs.

• As of March 10, policy banks issued RMB 51 billion of anti-coronavirus special bonds at low interest

rates to support virus control; they will also allocate special-purpose credit funds totalling RMB

350bn to SMEs and the private sector.

Denmark* • The standing swap line with ECB was doubled to EUR 24 billion.

• The Danmarks National Bank (DN) reached an agreement with Federal Reserve to establish a USD

30 billion swap line that will stand for at least 6 months.

• An extraordinary lending facility has been announced by the DN which will make full allotment, 1-

week, collateralized loans to banks at -0.5% interest rate.

• It has also been decided to pre-emptively release the countercyclical capital buffer and cancel the

planned increases meant to take effect later.

Other monetary measures undertaken by Global Central Banks

Source : IMF, SBIMF Research.

Countries Other monetary policy measures announced

Japan • Purchases of Japanese government bonds (JGBs) to the tune of JPY 80 trillion a year and the U.S. dollar

funds-supplying operations.

• Risk asset purchases: ETFs (from JPY6tn per year to 12tn), J-REIT (from JPY 90 bn to 180bn), CB (JPY1

trillion), CPs (JPY1trillion)

European

Union

• Targeted LTRO III at concessional rates and conditions. EUR120bn of asset purchases.

• EUR750 billion of pandemic emergency purchase programme (PEPP) up to end of 2020.

Singapore • Enterprise working capital loan scheme enhanced in Budget 2020. Available loan quantum increased to

SGD 1m from 300k, risk guarantee raised to 80% from 50-70%. Valid for a year from March 2020.

• USD 60bn swap line with US Fed.

Hong Kong • Reduce banks counter cyclical capital buffer to 1% from 2%

Australia • Purchase of Australian government securities and repo operations including LTROs.

• Launched targeted term lending facility to support SME lending ($90 bn i.e. 4.5% of GDP).

• Decreased the spread between cash rate and deposit rate to 15bps (deposit rate now at 0.1% rather than

0%)

Canada • Purchases will begin with a minimum of $5bn per week, across the yield curve. That's at least about 1% of

GDP per month.

• Creation of a Bankers' Acceptance Purchase Facility (BAPF) to support funding of small and medium-size

businesses.

• Introduction of a program to purchase Canada Mortgage Bonds (CMBs), a Provincial Money Market

Purchase (PMMM) program and a Commercial Paper Purchase Program (CPPP).

• Lowered the Domestic Stability Buffer requirement for domestic systemically important banks by 1.25% of

risk weighted assets.

Fiscal measures rolled out by various countries to contain the slowdown

Source: IMF, SBIMF Research ; *As of 23rd March 2020

Countries Amt

announced

Fiscal stimulus announced

United

States

US$2.3 trillion

(around 11%

of GDP)

o US$250 billion to provide one-time tax rebates to individuals;

o US$250 billion to expand unemployment benefits;

o US$24 billion to provide a food safety net for the most vulnerable

o US$510 billion to prevent corporate bankruptcy by providing loans, guarantees

o US359 billion in forgivable Small Business Administration loans and guarantees to help small

businesses that retain workers;

o US$100 billion for hospitals;

o US$150 billion in transfers to state and local governments

United

Kingdom

1.4% of GDP

to be

implemented

immediately

and 0.7% of

GDP to be

implemented

in the longer

term

o Additional funding for the National Healthcare Service and other public services (GBP5 billion)

o Measures to support businesses (GBP27 billion), including property tax holidays, direct grants for

small firms in the most-affected sectors, and compensation for sick pay leave;

o Strengthening the social safety net to support vulnerable people (by nearly GBP7 billion) by

increasing payments under the Universal Credit scheme as well as expanding other benefits.

o The government is also launching with the British Business Bank the Coronavirus Business

Interruption Loan Scheme to support SMEs; deferring VAT payments for the next quarter until the end

of the financial year; and will pay 80 percent of the earnings of self-employed workers or furloughed

employees (to a maximum of GBP2,500 per employee per month) for an initial period of 3 months

o To support the international response, the government has made available GBP150 million to

the IMF’s Catastrophe Containment and Relief Trust.

China RMB 1.3

trillion (or 1.2%

of GDP)

o Increased spending on epidemic prevention and control.

o Production of medical equipment.

o Accelerated disbursement of unemployment insurance.

o Tax relief and waived social security contributions.

Denmark* DKK 60 billion

(2.5% of GDP)

o The package will finance the healthcare needs and will support workers and businesses. Another

2.5% of GDP in countercyclical support is expected to come.


Source: IMF, SBIMF Research

Countries Amt announced Fiscal stimulus announced

Japan JPY 108 trillion (20%

of GDP).

o Measures to contain the spread of the virus and enhance preparedness of the

healthcare system

o Cash handouts worth JPY 6 trillion for households and small businesses hit by

the virus

o Measures to mitigate the economic impact including subsidies to firms who

maintain employment during scale down of operations.

o The deadline for tax return filing and payment of personal income tax, gift tax,

and consumption tax (for the self-employed) was extended from mid-March to

mid-April.

European

Union

EUR 37 billion 0.3 %

of 2019 EU27 GDP)

o Establishing a Corona Response Investment Initiative in the EU budget to

support public investment for hospitals, SMEs, labor markets, and stressed

regions;

o Extending the scope of the EU Solidarity Fund to include a public health crisis

within its scope, with a view of mobilizing it if needed for the hardest-hit EU

member states (up to EUR 800 million is available in 2020);

o Redirecting EUR 1 billion from the EU Budget as a guarantee to the European

Investment Fund to incentivize banks to provide liquidity to hit SMEs and

midcaps

o Announcing that credit holidays to existing debtors that are negatively affected

will be provided.

Singapore S$ 54.4 bn

o Amount to Ministry of Health ( S$800 million)

o The Care and Support Package provides support to households (S$1.6 billion)

o The Stabilization and Support Package provides support to businesses (S$4.0

billion) etc.


Source: IMF, SBIMF Research

Countries Amt announced Fiscal stimulus announced

Hong Kong HK$152 billion (or

5.3% of GDP)

o Establishment of a new Anti-Epidemic Fund (HK$30 billion or 1.0 percent of GDP)

to enhance anti-epidemic facilities and services;

o Tax and fee reliefs and other one-off relief measures (HK$51 billion or 1.8 percent

of GDP);

o Cash payout to Hong Kong SAR permanent residents aged 18 or above (HK$71

billion or 2.5 percent of GDP).

Australia AS $ 194 bn (9.7% of

GDP) o Sizeable wage subsidies (6.7 percent of GDP),

o Income support to households, cash flow support to businesses, investment

incentives, and targeted measures for affected regions and industries.

o Loan guarantees between the Commonwealth government and participating

banks to cover the immediate cash flow needs of SMEs (up to AS$20 billion),

o Separately, the Commonwealth government has committed to spend almost an

extra AS$5 billion (0.3 percent of GDP) to strengthen the health system and

protect the vulnerable people

Canada CAD 193 bn

(8.4% of GDP) o CAD 3.175 billion (0.1 percent of GDP) to the health system to support increased

testing, vaccine development, medical supplies, mitigation efforts, and greater

support for Indigenous communities.

o Around CAD105 billion (4.6 percent of GDP) in direct aid to households, including

payments to workers without sick leave and access to employment insurance, an

increase in existing GST tax credits and child care benefits, and a new

distinctions-based Indigenous Community Support Fund.

o Around CAD85 billion (3.7 percent of GDP) in support to businesses through

income and sales tax deferrals.

INDIA’S RESPONSE

Govt of India’s response to COVID-19: Mobility restrictions

Source:SBIMF Research

Travel restrictions in/out country were imposed. On 25th Jan, Indianswere advised to avoid all non-essential travel to China. Thereafter, Indiasuspended visas in phases to foreign nationals from countries heavily affectedwith COVID-19 cases

Social distancing/mobility restrictions were announced by variousstates in the form of closure of educational institutions, religious places,political rallies, sporting events) and services industry (malls, gyms ,museums, swimming pools, theatres)

All international aircraft was banned from 19th March 2020 till 14th April2020 and domestic aircraft flights from 24th March 2020 till 14th April

Nation-wide lockdown announced from 24th Mar for 3 weeks, till 14April. All train services including sub-urban rail services, metro services,inter-state rail services suspended till 14 April. To ensure the essentialsupplies in various parts of the country , movement of trains carrying suchgoods were permitted to continue.

Govt of India’s response to COVID-19: Relief actions

Source: Ministry of Finance, SBIMF Research

Category Relief Beneficiaries

Financial security Insurance over worth Rs. 5 mn for health care workers 2.2 mn workers

Food security Additional 5 kg (rice/wheat) and 1 kg of pulses per person through PDS for free 800 mn people

Income security

Farmers Frontload first instalment of Rs 2000 of PM kisan in the first week of April 87 mn people

MNREGA An increase of Rs 2000 per worker via increasing the daily wage of Rs 20* 136 mn families

Senior citizens, widows

and differently abled

Rs 1000 for next three months in two instalments 30 mn people

Women Rs 500 per month for the next three months to Jan Dhan account holders 204 mn women

Gas cylinders Free cylinders for next three months 80 mn families

Self-help groups (SHGs) Increase in collateral free loan limit to Rs 2mn from Rs 1mn earlier 68.5 mn families

Organized sector workers

Government to pay 24% of the monthly wages of wage earners (earning less than

Rs 15000) into their PF accounts for next three months.

8 mn employees,

0.4 mn

establishments

Amend EPFO regulation to allow non-refundable advance of 75% of the amount or

three months of wages whichever is less, from their accounts

40 mn EPFO

registered families

Construction workers

Use their welfare fund for building and construction workers (Rs 310 bn) to help

battle disruption

Use the district mineral fund for testing activities, medical screening, providing

health attention

35 mn registered

workers

Total cost (Rs bn) 1700

% of GDP 0.80%

Fiscal stimulus to the tune of Rs 1.7 trillion (0.8% of GDP) – a mix of cash transfers and food security schemes

RBI’s response to COVID-19: Sharp easing of monetary conditions

Source : RBI, SBIMF Research.

RBI reduced the repo rate by 75 bps in order to combat slowdown due to COVID-19

Reverse Repo rate has been lowered by 90bps to 4.00% leading to widening of LAF corridor to 65bps vs. 50bps previously

The cash reserve ratio has been brought down by 100 bps to 3% for one year starting March 28, 2020 (first time in last seven

years)

The sharper reduction in

Reverse repo is to dissuade

the banks from parking their

surplus liquidity with the RBI

and lend it out.

The CRR cut will release Rs

1.37 trillion of primary liquidity

into the system right from the

day of its implementation

RBI hopes to inject liquidity

worth Rs. 3.74

trillion (1.8% of GDP) with

help of TLTROs, CRR and

MSF

6.506.00

6.50

5.15

4.40

3

5

7

9

Jan

-11

Jun

-11

No

v-1

1

Ap

r-1

2

Sep

-12

Feb

-13

Jul-

13

Dec

-13

May

-14

Oct

-14

Mar

-15

Au

g-1

5

Jan

-16

Jun

-16

No

v-1

6

Ap

r-1

7

Sep

-17

Feb

-18

Jul-

18

Dec

-18

May

-19

Oct

-19

Mar

-20

RBI reduced the repo rate by 75 bps to 4.4% in March 2020

Other monetary measures by the RBI

Source : RBI , SBIMF Research.

Introduction of Target Long term repo operations (LTRO)

Increased borrowing under MSF

Moratorium on term loans for three months

Deferment of interest on Working capital facilities

Increase the WMA limits to 30% for all the states

Deferment of Net Stable Funding Ratio (NSFR) and Last tranche of Capital Conservation Buffer

Not necessary to activate countercyclical capital buffer for a period of one year

Permitting Banks to Deal in Offshore Non-Deliverable Rupee Derivative Markets

To de-freeze the corporate bond

market

This option, if utilized, will create

additional liquidity of Rs 1.37 trillion

Enables the businesses to fulfil their

other fixed cost requirements

Enables the businesses and state

governments to tide over theCOVID-

19 related issues

Facilitate banks to lend more

aggressively by giving them more

money in hands

Help in reducing the volatility in the

offshore rupee market by increasing

the no. of participants in the market

GROWTH IMPACT

Economic activity gets disrupted due to COVID-19 crisis

Source: CMIE Economic outlook ,POSOCO; SBIMF Research

Electricity consumption (a proxy for economic activity) has gone

substantially down in last week of March 2020

Other pain points:

• News articles suggest that companies including Maruti Suzuki, Hyundai motor and Mahindra and Mahindra witnessed sharp

decline in auto sales in March 2020. The companies have started to cut down on volumes to match the retail demand.

• Growth in domestic bank credit is at an all time low of 6% y-o-y in 2020 vs. 14.5% in 2019.

• Market expectation is getting increasingly tilted towards a global growth contraction in 2020 vs. 2.5-3% growth expectation

at the start of the year

• The US employment rate rose to 4.4% in March 2020 vs. 3.5% in Feb 2020, reflective of adverse impact of COVID-19

outbreak.

1% 1% 1%

9%6% 8% 9%

5% 5%

-4% -5% -5%-28%

-30%

-20%

-10%

0%

10%

20%

1-7th Jan2020

8-14th Jan2020

15-21st Jan2020

22-28th Jan2020

29-4th Feb2020

5-11th Feb2020

12-18th Feb2020

19-25th Feb2020

26-4th March2020

5-11th March2020

12-18thMarch 2020

19-25thMarch 2020

25-31stMarch 2020

Electricity demand (% y-o-y)

Manufacturing & Services PMI deteriorated

Source: CMIE Economic outlook , SBIMF Research

• The PMI Manufacturing index fell from 55.3 in February 2020 to 52.6 in March 2020 , reflecting weak global growth and

varying degrees of domestic lockdown since mid-March. Sharp contraction in new export orders led to moderation in the

PMI manufacturing activity. In addition, pace of expansion n output and input prices eased

• The PMI services activity fell to a 5-month low of 49.3 in March 2020 , reflective of economic costs that has begun to

show in data such as PMIs. Lower demand particularly from overseas market led to a fall in services PMI.

47.9

54.7 54.3

55.3

52.6

44

46

48

50

52

54

56

Jun

-15

Sep

-15

De

c-1

5

Mar

-16

Jun

-16

Sep

-16

De

c-1

6

Mar

-17

Jun

-17

Sep

-17

De

c-1

7

Mar

-18

Jun

-18

Sep

-18

De

c-1

8

Mar

-19

Jun

-19

Sep

-19

De

c-1

9

Mar

-20

PMI Manufacturing

Manufacturing PMI came in at 52.6 in Mar’20 Services PMI came in at 49.3, the lowest print in five months

53.2 53.8

48.7

57.5

49.3

40

45

50

55

60

Jun

-15

Sep

-15

Dec

-15

Mar

-16

Jun

-16

Sep

-16

Dec

-16

Mar

-17

Jun

-17

Sep

-17

Dec

-17

Mar

-18

Jun

-18

Sep

-18

Dec

-18

Mar

-19

Jun

-19

Sep

-19

Dec

-19

Mar

-20

PMI Services

Economic Activity: Other factors that will weigh down on growth

Source: SBIMF Research

Increased likelihood of

global growth contraction

• Markets expect the global growth to contract in2020 which will lead to weakness in exportdemand and further subdued industrial activity

Grim employment

situation in the past

• 58% of the income earners to come under thedirect impact owing to limited economic activity .The unemployment rate has moved to 6.1% as per2017-18 survey. This will impact consumption andthereby economic activity

Stressed Balance sheets

• The govt, household and financial sector’s balance sheets are not in a healthy shape to provide fillip to the economy.

Another year of loss in

agriculture income

• The lockdown scenario may affect the farmers’ income adversely.

Growth in FY21 to be materially low keeping the lockdown and the following factors in consideration

COVID-19 disruptions to lead to significant economic shock

Source : CMIE Economic outlook , SBIMF Research.

Indian economic growth could further moderate in FY21• We expect India’s growth to moderate in FY21 from an estimated growth

of 4.6% in FY20.

• Lockdown spread over March/April results in output loss of ~5.7% of the

total annual output. The limited human contact required to contain the

spread of the virus is hindering economic activity. Given elevated

infection rates, the public fear may result in below-normal activity for a

few more months. Even if demand for durable goods picks up,

consumption of services may stay weak.

• As corporate profits are squeezed (weakening operating leverage) they

are likely to delay capex plans, lower salaries and cut jobs, which in turn

will weaken consumption demand. As corporates struggle, banking

sector GNPAs are likely to deteriorate.

• The Rabi sowing was healthy and was expected to lay out good

prospects for Agri/rural income. Now against the lock down scenario, the

sale of these products are likely to face challenges when the rabi

products hit the mandi(s) in April/May

• Other factors that will weigh on growth are a) increased risks of a global

recession, b) grim domestic employment situation for nearly a decade, c)

high leverage in government and household balance-sheet, d) weakness

in financial sector health and e) erosion of wealth due equity price fall.

• On positive side, as per RBI estimates, the impact of the 10% fall in

crude oil price is expected to increase growth by 15 bps. But it is

contingent on benefits being passed on and leading to higher demand.

• Massive policy support (both fiscal and monetary) is needed to support

the growth conditions in India.

The projections of growth and inflation for FY21

would be heavily contingent on the intensity ,

spread and duration of COVID-19

5.5

6.4

7.48.0 8.3

7.0

6.1

4.6

0

2

4

6

8

10

FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 E

Real GDP (% y-o-y)

EQUITY MARKET

Global equity market snapshot : March 2020

Source: Bloomberg, SBIMF Research

Performance in March 2020 (local currency returns) Performance Year-to-Date (local currency returns)

Performance in March 2020 (US$ returns) Performance Year-to-Date (US$ returns)

-30-23 -23 -23 -22 -22

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% m-o-m (local currency

-37 -37-32 -29 -28 -28 -27 -26 -25 -25 -25 -24 -23 -20 -20 -20 -19 -16

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G

CH

INA

RU

SSIA

% YTD (local currency terms)

-29-26 -26 -25 -23 -21 -20

-17 -17 -16 -16 -14 -13-10

-6

1 2 3 3 3

-40

-30

-20

-10

0

10

PA

KIS

TAN

IND

ON

ESIA

IND

IA N

IFTY

MSC

I In

dia

MSC

I EM

- E

UR

OP

E

PH

ILIP

PIN

ES

SRI L

AN

KA

FRA

NC

E

GER

MA

NY

UK

MSC

I EM

DO

W J

ON

ES

KO

REA

JAP

AN

CH

INA

HA

NG

SEN

G

S&P

50

0

TAIW

AN

BR

AZI

L

RU

SSIA

% m-o-m (US$ returns)-38 -37 -33 -33 -32 -31 -30 -28 -28 -27 -24 -24 -23

-19-11

110 11

1925

-45

-30

-15

0

15

30

IND

ON

ESIA

MSC

I EM

- E

UR

OP

E

IND

IA N

IFTY

PA

KIS

TAN

PH

ILIP

PIN

ES

MSC

I In

dia UK

FRA

NC

E

SRI L

AN

KA

GER

MA

NY

KO

REA

MSC

I EM

DO

W J

ON

ES

JAP

AN

CH

INA

HA

NG

SEN

G

TAIW

AN

BR

AZI

L

S&P

50

0

RU

SSIA

% YTD (US$ returns)

Indian equity market snapshot : March 2020


Performance in March 2020 (local currency returns) Performance Year-to-Date (local currency returns)

-36-34

-31 -31 -30 -29 -28 -26 -24 -24 -23 -23 -23 -23-21 -20 -18

-14-10

-6

-40

-30

-20

-10

0

REA

L ES

TATE

BA

NK

EX

AU

TO

MET

ALS

SMA

LL C

AP

CA

P G

OO

DS

MID

CA

P

CO

NSU

MER

DU

RA

BLE

S

PSU

BSE

50

0

NIF

TY

BSE

10

0

SEN

SEX

LAR

GE

CA

P

OIL

& G

AS

PO

WER

TELE

CO

M IT

HEA

LTH

CA

RE

FMC

G

% m-o-m-45

-42 -41 -40-36 -35

-32 -30 -29 -29 -29 -29 -29 -29 -28-23

-17-13

-10 -10

-50

-40

-30

-20

-10

0

MET

ALS

AU

TO

REA

L ES

TATE

BA

NK

EX

PSU

CA

P G

OO

DS

OIL

& G

AS

SMA

LL C

AP

MID

CA

P

NIF

TY

LAR

GE

CA

P

BSE

50

0

BSE

10

0

SEN

SEX

PO

WER

CO

NSU

MER

DU

RA

BLE

S IT

TELE

CO

M

FMC

G

HEA

LTH

CA

RE

% Year-To-Date

• Indian equity market delivered negative returns across all the sectors in March’2020. Nifty and Sensex were down by 23%

each during the month. Real estate witnessed the sharpest decline (36%) on m-o-m basis followed by banks (34%) , auto

(31%) and metals (31%).

• Performance across the capitalization curve was also similar with mid cap and small cap delivering 28% and 30% negative

returns respectively.

• Concerns surrounding global economic growth amid coronavirus spread in and outside China weighed on the Indian equity

markets.

• On YTD basis, Nifty and Sensex were down by 29% each. On sectoral basis, all sectors delivered negative YTD returns.

Valuations have turned attractive on several parameters

Source: Bloomberg, CMIE Economic outlook , SBIMF Research

10

15

20

25

30

35

Sep

-02

Jul-

03

May

-04

Mar

-05

Jan

-06

No

v-0

6

Sep

-07

Jul-

08

May

-09

Mar

-10

Jan

-11

No

v-1

1

Sep

-12

Jul-

13

May

-14

Mar

-15

Jan

-16

No

v-1

6

Sep

-17

Jul-

18

May

-19

Mar

-20

NIFTY 12M Traling PE Ratio

Mean

+1 SD

-1 SD

1

2

2

3

3

4

4

5

5

6

6

Sep

-02

Jul-

03

May

-04

Mar

-05

Jan

-06

No

v-0

6

Sep

-07

Jul-

08

May

-09

Mar

-10

Jan

-11

No

v-1

1

Sep

-12

Jul-

13

May

-14

Mar

-15

Jan

-16

No

v-1

6

Sep

-17

Jul-

18

May

-19

Mar

-20

NIFTY 12M Traling PB Ratio

Mean

+1 SD

-1 SD

44

.1

10

1.7

79

.5

79

.95

1.6

0

20

40

60

80

100

120

FY9

2

FY9

4

FY9

6

FY9

8

FY0

0

FY0

2

FY0

4

FY0

6

FY0

8

FY1

0

FY1

2

FY1

4

FY1

6

FY1

8

FY2

0

Market capitalization/ GDP (%)

0

2

4

6

8

10

Sep

-07

Mar

-08

Sep

-08

Mar

-09

Sep

-09

Mar

-10

Sep

-10

Mar

-11

Sep

-11

Mar

-12

Sep

-12

Mar

-13

Sep

-13

Mar

-14

Sep

-14

Mar

-15

Sep

-15

Mar

-16

Sep

-16

Mar

-17

Sep

-17

Mar

-18

Sep

-18

Mar

-19

Sep

-19

Mar

-20

India 10 year Gsec yield (in %)

India earnings yield (%) - 12 M trailing

Earnings could be revised lower


-9.4

-7.6

-8.1

-4.4

-21.8

-16.8

-9.7

-12.6

-11.0

-25 -20 -15 -10 -5 0

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

Earnings upgrade downgrade- %chg

• Earnings were expected to recover sharply in FY20 and FY21.

• There could be material downward revision to earnings as growth and demand gets impaired due to COVID-19

Downgrade in NIFTY earnings during the fiscal year

Liquidity : FII outflows starker than Global Financial Crisis


FIIs sold US$ 8.3 bn in March 2020 in equities vs. US$0.4 bn

in February 2020

DIIs -MF purchased US$ 3.45 bn in March 2020 vs. US$

1.27 bn in February 2020

-2

-1

0

1

2

3

4

Jul-

15

Oct

-15

Jan

-16

Ap

r-1

6

Jul-

16

Oct

-16

Jan

-17

Ap

r-1

7

Jul-

17

Oct

-17

Jan

-18

Ap

r-1

8

Jul-

18

Oct

-18

Jan

-19

Ap

r-1

9

Jul-

19

Oct

-19

Jan

-20Net Domestic MF Investment (US$ billion)

Net DIIs as a percentage of Market capitalization

0.9

2.1

0.4

-0.3-0.1

-1.1-0.7

-0.2

0.9

0.2

0.80.5

1.2

-1.7

-1.0

-0.3

0.4

1.1

1.8

2.5

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

Net DII Investment/ Market Capitalization (%)

-10.0

-5.0

0.0

5.0

10.0

May

-07

Dec

-07

Jul-

08

Feb

-09

Sep

-09

Ap

r-1

0

No

v-1

0

Jun

-11

Jan

-12

Au

g-1

2

Mar

-13

Oct

-13

May

-14

Dec

-14

Jul-

15

Feb

-16

Sep

-16

Ap

r-1

7

No

v-1

7

Jun

-18

Jan

-19

Au

g-1

9

Mar

-20

FII Investment - Equity (US$ Billion)

Net DIIs purchased US$ 7.5 bn in March 2020 vs. US$2.35 bn

in Feb 2020

-4

-2

0

2

4

6

8

Jul-

15

Oct

-15

Jan

-16

Ap

r-1

6

Jul-

16

Oct

-16

Jan

-17

Ap

r-1

7

Jul-

17

Oct

-17

Jan

-18

Ap

r-1

8

Jul-

18

Oct

-18

Jan

-19

Ap

r-1

9

Jul-

19

Oct

-19

Jan

-20

Net DII Investment (US$ billion)

Equity Outlook

Source:Bloomberg, SBIMF Research

8

12

16

20

24

May

-06

Jan

-07

Sep

-07

May

-08

Jan

-09

Sep

-09

May

-10

Jan

-11

Sep

-11

May

-12

Jan

-13

Sep

-13

May

-14

Jan

-15

Sep

-15

May

-16

Jan

-17

Sep

-17

May

-18

Jan

-19

Sep

-19

NIFTY 12M Fwd PE Ratio

Mean

+1 SD

-1 SD

Nifty trading at 14.3 times forward earnings

• Coronavirus dominated headlines through the month and global risk assets

sold off sharply as the spread of the disease led to fears that slowdown in

global growth could be severe. Long-dated US bond yields plunged to

record lows.

• Nifty and Sensex fell by 23% each during March 2020. Broader markets fell

too with Nifty Midcap and Nifty Small-cap down 28% and 30% respectively.

FIIs sold US$ 8.4 billion in equities in March’2020.

• While it is too early to estimate the exact impact of Coronavirus on global

economy and consequently Indian economy, it is very likely that policy

action will stay very growth supportive. Yet growth continuing to struggle

globally even with all the monetary accommodation only suggests that

monetary policy has hit its limits. This only reaffirms our belief that fiscal

policy will have to play a major role going forward to take the global

economy out of this prolonged slump.

• Valuation attractiveness has increased somewhat post the recent fall. On

several measures of corporate performance such as return on equity, profit

margins, and corporate profits as proportion of GDP, we are at multi-year

troughs, though, there is a case for some downward reversion in economic

activity and earnings projection for FY21 as well.

• In the near-term, markets will have to navigate the pain of the crisis and its

aftermath. Heightened volatility should continue in the near term as

investors keep an eye on evolution of Covid-19 on one hand and policy

response on economic stress on the other. While the outlook for forward

earnings stays uncertain, we stay bottom-up in our approach by focusing on

resilient businesses that should emerge stronger on the other side.

FIXED INCOME MARKET

Bond yields in key developed markets: March 2020


• Bond yields across countries presented mixed picture with yields declining in the US, Germany and UK while increasing

in Italy, Japan, Spain and Switzerland.

• The 10-year US GSec yields have fallen by 125 bps. Increased safe haven assets buying by investors on account of

growth concerns amidst coronavirus scare helped the rally in US yields.

10 Year Gsec

Yield (% mth

end)

2017 end 2018 end 2019 end Jan-20 Feb-20 Mar-20m-o-m

(in bps)

YTD

change (in

bps)

Developed market

US 2.41 2.68 1.92 1.51 1.15 0.67 -48 -125

Germany 0.43 0.24 -0.19 -0.43 -0.61 -0.47 14 -29

Italy 2.02 2.74 1.41 0.94 1.10 1.52 42 11

Japan 0.05 0.00 -0.01 -0.07 -0.15 0.02 18 3

Spain 1.57 1.42 0.47 0.24 0.28 0.68 40 21

Switzerland -0.15 -0.25 -0.47 -0.73 -0.82 -0.33 49 14

UK 1.19 1.28 0.82 0.52 0.44 0.36 -9 -47

Bond yields at historic lows

Source : Bloomberg, SBIMF Research.

US 10 Year and 30 Year Treasuries yield at historic lows

Bond yields in the key emerging markets: March 2020


10 Year

Gsec Yield

(% mth end)

2017 end 2018 end 2019 end Jan-20 Feb-20 Mar-20m-o-m (in

bps)

YTD change

(in bps)

Emerging Market

Brazil 10.26 9.24 6.79 6.71 6.68 8.62 194 183

China 3.90 3.31 3.14 3.00 2.73 2.59 -15 -56

India 7.33 7.37 6.56 6.60 6.37 6.14 -23 -42

Indonesia 6.29 7.98 7.04 6.65 6.91 7.85 94 82

South Korea 2.47 1.96 1.67 1.56 1.33 1.55 23 -12

Malaysia 3.91 4.08 3.31 3.13 2.83 3.36 53 4

Phillippines 4.93 7.01 4.34 4.43 4.33 4.33 0 -2

Russia 7.49 8.70 6.36 6.27 6.48 6.75 28 39

Thailand 2.32 2.48 1.48 1.29 1.06 1.40 34 -8

Turkey 11.67 16.42 12.21 10.23 13.00 13.55 55 134

Mexico 7.66 8.66 6.91 6.63 6.87 7.12 25 21

Poland 3.30 2.83 2.12 2.14 1.79 1.68 -11 -44

South Africa 8.72 8.72 9.03 8.98 9.12 11.00 188 197

Colombia 6.48 6.75 6.34 5.95 5.80 8.42 262 208

Hungary 2.02 3.01 2.01 2.07 2.17 2.65 48 64

Commodity prices fall on the fear of low demand


-51-48

-43 -42-40

-19 -18-16 -15 -15 -15 -13 -13 -12 -11 -10 -9 -8 -7 -5

-2 -2

5 712

-60

-40

-20

0

20

Gas

olin

e

WTI

Bre

nt

Gas

Oil

Hea

tin

g O

il

Nat

ura

l Gas

Pla

tin

um

Zin

c

Co

pp

er

Co

tto

n

Nic

kel

Silv

er

Co

ffee

Suga

r

Tin

Lead

Alu

min

ium

Co

rn

Soyb

ean

s

Co

al

Ura

niu

m

Wh

eat

Iro

n O

re

Go

ld

Pal

lad

ium

Average commodity prices

(% change YTD)

Gold prices at seven year high


Gold prices at 7 year high, though it gave away some of the gains in March

India Rates Snapshot: March 2020

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;

Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20

m-o-m

change (in

bps)

YTD

change (in

bps)

1 Yr T-Bill 5.60 5.25 5.11 5.19 5.29 5.20 4.94 -26 -25

3M T-Bill 5.24 5.02 4.88 5.04 5.13 5.06 4.36 -70 -68

10 year GSec 6.70 6.45 6.47 6.56 6.60 6.37 6.14 -23 -42

3M CD*** 5.75 5.25 5.33 5.08 5.38 5.40 4.83 -58 -25

12M CD*** 6.63 6.13 5.68 5.98 5.98 5.73 5.48 -25 -50

3 Yr Corp Bond* 7.12 7.03 6.65 6.95 6.83 6.34 6.54 21 -41

5 Yr Corp Bond* 7.44 7.29 7.14 7.17 7.15 6.80 7.02 22 -14

10 Yr Corp Bond* 7.87 7.84 7.74 7.63 7.83 7.43 7.51 7 -12

1 Yr IRS 5.09 5.11 5.01 5.34 5.26 4.97 4.30 -67 -104

5 Yr IRS 5.11 5.16 5.09 5.54 5.42 5.02 4.73 -29 -81

Overnight MIBOR Rate 5.52 5.25 5.25 5.26 5.05 5.09 4.81 -28 -45

INR/USD 70.9 70.93 71.74 71.38 71.36 72.18 75.63 -5^ -6^

Crude Oil Indian Basket** 61.7 59.70 62.54 65.52 64.10 54.90 33.30 -39^ -49^

• Indian G-sec market has been extremely volatile. The 10-year G-Sec yields declined by 23 bps from 6.37% in February

2020 to 6.14% in March 2020 but traced back to ~6.30% in first week of April.

• Benign crude oil prices, risk of lower growth and continued monetary easing support the fall in yields. However, concerns

surrounding the likely fiscal slippages to combat the impact of COVID-19 and FPI outflows limit the fall.

• Crude oil prices for the Indian basket declined by 39% in March to US$ 33/bbl in Mar 2020.Concerns over oil demand amid

outbreak of coronavirus and the non-agreement between OPEC countries exerted downward pressure on prices, though

recent news flows suggest some reconciliation between the members over production cut..

• Rupee weakened against the US dollar and reached 76.15/US$ on March 22, 2020. Concerns over Global recession have

led to investors rushing towards safe haven assets, thus leading to FII outflows from India and rupee depreciation.

FIIs sold Indian debt assets


FIIs sold US$ 8.2 bn in March 2020 in debt

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

May

-07

No

v-0

7

May

-08

No

v-0

8

May

-09

No

v-0

9

May

-10

No

v-1

0

May

-11

No

v-1

1

May

-12

No

v-1

2

May

-13

No

v-1

3

May

-14

No

v-1

4

May

-15

No

v-1

5

May

-16

No

v-1

6

May

-17

No

v-1

7

May

-18

No

v-1

8

May

-19

No

v-1

9

FII investment - Debt (US$ bn)

India G-Sec yield curve


4

5

6

7

8

1 Y

ear

2 Y

ear

3 Y

ear

4 Y

ear

5 Y

ear

6 Y

ear

7 Y

ear

8 Y

ear

10

Yea

r

15

Yea

r

30

Yea

r

31-Dec-19 31-Mar-20

Govt. bond yield (%)

Rates moved lower across the tenor, with relatively sharper fall in 1-5 year segment

0.00

0.50

1.00

1.50

2.00

2.50

Sep

-15

Feb

-16

Jul-

16

De

c-1

6

May

-17

Oct

-17

Mar

-18

Au

g-1

8

Jan

-19

Jun

-19

No

v-1

9

Spread 10 yr - 3mths

0.00

0.50

1.00

1.50

2.00

Sep

-15

Feb

-16

Jul-

16

De

c-1

6

May

-17

Oct

-17

Mar

-18

Au

g-1

8

Jan

-19

Jun

-19

No

v-1

9

Spread 10yr - 1 yr

-0.50

0.00

0.50

Sep

-15

Feb

-16

Jul-

16

De

c-1

6

May

-17

Oct

-17

Mar

-18

Au

g-1

8

Jan

-19

Jun

-19

No

v-1

9

Spread 10yr - 5 yr

COVID-19 disruptions to lead to significant economic shock

Source : CMIE Economic outlook , SBIMF Research.

Indian economic growth could further moderate in FY21• We expect India’s growth to moderate in FY21 from an estimated growth

of 4.6% in FY20.

• Lockdown spread over March/April results in output loss of ~5.7% of the

total annual output. The limited human contact required to contain the

spread of the virus is hindering economic activity. Given elevated

infection rates, the public fear may result in below-normal activity for a

few more months. Even if demand for durable goods picks up,

consumption of services may stay weak.

• As corporate profits are squeezed (weakening operating leverage) they

are likely to delay capex plans, lower salaries and cut jobs, which in turn

will weaken consumption demand. As corporates struggle, banking

sector GNPAs are likely to deteriorate.

• The Rabi sowing was healthy and was expected to lay out good

prospects for Agri/rural income. Now against the lock down scenario, the

sale of these products are likely to face challenges when the rabi

products hit the mandi(s) in April/May

• Other factors that will weigh on growth are a) increased risks of a global

recession, b) grim domestic employment situation for nearly a decade, c)

high leverage in government and household balance-sheet, d) weakness

in financial sector health and e) erosion of wealth due equity price fall.

• On positive side, as per RBI estimates, the impact of the 10% fall in

crude oil price is expected to increase growth by 15 bps. But it is

contingent on benefits being passed on and leading to higher demand.

• Massive policy support (both fiscal and monetary) is needed to support

the growth conditions in India.

The projections of growth and inflation for FY21

would be heavily contingent on the intensity ,

spread and duration of COVID-19

5.5

6.4

7.48.0 8.3

7.0

6.1

4.6

0

2

4

6

8

10

FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 E

Real GDP (% y-o-y)

Inflation to moderate from here

Source : CMIE economic outlook, SBIMF Research.

0

2

4

6

8

10

12

14M

ar-1

2

Jun

-12

Sep

-12

De

c-1

2

Mar

-13

Jun

-13

Sep

-13

De

c-1

3

Mar

-14

Jun

-14

Sep

-14

De

c-1

4

Mar

-15

Jun

-15

Sep

-15

De

c-1

5

Mar

-16

Jun

-16

Sep

-16

De

c-1

6

Mar

-17

Jun

-17

Sep

-17

De

c-1

7

Mar

-18

Jun

-18

Sep

-18

De

c-1

8

Mar

-19

Jun

-19

Sep

-19

De

c-1

9

Mar

-20

Jun

-20

Sep

-20

De

c-2

0

Mar

-21

CPI % y-o-y

CPI target range 4% + 2% Forecast

CPI inflation likely to average around 4.8% in FY20 and ~4.5% in FY21

• We expect inflation to average around 4.8% in FY20 and ~4.5% in FY21.

• Unusual rain pattern, supply adjustment in response to low food inflation during 2017-2019 and rise in global edible oil prices

contributed led to a sharp surge in food inflation and hence overall CPI inflation during Dec’ 2019-Feb’20. The up-move in food

inflation was broad based, though sharpest inflation was recorded in vegetables and pulses (which contributed to 40% of higher

inflation print). Higher inflation was more for supply reasons than demand factors. Fuel inflation also picked up in recent months

due to higher LPG and kerosene prices, but core inflation remained benign.

• Inflation is likely to moderate in FY21. All the current forces such as crash in global crude oil prices and likelihood of further

weakness in demand growth amidst coronavirus scare are deflationary in nature. Inflation may remain benign till they persist.

• We expect the inflation to fall below 6% as early as in March 2020. Part of it would be driven likely sharp crash in meat & fish

prices and moderation in some of the services prices (such as air-fare, hotels, entertainment etc..) due to COVID-19 scare. But

broadly, food inflation will normalize for veggies, cereals and spices. On the other hand, edible oil, milk, egg will continue to

exhibit firmness in inflation. At the current juncture, it is very difficult to predict how long these trends will last (we have penciled

some normalcy post June 2019). Even the crude price fall is partly political in nature. These prices could quickly revert upwards

once the normalcy restore. Moderation in CPI inflation will add support to RBI’s accommodative stance.

Crude price fall to lead to massive oil savings

Source : CMIE Economic Outlook, PPAC, SBIMF Research.

Sharp fall in crude oil prices

20

40

60

80

100

120

Ma

r-1

0

Au

g-1

0

Jan

-11

Jun

-11

Nov-1

1

Ap

r-12

Se

p-1

2

Fe

b-1

3

Jul-

13

Dec-1

3

Ma

y-1

4

Oct-

14

Ma

r-1

5

Au

g-1

5

Jan

-16

Jun

-16

No

v-1

6

Ap

r-17

Se

p-1

7

Fe

b-1

8

Jul-

18

Dec-1

8

Ma

y-1

9

Oct-

19

Ma

r-2

0

Brent prices -average ( US $ per barrel)

9,812

4,082

3,724

3,185

2,574

1,888

1,531

1,274

1,233

1,222

US

China

Japan

India

Korea

Germany

Italy

Netherlands

Spain

UK

Crude Oil Imports ('000barrels per day)

Data is for 2018

229 239

279

1,585

0

400

800

1200

1600

2000

19

98

-99

19

99

-00

20

00

-01

20

01

-02

20

02

-03

20

03

-04

20

04

-05

20

05

-06

20

06

-07

20

07

-08

20

08

-09

20

09

-10

20

10

-11

20

11

-12

20

12

-13

20

13

-14

20

14

-15

20

15

-16

20

16

-17

20

17

-18

20

18

-19

Crude- Domestic Production Crude Import

Million Barrel

India is the 4th largest importer of crude oil

India imports 87% of its crude oil need i.e. 1.6 billion barrel

annually

POL import bill and crude price

87 106 155 164 165 138 83 87 109 141 127 85

69

87

114 108 106

84

46 4857

7060

45

0

20

40

60

80

100

120

60

80

100

120

140

160

180

FY1

0

FY1

1

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6

FY1

7

FY1

8

FY1

9

FY2

0E

FY2

1E

POL Import (US$ billion)

Crude Prices (US$/barrel)- Avg Indian basket - RHS

But exports, remittances and services receipts to weaken too

Source : CMIE Economic outlook, SBIMF Research.

India’s export receipts have almost been flat for 9 yearsFall in crude oil prices(i.e. reflective of weak global demand)

result in decline in India’s exports

Net Travel receipts could fall by 2/3rd to US $2-3 bn in FY21

due to COVID-19

250

270

290

310

330

350

0

30

60

90

120

Fe

b-1

4

Jun

-14

Oct-

14

Fe

b-1

5

Jun

-15

Oct-

15

Fe

b-1

6

Jun

-16

Oct-

16

Fe

b-1

7

Jun

-17

Oct-

17

Fe

b-1

8

Jun

-18

Oct-

18

Fe

b-1

9

Jun

-19

Oct-

19

Fe

b-2

0

Brent (US$/bbl)- 3m earlier Total exports (US$ billion) -RHS

13 15 1622 21

2430

42 4552 53

63 64 65 6663

5763

71 72

20

40

60

80

100

120

10

20

30

40

50

60

70

80

FY0

1

FY0

2

FY0

3

FY0

4

FY0

5

FY0

6

FY0

7

FY0

8

FY0

9

FY1

0

FY1

1

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6

FY1

7

FY1

8

FY1

9

FY2

0e

BoP: Private Transfers (US$ billion) Brent (US$/barrel)- RHS

Private transfers could fall sharply both due to crude

and COVID-19

On balance, current account will improve

Source : RBI, CMIE Economic outlook , SBIMF Research; *assuming flat growth in crude oil import demand

Average crude price in FY20 (US$/bbl) 60

Net POL import bill in FY20 (US$ billion)- estimated 87

Case 1 Case 2 Case 3 Case 4 Case 5

Crude Price (US$/bbl) 25 35 45 55 65

Export of POL products in FY21 (in billion barrel) 0.4 0.4 0.4 0.4 0.4

Imports of crude & POL products in FY21 (in billion barrel)* 1.9 1.9 1.9 1.9 1.9

Exports Receipts from POL exports (US$ billion) 10 14 18 22 26

Import bill from Crude & POL products (US$ billion) 48 67 86 105 124

Net POL import bill in FY21 (US$ billion) 38 53 68 83 98

Net Savings (US$ billion) 50 35 20 5 -11

2.9 2.9

4.34.8

1.71.4

1.10.7

1.82.1

0.70.5

0

1

2

3

4

5

6

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20 E

FY

21E

CAD (% GDP)

Current account deficit expected to narrow to 0.5% in FY21 FDI inflow will be sufficient to fund CAD in FY20 and FY21

48

78

88

3228

2215

4957

211412

22 20 22

33 36 3630 31

40

30

0

20

40

60

80

100

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20E

FY

21 E

CAD Net FDI - in US$ billion

External account: BoP to stay in surplus

Source : CMIE Economic Outlook ; SBIMF Research.

Balance of Payment likely to post a surplus in FY21

13 13

-13

4

16

61

1822

44

-3

41 41

-20

-10

0

10

20

30

40

50

60

70

FY1

0

FY1

1

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6

FY1

7

FY1

8

FY1

9

FY2

0E

FY2

1 E

BoP - US $ billion

India’s FDI inflows have been on a structural ascent since

FY07

8

16

2218

12

21.919.8 21.6

31.3

36.0 35.6

30.3 30.7

40.0

0

10

20

30

40

50

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20 E

Net FDI (US $ billion)

32 30

17

27

5

41

-5

8

22

-1

05

-10

0

10

20

30

40

50

FY1

0

FY1

1

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6

FY1

7

FY1

8

FY1

9

FY2

0E

FY2

1 E

Net FII (US$ Billion)

On a net Basis, FII inflows have been muted in four out of

five years between FY16 to FY20

Net ECB inflows at 12 year high in FY20

Brent and Policy rate

Source : SBIMF Research.

Change in Repo Rate

(in bps)

Change in Brent price

(in %)

May 2004-Jul 2006 100 119

Jul 2006 - Jan 2007 50 -27

Jan 2007- Jul 2008 150 147

Jul 2008- Dec 2008 -250 -70

Dec 2008-Mar 2012 200 214

Mar 2012- Apr 2016 -200 -67

Apr 2016 - Oct 2018 0 95

Oct 2018- till date -210 -59

0

40

80

120

160

2

4

6

8

10

Dec

-04

Jul-

05

Feb

-06

Sep

-06

Ap

r-0

7

No

v-07

Jun

-08

Jan

-09

Au

g-0

9

Mar

-10

Oct

-10

May

-11

Dec

-11

Jul-

12

Feb

-13

Sep

-13

Ap

r-1

4

No

v-14

Jun

-15

Jan

-16

Au

g-1

6

Mar

-17

Oct

-17

May

-18

Dec

-18

Jul-

19

Feb

-20

Repo Rate (in %) Brent (US$ per barrel)- RHS

Almost every time, Brent rise and fall has been accompanied with rate hikes and cut respectively

Movement in Rupee


-23 -22 -21 -20 -19-15

-10 -10 -9 -8 -6 -5 -5-2 -1 0

1 27

15

-30

-20

-10

0

10

20

Bra

zil R

eal

Afr

ican

Ran

d

Ru

ssia

n R

ou

ble

Mex

ican

Pes

o

Co

lom

bia

n P

eso

Ind

on

esia

n R

up

iah

Turk

ey L

ira

Hu

nga

rian

Fo

rin

t

Thai

Bah

t

Po

lish

Zlo

ty

Ind

ian

Ru

pee

Mal

aysi

an R

ingi

tt

Ko

rean

Wo

n

Ch

ines

e re

nm

inb

i

Taiw

anes

e D

olla

r

Ph

ilip

pin

e P

eso

Jap

anes

e Ye

n

Euro

Bri

tish

Po

un

d

Au

stra

lian

Do

llar

(% change YTD)

Most EM currencies depreciated YTD as investors rush to safe haven assets

68.8

71.4

71.4

75.6

65

67

69

71

73

75

77

Jan

-19

Feb

-19

Mar

-19

Ap

r-1

9

May

-19

Jun

-19

Jul-

19

Au

g-1

9

Sep

-19

Oct

-19

No

v-1

9

Dec

-19

Jan

-20

Feb

-20

Mar

-20

Rupee/USD (month-end)

Rupee depreciated by 4.5% in March 2020 and stood at

Rs 75.6/$ on 31st March 2020

80

85

90

95

100

105

110

115

De

c-1

0

Oct

-11

Au

g-1

2

Jun

-13

Ap

r-1

4

Feb

-15

De

c-1

5

Oct

-16

Au

g-1

7

Jun

-18

Ap

r-1

9

Feb

-20

Trade weights : 6 currency REER Trade weights : 36 currency

2010-11=100

REER indicates marginally appreciated rupee- will come to

more equilibrium levels with depreciation in March

Outlook on Rupee

Source : RBI , CMIE economic outlook, SBIMF Research; *uptil 20th March 2020

Favourable factors

Risk

• Crude oil price crash and

strong Forex reserves to work

in favour of rupee

• The coordinated global

policy easing may stem the

portfolio outflows but may

take a while for risk appetite to

fully recover.

• US $ and other safe haven

currencies to maintain its

appreciation bias , that can

weigh on Indian currency

• Rupee likely to come under

pressure if number of new

virus cases sharply rise in India

or policymakers undelivered and

growth is impacted

Rupee is likely to maintain a depreciation bias in the near-term. Global and local policy action, number of COVID-

19 cases in India and its impact on growth will determine the near-term trajectory

Foreign Exchange reserves at an all time high

277

303 294 293304

341356

370

424412

470

200

250

300

350

400

450

500

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20*

Total FX Reserves (US $ billion)

Central fiscal situation witnessing pressure

Source : CMIE economicc outlook, SBIMF Research ; Uptil March’2020.

• Centre’s fiscal deficit uptil Feb’2020 stands at Rs 10.36 trillion against RE of Rs. 7.67 trillion i.e. Rs. 2.7 trillion or 34%

higher than the target.

• Receipts stand at Rs. 14.3 trillion till Feb end, i.e. Rs. 5 trillion lower than revised collection target of RS. 19.3 trillion.

• Cumulative Gross tax and net tax revenue has shown -0.8% and 2% growth respectively during Apr-Feb against the revised

growth targets of 4% (for gross tax) and 14.2% for net tax.

• As per the data available on disinvestments, nearly Rs. 500 billion has been materialised in this fiscal year, thus creating a

shortfall of Rs 150 billion.

• The recent data on GST collections also point towards shortfall. The collection contracted by (-)8.4% y-o-y in March 2020

(Rs. 976 billion). There is a high likelihood that the fiscal deficit target for FY20 (i.e. 3.8% of GDP) will be breached.

7.7

18

.5

15

.0 3.5

0.7

23

.5 3.5

10

.4

13

.8

11

.1 2.6

0.5

21

.6 3.0

0

5

10

15

20

25

Fiscal Deficit Revenue receipts Tax revenues Non-tax revenues Disinvestments* Revenueexpenditure

Capitalexpenditure

FY20 (RE)Rs billion

April-Feb'2020Rs billion

Fiscal deficit targets may be breached

Source : CMIE economic outlook, SBIMF Research.

• Central government has failed to achieve its FY20 tax revenue targets making the FY21 asking growth rate highly ambitious. As

per our calculations, tax revenues will have to grow by ~23% in FY21 to meet the budgeted target. Tax collections in FY21 may

be missed by a wide margin.

• The weakness in equity market make the disinvestment targets appear too tall, while the spectrum auctions planned for FY21

may have to be shifted forward by another year. Some weakness in revenue may be tide over by the excise duty hike and

reduced subsidy outgo due to crude price fall.

• Central government has announced fiscal stimulus measures in the wake of COVID-19 and may have to deliver some more

stimulus going ahead.

• Anticipated fiscal stimulus measures along with weakness in receipts will likely lead to fiscal slippage of 2% of GDP in FY21.

2.6

6.16.6

4.9

5.9

4.94.5

4.1 3.93.5 3.5 3.4

3.8

5.5%

0

1

2

3

4

5

6

7

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20 R

E

FY

21 E

Fiscal deficit (as a % of GDP)

Likely fiscal slippage of nearly 2% of GDP in FY21 ...

Crude and government finances


• States charge VAT on petroleum products. VAT on petroleum products is an ad-valorem tax. Ideally, with fall in crude prices,

pre-VAT price of petrol and diesel should fall and should translate in lower VAT collection.

• However, VAT is a tax on tax, implying that it is calculated after adding up the excise duty. Hence, with rise in excise duty, the

fall in VAT may not be that much.

• Further, states may also hike VAT on petrol and diesel

Impact of crude oil decline on Central government finances

Impact on state government finances

Centre hiked excise duty by Rs 3/litre on petrol and

diesel – which will provide additional revenues of Rs 450

billion in FY21

If govt exercise the provision to hike excise duty by

another Rs.8/litre, it will entail additional benefit of Rs 1

trillion annually

Crude prices below US$ 50/bbl entails no additional

subsidy cost to government on LPG and Kerosene.

Therefore, govt see a subsidy savings of Rs. 260 billion

in FY21 (BE of Rs.400 bn – 140 bn of last year dues)

Lower collections from upstream oil companies as levies

like royalties (on offshore output) and cesses are ad-

valorem

There is also a likelihood of reduced income tax

payments and dividend by the oil companies

Materializing the BPCL investment will be difficult amid

crude oil price decline

Benefits Adversaries

Centre plans to raise 62.5% of its budgeted borrowings in 1HFY21


Higher than budgeted borrowings for FY21 may be inevitable amid increased likelihood of fiscal stimulus

Inclusion in global bond

indices

Small savings

schemes

OMOs purchases

by the RBI

In case of fiscal slippages, higher borrowings will be

funded by a mix of following operations :

➢ OMO Purchases by the RBI

➢ Small Savings Scheme

➢ Inclusion in Global Bond Indices (As a precursor to

it, RBI has announced special securities in which

there will be no foreign investment limit, which are

now termed as ‘fully accessible route’.

1H Borrowing calendar

Rs bn 1H Borrowing

Total Budgeted

borrowing

1H Borrowing

(% of Budget)

FY15 3,680 6,000 61

FY16 3,600 6,000 60

FY17 3,550 6,000 59

FY18 3,720 5,800 64

FY19 2,880 6,055 48

FY20 4,420 7,100 62

FY21 4,880 7,800 63

Low credit growth despite surplus banking system liquidity

Source : RBI, BIMF Research.

• Banking system liquidity remained in surplus for

the 10th consecutive month.

• Currency in circulation for the financial year so

far (Apr-March 20,2020) grew by 12.8%, lower

than the 17.4% growth witnessed in the

corresponding period a year ago.

• Looking ahead, we expect the inter-bank

liquidity to continue to remain in the surplus in

the coming quarter aided by tepid credit –offtake

vis-à-vis deposit growth.

77.69

99.61

26.89

5.4

76.02

48.19

28.45

54.09

0

20

40

60

80

100

120

Credit/Deposit Incrementalcredit/deposit

Investment/Deposit Incrementalinvestment/deposit

As of 29th March 2019 As of 13th March 2020

Ratios (%)

-5,000

-4,000

-3,000

-2,000

-1,000

0

1,000

2,000

Sep

-15

Jan

-16

May

-16

Sep

-16

Jan

-17

May

-17

Sep

-17

Jan

-18

May

-18

Sep

-18

Jan

-19

May

-19

Sep

-19

Jan

-20

Average monthly banking system liquidity - Rs billion (+ve is…

Net Borrowing of Banks from the RBI adjusted for surplus cash reserve

0

4

8

12

16

20

Jan

-16

Mar

-16

May

-16

Jul-

16

Sep

-16

No

v-16

Jan

-17

Mar

-17

May

-17

Jul-

17Se

p-1

7N

ov-

17Ja

n-1

8M

ar-1

8M

ay-1

8Ju

l-18

Sep

-18

No

v-18

Jan

-19

Mar

-19

May

-19

Jul-

19

Sep

-19

No

v-19

Jan

-20

Mar

-20

Bank deposit Bank credit

(% y-o-y)

Summary of Economic Parameters


Growth GDP growth could be materially lower in FY21 vs. expected growth of 4.6% in FY20

Inflation CPI inflation is likely to average around 4.8% in FY20 and ~4.5% in FY21. All the current forces such as crash

in global crude oil prices and likelihood of further weakness in demand growth amidst coronavirus scare are

deflationary in nature. Inflation may remain benign till they persist.

External account

Current account deficit is likely to narrow to 0.5% of GDP in FY21 owing to lower crude oil prices and subdued

capital goods imports. BOP is likely to remain in surplus in FY21 as lower current account deficit (due to fall in

oil price) will offset the expectation of reduced FDI and ECB inflows.

Rupee We expect Rupee to maintain a depreciation bias in FY21. Global and domestic policy actions, number of

COVID-19 cases in India and expectation of domestic growth will shape the near-term rupee trajectory.

Expectation of favourable current account balance in FY21 and strong FX reserves with RBI is likely to provide

some support to Rupee.

Fiscal Anticipated fiscal stimulus measures along with weakness in receipts will likely lead to a fiscal slippage of 2%

of GDP in FY21. The fiscal deficit may reach 5.5%-6% of GDP in FY21.

Valuations: India vs. US 10-year G-sec

Source: Bloomberg, SBIFM Research

3.0

4.0

5.0

6.0

7.0

8.0

Sep

-09

Ap

r-1

0

No

v-1

0

Jun

-11

Jan

-12

Au

g-1

2

Mar

-13

Oct

-13

May

-14

De

c-1

4

Jul-

15

Feb

-16

Sep

-16

Ap

r-1

7

No

v-1

7

Jun

-18

Jan

-19

Au

g-1

9

Mar

-20

India minus US 10 year G-sec (in %) LTA since 2001

10 year Avg (in %) 5 year average (in %)

-3.0

-1.0

1.0

3.0

Sep

-09

Mar

-10

Sep

-10

Mar

-11

Sep

-11

Mar

-12

Sep

-12

Mar

-13

Sep

-13

Mar

-14

Sep

-14

Mar

-15

Sep

-15

Mar

-16

Sep

-16

Mar

-17

Sep

-17

Mar

-18

Sep

-18

Mar

-19

Sep

-19

Mar

-20

India minus US 10 year G-sec adjusted for 1 yr rupee fwd premium(in %)LTA since 200110 year Avg (in %)5 year average (in %)

Spread of 10-year G-sec (India-US) broadly in line with

historical averages Spread of 10-year G-sec (India-US) adjusted for 1-year

currency premium: unattractive (investors look for 2% plus)

Valuations: AAA Corporate Bonds vs. GSec


Spread of 10-year AAA Corporate Bonds vs. G-sec: 137bps in March 2020, higher than recent trend but

lower than the average of 236 bps during 2008 crisis)

20

100

180

260

340

420

Sep

-07

Feb

-08

Jul-

08

Dec

-08

May

-09

Oct

-09

Mar

-10

Au

g-1

0

Jan

-11

Jun

-11

No

v-1

1

Ap

r-1

2

Sep

-12

Feb

-13

Jul-

13

Dec

-13

May

-14

Oct

-14

Mar

-15

Au

g-1

5

Jan

-16

Jun

-16

No

v-1

6

Ap

r-1

7

Sep

-17

Feb

-18

Jul-

18

Dec

-18

May

-19

Oct

-19

Mar

-20

10 year Corp Bond minus G-sec (in bps) LTA since 2002 10 year avg. 5 year avg.

Spread here

touched ~400

Policy rate Outlook

Source : CMIE Economic outlook ; SBIMF Research.

6.50

6.00

6.50

5.15

4.40

3

5

7

9

Jan

-11

Jul-

11

Jan

-12

Jul-

12

Jan

-13

Jul-

13

Jan

-14

Jul-

14

Jan

-15

Jul-

15

Jan

-16

Jul-

16

Jan

-17

Jul-

17

Jan

-18

Jul-

18

Jan

-19

Jul-

19

Jan

-20

RBI reduced the repo rate by 75 bps to 4.4% in March

2020

• The RBI brought forward its MPC meeting (earlier scheduled in 1st week

of April) and concluded their meeting with a 75bps Repo rate cut (to

4.40%). The LAF window has been widened from 50bps to 65bps as

Reverse repo rate has been lowered by 90bps to 4% and MSF rate has

been brought down by 75bps to 4.65%.

• The CRR (cash reserve ratio) has also been tinkered for the first time in

last seven years (since Feb 2013) and brought down by 100bps to 3% for

one-year period starting March 28, 2020. The move will release Rs 1.37

trillion of primary liquidity into the system right from the day of its

implementation. CRR cut is the most direct and immediate form of

monetary easing measure that any central bank can use.

• Apart from the rate actions, the central bank took host of measures to

a) inject liquidity into the system b) defreeze the corporate bond

market and unwind the higher spreads being witnessed over last

few weeks, c) provide relief to the all the segments of borrowers

(both retail and businesses) who may find it difficult to honour their

term/working capital loans, and d) incentivize the banks to lend by

deferring their statutory obligations, aiding liquidity and reducing

rates.

• Few other key issues which will need addressing by RBI in our view is a)

guidance on the OMO and b) continued support to the banking system in

case the financial stresses amongst the corporates come to the fore

amidst the COVID-19 led growth slowdown.

• Looking ahead, stresses in economic activity and hence growth suggests

that rates will have a softening bias for long.

Debt Market Outlook


-100

0

100

200

300

400

Sep-0

9

Apr-

10

No

v-1

0

Jun-1

1

Jan-1

2

Aug-1

2

Ma

r-1

3

Oct-

13

Ma

y-1

4

De

c-1

4

Jul-1

5

Feb

-16

Sep-1

6

Apr-

17

No

v-1

7

Jun-1

8

Jan-1

9

Aug-1

9

Ma

r-2

0

10 year G-sec minus Repo rate (in bps)10 year average

Spread when CD ratio>74%: 70bs

Spread when CD ratio<74%: 58bps

LTA since 2001: 88bps

8.0

6.4

6.7

6.1

4.404.0

5.0

6.0

7.0

8.0

9.0

10.0

Jan-1

4

Ma

y-1

4

Sep-1

4

Jan-1

5

Ma

y-1

5

Sep-1

5

Jan-1

6

Ma

y-1

6

Sep-1

6

Jan-1

7

Ma

y-1

7

Sep-1

7

Jan-1

8

Ma

y-1

8

Sep-1

8

Jan-1

9

Ma

y-1

9

Sep-1

9

Jan-2

0

10 year G-sec (in %) Repo Rate (in %)

• Indian G-sec market has been extremely volatile. 10-year G-Sec yield

declined by 23 bps during the month to 6.14% but traced back to ~6.30% in

first week of April.

• Benign crude oil prices, risk of lower growth and expectation of continued

monetary easing support the fall in yields. However, concerns surrounding

the likely fiscal slippages to combat the impact of COVID-19 and FPI

outflows limit the fall.

• Growth is expected to weaken as the COVID-19 leads to risk of global

growth recession, supply chain disruption both globally and locally, and

weakening prospects for domestic demand. Inflation has likely peaked in

February 2020 and should moderate through 2020. As such growth inflation

dynamics are supportive of continued monetary policy easing.

• Rupee depreciated to ~76/US$ in March and should continue to see a

depreciation bias, at lease in Q1 FY21 as FPI flows chases safe haven

assets and invest out of India. That said, a favourable external account

dynamics (emanating primarily from low crude prices) and strong FX

reserves balance should keep the rupee supported.

• Government balance-sheet is stressed and pose significant risks of slipping

the stated deficit target and hence translating into higher than budgeted

borrowings. Policy makers are working on creating enabling framework so

that a part of higher fiscal deficit can be financed via external sources. RBI

may also have to come forward and monetize the fiscal deficit via OMO

purchase.

• In the other fixed income assets, challenge is of massive liquidity on one

hand and deteriorating credit conditions on the other.

• We stay long duration as we think that ultimately the central bank will

continue to take alternate policy actions so as to keep the rates across the

asset class low.

GSec is trading at 174 bps spread to Repo rate

Thank you

Disclaimer

This presentation is for information purposes only and is not an offer to sell or a solicitation to buy anymutual fund units/securities. These views alone are not sufficient and should not be used for thedevelopment or implementation of an investment strategy. It should not be construed as investmentadvice to any party. All opinions and estimates included here constitute our view as of this date and aresubject to change without notice. Neither SBI Funds Management Private Limited, nor any personconnected with it, accepts any liability arising from the use of this information. The recipient of thismaterial should rely on their investigations and take their own professional advice.

Mutual Funds investments are subject to market risks, read all scheme related documentscarefully.

Asset Management Company: SBI Funds Management Private Limited (A joint venture with SBI andAMUNDI). Trustee Company: SBI Mutual Fund Trustee Company Private Limited.

Contact Details

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(A joint venture between SBI and AMUNDI)

Corporate Office:

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Documents

Economy and Markets - Mutual Fund India - SBI Mutual Fund, … presentation_april 2020.pdf · COVID-19 cases in India rise sharply in the last few days Source: WHO, as of 6thh April