Economy and Markets

October 2019

EQUITY MARKET

Global equity market snapshot: September 2019

Source: Bloomberg, SBIMF Research

Performance in September 2019 (local currency returns) Performance Year-to-Date (local currency returns)

Performance in September 2019 (US$ returns) Performance Year-to-Date (US$ returns)

Indian stock market sector-wise returns: September 2019

Source: Bloomberg, SBIMF Research

• Nifty and Sensex were up 4% each during the month. Performance down the capitalization curve was positive with mid-cap andsmall-cap indices up 5% each in September.

• On the sectoral basis, majority of the sectors witnessed positive returns during the month, with maximum returns in oil and gasand consumer durables. On the other hand, real estate and IT were sectoral laggards.

• On Year-To-Date basis, Nifty and Sensex show a positive return of 6% and 7% respectively. BSE Large caps (+5%) haveoutperformed the mid caps (-9%) and small caps (-10%) thus far. Consumer durables and IT are sector outperformers whilemetals and auto are sectoral laggards.

Performance in September 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 weaken in August• High frequency activity indicators continue to show weakness in

economic activity.

• There is a visible slowdown in consumption indicators (2-wheelers and car sales, FMCG products or sale ofdiscretionary products). Both RBI’s consumer sentiment andfuture expectations have deteriorated, primarily attributable todeterioration in sentiments on the economic situation andemployment. Consequently, domestic production and imports ofconsumer goods have moderated.

• All the investment related indicators (such as commercialvehicle sales, import and production of capital goods) areshowing signs of moderation.

• Export growth declined to -6% y-o-y in August – indicating weakglobal demand situation for Indian business. 2019 averageexports growth is 1.2% in 2019 vs. 9.2% in 2018.

• On the supply side, while 2019 south-west monsoon endedabove normal, however, large spatial and temporal distributionmay have a negative bearing on the crop yields.

• Growth in industrial production has been weak since Nov’18.Most of key sub-categories (mining, manufacturing and withinmanufacturing – primary, capital goods, intermediate,infrastructure and consumer durables) reported slower growthin August. Domestic auto sales continue to decline across theconsumer and industrial verticals.

• Service sector activity continue to present a mixed picture.

Consumption demand is weakening

Source: CMIE Economic Outlook, Capitalline, SBIMF Research; NB: *Q1 FY20 growth is based on 19 companies

Domestic sales of two-wheelers and cars, which act as a good gauge for rural and urban demand, have declined

Domestic air traffic growth improved marginally in August, butweaker than last year’s trend; partly due to supply side shocks

FMCG Sales growth moderated marginally to 11% in Q1 FY20 vs. 13% in Q4 FY19*

Domestic production of consumer durables declined while consumer non-durables holding up, helped by favorable base

Factors weighing on consumption demand

Source: CMIE Economic Outlook, Capitalline, SBIMF Research

Agri income has been depressed for long; however some improvement in Nominal Agri-GDP seen in Q1 FY20

Even urban wage growth has softened

Rural wage growth has been depressed for long

• Other factors affecting the consumption demand:

o Weak job prospectso Weakness in real estate prices for long leading to

negative wealth effecto Moderation in NBFC loan disbursement (particularly

in the wholesale segment)o Liquidity/funding struggle in the unorganized sector

GST impact on informal segment

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%); *FY19 is based on 4th advance estimates, ** FY20 is based on 1st advance estimates

2019 South-West monsoon ended above normal India’s 2019 South-West monsoon ended above normal with a recorded surplus of 10%

Kharif sowing is at par with previous year*

• 2019 South-West Monsoon ended above normal with a recordsurplus of 10% vs. the expectation of normal rainfall (-4%) bythe Indian Metrological Department’s (IMD), a governmentweather-forecasting agency. Even as monsoon has endedabove normal, spatial and temporal distribution is highly skewed.

• Kharif sowing is in par with previous year. As a result, risks tofood inflation has alleviated. In addition, government has amplestock of most of the crops (particularly, cereals) and hence maynot see meaningful price rise. That said, we have penciled somemean-reversion in food prices. However, poor spatial distributionmay affect the yield of the crops (thus reduced output andquality of crops). Thus, the overall effect on farm income may beunfavorable.

• Looking ahead, live storage of water in major reservoirs standsat 87% of the total capacity (higher than previous year andaverage of last 10 years) – which augurs well for the Rabi crops.

Industrial output weaker than trend

Source: CMIE Economic Outlook, SBIMF Research

Domestic industrial production contracted in August led by a sharp de-growth in manufacturing sector growth

Growth in Investment related indicators (such as capital goods production and imports) has declined

Exports growth has softened; partially led by slowdown in global growth

Non-Oil Non-Gold imports growth is declining; indicating weak domestic demand

Q1 FY20 Capacity utilization moderated in select sectors

Source: RBI, FICCI, SBIMF Research: *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

As per the RBI, capacity utilization moderated to 73.6% in Q1 FY20 vs. 76.1% in Q4 FY19 and lower than LPA of 75%

FICCI survey suggests overall capacity utilization in manufacturing fell to 78% in Q1FY20 vs. 80% in Q4 FY19*

Capacity Utilization (in %) Avg since FY13 Q4 FY19 Q1 FY20Auto 75 80 80Capital Goods 72 74 76Cement 75 80 80Chemicals & Fertilizers 79 77 76Textiles 81 82 84Electronics & Electricals 67 72 67Leather & Footwear 66 60 60Metals 75 88 76Textiles Machinery 59 60 60Paper 84 95 95

• Aggregate capacity utilization for industrials moderated in Q1 FY20 to 73.6% vs. 76.1% in Q4 FY19 and 75% of its long periodaverage.

• Latest FICCI sector-wise capacity utilization for Q1 FY20 also indicated towards marginal moderation in select sectors. Sector likechemicals and fertilizers, electronics and electricals, and metals have witnessed a moderation in the capacity utilization. On theother hand, capacity utilization improved for selective sectors like capital goods and textiles.

• Given the weakness in all three elements of demand i.e. consumption, investment and exports, risks of further moderation incapacity utilization can not be ruled out.

Moderation in bank credit growth

Source: RBI, SBIMF Research

Despite improved banking liquidity, credit growth has moderated since March; led by both demand & supply reasons

…while, small and medium enterprises are in want of funds and reflecting some risk aversion in bank lending

Even as bank industrial credit growth has picked up, incremental industrial credit is led by large industries…

Source: CMIE economic outlook, SBIMF Research,

FY20 growth outlook has weakened

FY20 GDP growth is expected to be around 6.0%

• India’s economic activity has moderated meaningfully in recent months.Government has responded with various reforms, amongst which, one bigbang reform is cut in corporate taxes. While this move doesn’t directlyaddress the near-term demand weakness beyond providing a sentimentboost, this is an important step towards reviving investment cycle, providedit is followed with appropriate regulatory alignment.

• Global growth moderation is weighing on export demand. Domestically,consumption has slowed in 2019 and may not revive meaningfully this year.FY20 state and central budget had corroborated that with weakness inrevenue buoyancy, government has sided with fiscal prudence.

• Farm income support scheme could have helped rural incomes but has metwith implementation challenges (lack of land-records digitization in states).

• Growth is facing both structural and cyclical issues. Structurally, theweakness in household job and income prospects and lack of competitiveadvantage in host of export sectors are affecting growth. Cyclically, theglobal growth and challenges in NBFC sector are at play. NBFC challengesentails the risk of percolating into other parts of financial system given deepconnection between real estate developers, HFCs, banks and bondmarkets.

• Despite the 135bps cut in policy rates and a comfortable inter-bank liquiditysince June, financial conditions have not eased that much. While the liquidsegments have responded to monetary easing, spreads in the othersegment (lower rated corporate, bank lending) continues to remain high.

• We expect India's real GDP growth to some recovery by Q4 FY20, helpedby favorable base, lagged impact of monetary easing and recentgovernment announcements of growth supportive policy actions.

Source: News reports, Spark Capital, SBIMF Research,

Government announced various measures to boost the economy

Merged 10 Public Sector Banks into 4; 12 Public Sector Banks to exist post the

consolidation vs. 27 PSBs in 2017

Rollback of higher surcharge for Foreign Portfolio Investors

Fast-tracking of GST refunds for MSMEs

Additional liquidity support of Rs 200 billion to Housing Finance Companies by

the National Housing Bank

Launch of external benchmark linked interest rate products

Repayment of 75% of arbitration funds in contractual disputes between

government/Central Public Sector Enterprises and private entities.

Upfront release of Rs 700 billion capital to Public Sector Banks

Various measure to boost the automobile sector like additional 15% depreciation to

be provided on vehicles acquired from now till March 2020

Corporate tax rate for domestic companies lowered to 22% (vs. 30%

earlier) taking down the effective corporate tax rate to 25% (vs. 35%

earlier).

Proposed to set up Rs 20,000 crore fund (with government contributing the half), to provide last-mile funding for housing projects that are not in bankruptcy court

or already tagged as bad debt

Source: Capitaline ,SBIMF Research,

NIFTY: 1QFY20 PAT growth moderated

• All companies in NIFTY50 have reported quarterlyearnings.

• NIFTY 50 witnessed further moderation in revenue (6%in Q1 FY20 vs. 10% in Q4 FY19 and +20% in theprevious three quarters).

• EBITDA growth stayed muted at 3% in Q1 FY20 vs. 6%in Q4 FY19.

• PAT growth also moderated to 5% in Q1 FY20 vs. 15% inQ4 FY19.

• PAT growth (ex corporate banks) declined further to -8%y-o-y in Q1 FY20 vs. -2% in Q3 and -3% in Q4 FY19.

1Q FY20 sales growth moderated to 6%

PAT growth moderated to 5% in Q1 FY20 vs. 15% in Q4 FY19

EBITDA growth stayed muted

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. Recent economicdata corroborates this view.

• We expect earnings growth to improve over its average growth of 5% in last five years.

• Earnings growth for FY20 is expected at ~20% led primarily by the financials

Liquidity: Both FIIs and DIIs invested in Indian equities

FIIs invested in September to the tune of US$ 1.1 billion, after selling for two previous consecutive months

Source: CEIC, Bloomberg, SBIMF Research

DIIs invested US$ 1.8 billion in September led by higher investment by mutual funds

FDI inflows robust in FY20 so far; can improve further going ahead

Source: CMIE economic outlook, Various media reports, SBIMF Research

India has witnessed net FDI inflows of US$ 18.3 billion in FY20 (till July) vs. US$ 11.4 billion during corresponding period last year

• India has witnessed sharp net FDI inflows of US$ 18.3 billion during April-July FY20.

• As per recent media reports, FDI inflows can improve going ahead. A couple of large-ticket deals have been announcedwhich can lead to higher FDI inflow going ahead. The government has taken various steps to boost the FDI inflows recentlylike a). 100% FDI in commercial coal mining and contract manufacturing under automatic route, b). 26% FDI for digitalmedia, c). 100% FDI in insurance intermediaries, and d) eased local sourcing norms for single-brand retailers with FDI.

ValuationsValuations improved marginally across the capitalization curve in September

Source: Bloomberg, SBIMF Research,

Valuation of MSCI India vis-à-vis MSCI EM improved in September

NIFTY 12m Fwd. P/E is trading at 22% premium to 10-year G-sec (higher than long-term average premium of 16%)

Equity Market outlook

Nifty is trading at ~18 times forward earnings

Source: Bloomberg, SBIMF Research

• Nifty was very volatile through the month. While gloom and doom continued for agood part of the month, FM’s big bang announcement to cut corporate tax ratebrought cheer back. Nifty eventually ended up by 4.1% in September. Mid-capsand small-caps fared slightly better with the respective indices up 4.7% and5.1% respectively. FIIs also invested in the Indian equities to the tune of US$ 1.1billion during the month.

• While corporate tax rate cut doesn’t directly address the near-term demandweakness beyond providing a sentiment boost, this is an important step towardsreviving investment cycle, provided it is followed with appropriate regulatoryalignment. The immediate challenge for economy and markets continues to bethe ongoing stress in the financial sector. We expect monetary policy to remainhighly accommodative. While the RBI cut repo rates by 25 bps in its Octobermeet, it clearly indicated that the accommodative stance will continue as long asit is necessary to revive the growth momentum.

• Corporate profits to GDP has touched a multi-decade low and mean reversionshould be in order. Investors should take comfort that policy makers are intenton decisive structural reforms to fortify India’s position in global arena.

• We expect earnings growth to improve. Our top down earnings growth forecastfor FY20 is at ~20% led primarily by financials. Ex of financials, earnings growthis likely to remain muted, as tailwinds from tax cuts get offset by continuingeconomic sluggishness.

• Valuations continue to be favorable versus history (across several metrics suchas relative to other EMs, earnings-bond yield gap, market cap to GDP, and in themid & small cap segment). Sentiment, as measured by our proprietary indicator,has improved a bit in September but continues to be near pessimistic extremes,which augurs well for 12 months forward returns from a contrarian standpoint. Assuch, equity market looks attractive from forward returns perspective.

Fixed Income Market

Bond yields in the key developed markets: September 2019

Source: Bloomberg, SBIMF Research

• Barring Italy, global bond yields increased in the month of September. On the other hand, year-to-date, all the key developedcountries witnessed an ease in their respective 10-year bond yields amidst global growth slowdown and trade turbulence.

• US 10-year bond yields rose by 17 bps in September even after Fed delivered a second rate cut of 25 bps to 1.75-2.0%. Theyields rose mainly on account of better than expected US retail sales data. However, yields eased back to 1.54% (as on 9th

October) over weaker consumer confidence prints.

• 10-year bond yields increased in various euro area after ECB cut its deposit rate by 10 basis points to -0.5% and restarted itsbond-buying programme at a rate of 20 billion euros a month from November 1 in a fresh bid to drag up dour inflation.

• On the other hand, bond yields in Italy eased by 18 bps on the back of expectations of the government complying with fiscalrules laid down by the European Union in the upcoming budget for 2020.

10 Year Gsec Yield (% mth end) 2015 end 2016 end 2017 end 2018 end Jul-19 Aug-19 Sep-19

m-o-m change (in bps)

3m Change (in bps)

Change in 2019

(in bps)

Developed market

US 2.27 2.44 2.41 2.68 2.01 1.50 1.66 17 -34 -102

Germany 0.63 0.21 0.43 0.24 -0.44 -0.70 -0.57 13 -24 -81

Italy 1.60 1.82 2.02 2.74 1.54 1.00 0.82 -18 -128 -192

Japan 0.27 0.05 0.05 0.00 -0.15 -0.27 -0.21 6 -6 -22

Spain 1.77 1.38 1.57 1.42 0.28 0.11 0.15 4 -25 -127

Switzerland -0.06 -0.19 -0.15 -0.25 -0.76 -1.02 -0.76 26 -23 -51

UK 1.96 1.24 1.19 1.28 0.61 0.48 0.49 1 -35 -79

Bond yields in the key emerging markets: September 2019

Source: Bloomberg, SBIMF Research

• 10-year bond yields in the key emerging markets exhibited mixed movements during the month, driven by country-specificfactors. Bond yields in Philippines, South Korea and India rose while in Turkey, Brazil and Russia eased during the month.

• Indian 10-year bond yields increased by 14 bps in September on fears of fiscal slippage post tax cut announcement.

• On the other hand, 10-year bond yields eased by 268 bps during the month as the central bank slashed the interest ratesby 325 bps to 16.5%.

10 Year Gsec Yield (% mth end) 2015 end 2016 end 2017 end 2018 end Jul-19 Aug-19 Sep-19

m-o-m change (in bps)

3m Change (in bps)

Change in 2019

(in bps)Emerging Market

Brazil 16.51 11.40 10.26 9.24 7.23 7.43 7.05 -38 -41 -219China 2.86 3.06 3.90 3.31 3.16 3.06 3.14 8 -9 -17India 7.76 6.52 7.33 7.37 6.37 6.56 6.70 14 -18 -67Indonesia 8.69 7.91 6.29 7.98 7.35 7.31 7.26 -4 -8 -71South Korea 2.09 2.09 2.47 1.96 1.39 1.30 1.46 17 -14 -50Malaysia 4.19 4.23 3.91 4.08 3.59 3.31 3.35 4 -30 -73Phillippines 3.95 4.64 4.93 7.01 4.70 4.33 4.63 30 -41 -238Russia 9.62 8.36 7.49 8.70 7.30 7.12 7.01 -11 -41 -169Taiwan 1.03 1.22 0.98 0.83 0.83 0.83 0.83 0 0 0Thailand 2.50 2.65 2.32 2.48 1.84 1.44 1.47 3 -65 -101Turkey 10.74 11.39 11.67 16.42 15.47 16.26 13.58 -268 -315 -284Mexico 6.28 7.44 7.66 8.66 7.52 6.99 6.89 -10 -70 -177Poland 2.94 3.63 3.30 2.83 2.18 1.84 2.00 16 -39 -83South Africa 9.80 8.92 8.72 8.72 8.97 8.94 9.01 7 17 29Colombia 8.66 7.11 6.48 6.75 5.97 6.06 5.99 -6 -15 -76Hungary 3.33 3.16 2.02 3.01 2.28 1.90 1.97 7 -66 -104

Commodity market snapshot

Source: Bloomberg, SBIMF Research

Most of the agri commodities moderated YTDMost of the energy prices increased YTD

Prices of precious metals rose YTD Barring tin, aluminum and copper, prices of most of the industrial metals increased YTD

India Rates Snapshot: September 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

• During the month of September, Indian 10-year bond yields rose by 14 bps on account of higher oil prices and corporatetax reduction leading to rise in fiscal concerns. To address the current economic slowdown, the government had reducedthe effective tax rate to 25.2% from 29.5% currently.

• Crude oil prices rose by 2.6% during the month. Year-to-date, crude price has risen by 5.4%.

• Rupee appreciated by 0.8% in September. Year-to-date, rupee has depreciated by 1.5%.

Dec-17 Dec-18 Jun-19 Jul-19 Aug-19 Sep-19 m-o-m change (in bps)

Change in 2019 (bps)

3M T-Bill 6.20 6.65 6.03 5.65 5.41 5.41 0 -1241 Yr T-Bill 6.40 6.94 6.16 5.94 5.72 5.60 -12 -13410-year G-Sec 7.33 7.37 6.88 6.37 6.56 6.70 14 -67Overnight MIBOR Rate 6.20 6.73 5.97 5.75 5.45 5.52 7 -121Weighted Average Call money rate 5.99 6.57 5.73 5.58 5.37 5.30 -7 -1103M CD*** 6.38 7.05 6.45 6.28 5.55 5.75 20 -13012M CD*** 6.75 8.08 7.18 6.88 6.43 6.63 20 -1453 Yr Corp Bond* 7.66 8.50 7.74 7.25 7.12 7.12 1 -1385 Yr Corp Bond* 7.68 8.43 7.96 7.54 7.36 7.44 8 -9910 Yr Corp Bond* 7.90 8.51 8.07 7.65 7.67 7.87 20 -641 Yr IRS 6.44 6.56 5.63 5.45 5.15 5.09 -6 -1475 Yr IRS 6.75 6.62 5.67 5.40 5.02 5.11 9 -151INR/USD 63.9 69.8 69.0 68.8 71.4 70.9 0.8# -1.5#

Crude Oil Indian Basket** 62.3 57.8 62.4 63.6 59.3 60.9 2.6# 5.4#

Global central banks on monetary easing cycle

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

Source: CMIE economic outlook, RBI, SBIMF Research,

Indian growth-inflation dynamics favor monetary easing by RBI

CPI inflation likely to stay range-bound through out FY20GDP growth has moderated to 5.0% and is likely to remain lower for the next few quarters

• India’s economic activity has moderated and is likely to be weak for next few quarters. Even RBI has grown visibly concerned ongrowth this year. Cumulatively, the central bank has revised down its FY20 growth projections by 130bps (since February policy)to 6.1%, with risks evenly balanced.

• Inflation is expected to be within the RBI’s target of 4%. While, we expect inflation to bottom-out and cross 4% by Q3 FY20 (ledprimarily by food), inflation outlook does not cast any meaningful worry. It is likely to remain range-bound (sub 5%) leavingenough space for the policy makers to focus on growth.

• To sum, in an environment where domestic growth faces challenges both from structural and cyclical factors and given theprojected benign inflation trajectory, the headroom available for monetary policy actions is likely to be used.

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

Current account deficit deteriorated in Q1 FY20 to 2.1% of GDP vs. -0.7% in Q4 FY19*…

…led by higher oil and gold imports and fall in exports even as invisible surplus remained high

External account strengthened in Q1 FY20

…and robust FDI inflows in telecom, computer software and hardware sector

Capital account improved in Q1 FY20 helped by higher ECB inflows owing to favorable change in ECB regulation…

Banking system liquidity is in ample surplus

Source: RBI, SBIMF Research;

Inter-bank liquidity is in ample surplus CIC growth has moderated in FY20 (till Q2)

• Banking system liquidity remained in surplus zone for the fourth consecutive month, however, average surplus liquidity has comedown to Rs. 1.2 trillion in September vs. Rs. 1.4 trillion during August.

• The moderation in the surplus liquidity during the month of September is probably a reflection of build-up in cash balance by thecentral government vs. dipping from the WMA limit in the previous month. This build-up of government cash balance is a partialreflection of transfer of surplus capital to the government by RBI. As of 27th September, the government is sitting on the cashbalance of Rs. 617 billion. Further, LAF operations up until September end shows that Rs 464 billion of government’s cash balancewas being called for auction, implying that much of government cash balance with RBI.

• CIC leakage has moderated drastically in FY20. FYTD (till Q2), Rs 494 billion of currency has leaked out of the system vs. Rs 960billion in corresponding period last year. Three factors may be at play a) weakness in economic activity (particularly in informalsegment), b) reduced leakage post-election, and c) end of rapid re-monetization phase witnessed during FY18 and FY19.

• Looking ahead, we expect the inter-bank liquidity to continue to remain in ample surplus through-out FY20.

Monetary policy transmission has been weak

Source: Bloomberg, CMIE Economic Outlook, SBIMF Research

It also remains elevated in the riskier segmentCost of borrowing in safe assets have increased in last few months

• We have seen a cumulative rate cut 135bps spread across four successive meetings (from February 2019 to October 2019).However, adequate transmission of rates remains a challenge.

• Both liquid segments (overnight money market rates, G-sec and AAA corporate bond yields) and spreads in the other segment(lower rated corporate bonds, bank lending) continues to remain high.

• Similarly, while bank industrial credit growth has picked up a bit, 96% of the incremental industrial credit has come on the accountof large corporates, leaving the riskier small and medium enterprises in want of funds.

• The higher magnitude of rate cut (as we expect) and a shift in the banking system’s liquidity to surplus should likely help to speedup monetary transmissions and bring some relief to borrowing costs. Policy actions to restore the confidence among businessand investor community is also needed.

Rupee appreciated in September but depreciated on YTD basis

Source: Bloomberg, CMIE Economic Outlook, SBIMF Research

Most EM currencies depreciated YTD (till Sep); effect of Fed rate cut and amidst trade tussle between US and China

Rupee appreciated by 0.76% in September and hovered mostly around ~70-71/US$ levels during the month

Rupee is undervalued on 6 currency trade weighted REER basis but overvalued on 36 currency trade weighted REER basis- as of August

Rupee is marginally undervalued on productivity adjusted REER basis as of August

Banks demand for SLR securities have picked up in FY20 (YTD)

Source: RBI, SBIMF Research;

Gap between deposit and credit growth is narrowing as credit growth is moderating

SLR holdings of banks stands high at 27.8% i.e. 9.1% higher than the required SLR holdings by RBI (18.75%)

• Gap between deposit and credit growth is narrowing. Bank deposit growth stands at 10.0% y-o-y in September (till 13th) vs. thesimilar levels seen in March 2019. On the other hand, bank credit growth stands at 10.3% y-o-y in September (till 13th) vs.13.3% y-o-y in March 2019.

• During the beginning of the year, Credit/Deposit ratio was high at 77.7x. However, with weakness in economic activity, bankcredit growth has slowed-down due to both demand and supply reasons. As a result, Credit/Deposit ratio has also come downto 76.3x.

• As of mid-September, SLR holdings of banks stands high at 27.8% i.e. 9.1% higher than the required SLR holdings by RBI(18.75%).

Source: CMIE economic outlook, SBIMF Research;

Cumulative fiscal deficit during FY20 (till Aug) is running lower at 79% of BE i.e. than previous two corresponding year

Both direct and indirect tax collection are running much lower than the required growth rate in FY20

• Cumulative fiscal deficit during Apr-Aug FY20 is running at 79% of the budget estimates i.e. lower than the corresponding periodduring last two years.

• Both direct and indirect collections are running much lower than the required growth rate of FY20. Direct tax collections arewitnessing a cumulative growth of 9.6% y-o-y during Apr-Aug FY20 (vs. required rate of 17.5% y-o-y), while indirect tax collection isseen a cumulative de-growth at 0.3% y-o-y during Apr-Jul FY20 (vs. required rate of 18.2% y-o-y).

• The sharp fall in GDP necessitates policy action at a war scale. Against the light of such data inflows, holding on to fiscal prudencemay be extremely challenging. The weakness in economic activity can put further stress to already beaten down tax collection.

• Overall, we expect central government revenue shortfall of nearly Rs 1.5 trillion in FY20, owing to weakness in both direct andindirect tax collection.

Sharp weakness in both direct and indirect tax collections so far

Source: CMIE economic outlook, pib.nic.in, SBIMF Research;

GST collections averaged around Rs 1.0 trillion per month in FY20 (till Q2)

Monthly-run rate for GST collections are running marginally lower than the budgeted expectations

GST monthly collections running marginally lower than the required rate

• September 2019 GST collection witnessed a de-growth of -2.7% y-o-y, lowest since inception.

• 1H FY20 GST monthly run-rate stands at Rs 1.01 trillion – marginally lower than the budget expectations of Rs 1.04 trillion. Forthe 2H FY20, run-rate of Rs 1.06 trillion is required to meet the FY20 budgeted amount.

• While moderating economic activity brings some risk to collection buoyancy, it is achievable if the government increasescompliance.

Valuations have improved in September

Source: Bloomberg, SBIMF Research

CPI Inflation adjusted real rate in India at 3.5% G-sec is trading at 130bps spread to the Repo i.e. above its LPA of 87bps

Valuations vs. US yield have remained high in Septembe

Real rates

10 Year Gsec Yield

(% mth end, Sep

2019)

CPI Inflation -Aug 2019

Real Rate (%, 10-year G-

Sec Yield minus CPI)

12M FX forward

premium (in %) -

Sep 2019

10-year G-sec yield adjusted for 12m fwd.

premium (in %) - Sep 2019

South Africa 9.01 4.3 4.7 6.8 2.2

Indonesia 7.26 3.5 3.8 6.8 0.5

Mexico 6.89 3.2 3.7 7.2 -0.3

Brazil 7.05 3.4 3.6 4.3 2.8

India 6.70 3.2 3.5 4.3 2.4

Phillippines 4.63 1.7 2.9 3.6 1.1

Russia 7.01 4.3 2.7 N/A N/A

Colombia 5.99 3.8 2.2 4.1 1.9

Malaysia 3.35 1.5 1.8 2.7 0.7

South Korea 1.46 0.0 1.5 0.6 0.9

Thailand 1.47 0.5 1.0 1.5 0.0

Taiwan 0.83 0.4 0.4 0.0 0.9

China 3.14 2.8 0.3 2.6 0.5

Poland 2.00 2.9 -0.9 1.6 0.4

Hungary 1.97 3.1 -1.1 -0.1 2.1

Turkey 13.58 15.0 -1.4 13.2 0.4

Policy Rate Outlook: We expect further rate cut

Source: RBI, SBIFM Research

RBI cut the policy rate by 25bps in their October 2019 policy to 5.15%

• RBI eased Repo rate by 25bps to 5.15% and maintained the stance asaccommodative. While all the members, unanimously, voted to retainthe accommodative stance, five members voted for 25 bps and onevoted for 40 bps rate cut.

• RBI has grown visibly concerned on growth this year. Cumulatively,FY20 growth projections have been revised down by 130bps (sinceFebruary policy) to 6.1%. Domestic economic activity continues to beweak, with global slowdown and uncertainties around trade warsproviding a weak external backdrop. The RBI has shifted its focus togrowth over inflation and aims to address the weak demand andnegative output gap.

• On the inflation front, the central bank continues to bring out comfort.Even as the inflation projections have been revised up to 3.4% for Q2FY20, the central bank expects it to stay below the central target of 4%throughout 12-month ahead horizon.

• To sum, in an environment where domestic growth faces challengesboth from structural and cyclical factors and given the projected benigninflation trajectory, the headroom available for monetary policy actionsis likely to be further used.

• We project another rate cut in the next December meeting.Historically, repo rate has gone below 5% only on two occasions (2003and 2009). Whether this can be third one, can only be ascertained byincoming data over next few months.

Debt Market Outlook

Source: Bloomberg, SBIFM Research

Valuations look attractive at G-sec vs. Repo rate

• Government bond yields continued to inch up over the month on continuingconcerns with respect to the fiscal position. Global bond yields alsowitnessed an uptick over the month especially over the first half.

• Improving liquidity leading to OMO purchases being priced out provided achallenging backdrop for market absorption of potential additional supply.

• The Corporate tax cut announced with the expected revenue loss number ofRs 1.45 trillion further dented trader sentiments. However, additional mopup through divestment/ strategic sales, excess dividend from RBI andpotential savings out of budgeted expenditures such as PM Kisan canbridge some of the anticipated revenue shortfalls. The revenue foregonethis financial year on account of corporate tax cuts could be much lowerthan the announced numbers.

• RBI policy stance provided a bold guidance with respect to maintaining anaccommodative policy stance as long as necessary to revive growth. RBIguidance reaffirms the positive Growth- Inflation dynamics with respect tothe interest rate trajectory.

• Easy liquidity, slow credit growth momentum and positive global policy ratebackdrop along with attractive valuations are compelling from marketperspective.

• While fiscal concerns remain a challenge, especially in an environment ofweaker growth, non-market sources of financing such as Small savings areexpected to provide additional funding support.

• We expect macro fundamentals to reassert over time, leading to lower ratesand an extended accommodative rate cycle given the structural & cyclicalchallenges to growth.

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.

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