Budget and Market Outlook

March 2016

Union Budget 2016-17

The Back Drop- Tougher than last year

CHALLENGES IN GLOBAL MARKET

DISCRETIONARY SPENDING

REQUIREMENT

TOUGH EQUITY AND BOND

MARKET CONDITIONS

DEMAND CHALLENGES IN

DOMESTIC ECONOMY

• Slow down in global growth from 3.4% in 2014 to 3.1% in 2015• Contraction in trade activity• Financial Markets have been battered. MSCI world had fallen ~12% since last budget

(as of 26 Feb 2016)• Fears over slowdown in Chinese growth and devaluation of Chinese currency• Fall in oil prices has induced fiscal worries on oil producing nations

• Slowdown in global trade activity leading to contraction in Indian exports demand• Rural distress due to two consecutive years of bad weather and slow down in

construction• Capacity under-utilization in manufacturing units and corporate deleveraging leading

tepid private capital spending

• NIFTY fell ~21% since last budget as FII pulled out money and earnings growth has fallen short of expectations

• Bond yields inched up primarily due to demand-supply mismatch

• Public sector banks in distress requiring capital infusion• Higher spending requirement on account of Pay and Pension as 2016 happens to the

year of OROP and 7th Pay commission implementation

Highlights: Prevented macro instability, focused on growth

Source: indiabudget.nic.in, SBIMF Research; NB: RE – revised estimate, BE- budget estimate

Key Budget Figures

• Union budget stuck to the earlier laid out path of fiscal consolidation thus preventing macro instability. Aims to narrow fiscal deficit to 3.5% in FY17 compared to 3.9% in FY16. Revenue deficit will also be lowered to 2.3%%

• Sticking to fiscal consolidation without losing focus to growth (in terms of rural and infrastructure push) is a huge positive. Central bank is likely to take the quality and quantity of fiscal stance in positive light opening the possibility of rate cut.

• Budget has avoided any populist measures at large

2014-15 2015-16 RE 2016-17 BE

Budget size (in Rs. Bn) 16,637 17,854 19,780

Expenditure growth (%) 6.7 % 7.3 % 10.8 %

Receipt growth (%) 9.1 % 8.4 % 15.5 %

Gross tax to GDP (in %) 9.9 % 10.7% 10.8 %

Fiscal deficit ( Rs. Bn) 5,107 5,351 5,339

Fiscal deficit ( % GDP) 4.1 % 3.94 % 3.54 %

Revenue deficit (% GDP) 2.9 % 2.5 % 2.3 %

Net market borrowing (Rs. Bn) 4,531 4,406 4,252

Nominal GDP growth (%) 13.6 % 8.2 % 11.0 %

Budget in Charts

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

2013-14

2014-15

2015-16 RE

2016-17 BE -

1,000

2,000

3,000

4,000

5,000

6,000

0.0

1.0

2.03.0

4.0

5.0

6.0

7.0

5.56.0 5.7

4.33.9 4.0

3.32.5

6.06.5

4.8

5.94.9

4.5 4.1 3.9 3.5

Fiscal Deficit (Rs. Bn)- LHS Fiscal Deficit (% GDP)- RHS

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

2012

-13

2013

-14

2014

-15

2015

-16

RE

2016

-17

BE

-2.0-1.00.01.02.03.04.05.06.0

3.9 4.3 4.33.5

2.4 2.51.9

1.1

4.55.2

3.24.5

3.7 3.2 2.9 2.5 2.3

0.9 1.4 1.10.0 0.0 0.4 -0.2

-0.9

2.63.2

1.82.8

1.81.1 0.9 0.7 0.3

Revenue Deficit (% GDP) Primary Deficit (% GDP)

Fiscal deficit targeted at 3.5% in FY17 Lowest revenue and primary deficit in last nine years20

00-0

1

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

2012

-13

2013

-14

2014

-15

2015

-16

RE

2016

-17

BE

-10-505

10152025303540

7 7

21

30

7

-4

23

33

-7

11

36

-4

17 159 8

16

9 1114 14

62

1522 24

16 17

9 8 117 7

11

Non-debt Receipts (%) Expenditure (%)

Sharper rise in receipts relative to expenditure

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

2012

-13

2013

-14

2014

-15

2015

-16

RE

2016

-17

BE

- 1.0 2.0 3.0 4.0 5.0 6.0 7.0

1.5 1.7 2.7

4.5 4.4 5.1

5.6 5.6 6.0 5.8 6.0

1.10 1.32 2.34

3.98 3.25

4.36 4.67 4.54 4.53 4.41 4.25

Gross Market Borrowings (Rs Tn) Net Market Borrowing (RS Tn)

Net market borrowing brought down- a huge positive

Source: indiabudget.nic.in, SBIMF Research

Receipts targets looks achievable, barring spectrum windfall

Source: indiabudget.nic.in, SBIMF Research

-10

0

10

20

30

40

50

13

6

11

50

25

18

9 1012 10

2013-14 2014-15 2015-16 RE 2016-17 BE

% growth

Conservative assumptions in tax growth- can surprise upward by year end

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 RE

2016-17 BE

4,000

6,000

8,000

10,000

12,000

14,000

16,000

5,699 6,298 7,419 8,159 9,036 9,475 10,541 2,186 1,217 1,374

1,989 1,979

2,586

3,229

353 369 410

419 515

442

671

Net tax revenue Non-Tax revenue Non-debt capital receipts

Non tax revenue expected to increase by 644bn, tax revenue by 1 trillion and non-debt capital receipts by 229bn

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 RE

2016-17 BE

0100200300400500600700800

228181

259 294377

253

Disinvestment Budgeted (Rs. Bn) Disinvestment Actual (Rs bn)

2016-17 BE= 565 Bn (in-clusive of 205bn strategic sale)

Credible divestment targets

2009-102010-11

2011-122012-13

2013-142014-15

2015-16 RE

2016-17 BE0

200

400

600

800

1000

1200

1400

159

1205

174 189

401306

560

990

Telecom Receipts

Optimism in receipts from telecom services

Expenditure: Higher revenue spend on account of Pay and Pension

Source: indiabudget.nic.in, SBIMF Research; NB: * Expenditure on Account of Finance ministry, Home ministry and Defence ministry has been excluded as they mainly capture sticky operating expenses

2009-10

2010-11

2011-12

2012-13

2013-14

2014-15

2015-16 RE

2016-17 BE - 5

10 15 20 25 30 35 40 45

15 14 10 9 10

7 5 12

25

39

1 5

12

5

21

4

Revenue Expenditure Capital expenditure

% growth

Sharper rise in revenue expenditure on account of provisioning for 7PC and OROP

DBT platform and lower gas, urea and crude prices helps contain subsidy bill

Food Fertilizer Petroleum 200

400

600

800

1,000

1,200

1,400

1,600 1,394

724

300

1,348

700

269

2014-15 2015-16 2016-17

Rs BN

Total subsidy bill expected at 2.5 Tn vs. 2.6Tn in FY16

Others31%

Social26%

Rural and Agriculture16%

Fertilisers 9%

Energy7%

Road7%

Communications4%

Expenditure has been focused on Social and Rural sectors*

The Budget Agenda

With a realistic approach and without compromising fiscal prudence

Agriculture and Farmers’ WelfareReviving the Rural economyEnhancing Social EquityIncentivizing education and employmentInfrastructure pushFinancial Sector ReformsEase to do Business

Key Reforms

Renewed thrust on the insolvency and bankruptcy law

Legal framework for dispute resolution in PPP projects and Utility Contracts

Aims listing of General Insurance Companies

Aims at giving a legal status to Aadhar

FDI Policy Liberalization

Simplification of Taxation Structure

New policy to realize Disinvestment targets

Rural Thrust: Bodes well for both Consumption and Investment

Source: Antique Research, SBIMF Research

FY12 FY13 FY14 FY15 FY16RE FY17BE 400

500

600

700

800

900

1,000

1,100

1,200

-15.0

-10.0

-5.0

-

5.0

10.0

15.0

20.0

25.0

846 763

859 850 926

1,139

-10

13

-1

9

23

Spending on Rural oriented schemes (in Rs bn) % growth- RHS

Spend on Rural economy under various schemes is budgeted to grow by 23%

• The Govt. has emphasised to improve rural development. Various rural schemes spread across rural electrification, seeds, crop insurances, fertilizer, irrigation, employment and housing is expected see a central support of Rs1.1 trillion.

• This is nearly 23% jump compared to last year.

• MGNREGS spend has been increased to Rs. 385bn and the focus will be to develop rural infratsructure.

• 100% village electrification is aimed at by 1st May 2018

Extra-Budgetary Sources to support Infrastructure Spending

Source: Axis Capital, SBIMF Research

Rs in (Bn.) FY14 FY15 FY16 RE FY17 BE GrowthFY 16 YOY%

GrowthFY 17 YOY%

Budgeted Capital Expenditure

1877 1967 2377 2470 21 4

Rs in (Bn.) FY14 FY15 FY16 RE FY17 BE GrowthFY 16 YOY%

GrowthFY 17 YOY%

ROADS CAPEX

Provisions in the Budget236 274 443 550 62 24

Extra Budgetary Support79 33 280 593 748 112

RAILWAYS CAPEX

Provisions in the Budget282 316 347 450 10 30

Extra Budgetary Support257 336 628 760 87 21

Total CAPEX in Roads and Railways 960 1233 2141 2903 74 36

Capital spending provisions in budget is projected to grow by mere 4%

Extra-budgetary support to Road, Railways and other infrastructure spend will give thrust to Public capex

Social sector spend will enable capitalizing demographic dividend

Social betterment with emphasis on health of individuals

New health protection scheme for economically weak families

Invigorating free supply of generic drugs

Tax incentives to go for health and general insurance

Tax and PF incentives to bring the workforce under formal employment

Tax incentives and duty assumptions to promote affordable housing

EQUITY MARKET

Impact of the Budget on Equity Market

Source: Bloomberg, SBIMF Research

POSITIVE

• Policy Reforms: Allowing 100% FDI in Asset Reconstruction companies, tax clarity on InvITs and REITs, resolution to deal with stressed asset recovery and bankruptcy code is an overall positive for the financial sector

• Consumption boost: Likelihood or OROP and Pay commission implementation in FY17 and focus on increased rural income is positive for consumption oriented companies

• Rural Thrust: Support to agriculture in the form of seeds, irrigation. crop insurance, 100% FDI in agriculture marketing is positive for agriculture sector oriented companies

• Continued Focus on Public Capex: Thrust on Infrastructure spending continues particularly on sectors like Roads and Railways – positive for industrials

• No change in LCGT: Budget refrained from decreasing the holding period of Long-term Capital Gains Tax on listed companies

NEGATIVE

• Lower than anticipated PSU support: The provisioning for Public sector Banks recapitalization was lower than market expectations.

• Taxation changes: Negative sentiments in some sectors have been mainly due to marginal rise in tax/cess or additions of sunset clause to currently enjoyed tax exemptions, tax on dividend income above Rs. 10 lakh

FII Outflow and Weak Earnings affecting market

Source: NSDL, Antique, SBIMF Research

FIIs have been pulling money out of India, in line with other emerging markets

Earnings Outcome has been depressed for five consecutive quarters

Feb/

13

Apr/

13

Jun/

13

Aug/

13

Oct

/13

Dec/

13

Feb/

14

Apr/

14

Jun/

14

Aug/

14

Oct

/14

Dec/

14

Feb/

15

Apr/

15

Jun/

15

Aug/

15

Oct

/15

Dec/

15

Feb/

16

-8000

-6000

-4000

-2000

0

2000

4000

6000

8000

Equity Investment Debt Investment

USD mn

Jun/

10Se

p/10

Dec/

10M

ar/1

1Ju

n/11

Sep/

11De

c/11

Mar

/12

Jun/

12Se

p/12

Dec/

12M

ar/1

3Ju

n/13

Sep/

13De

c/13

Mar

/14

Jun/

14Se

p/14

Dec/

14M

ar/1

5Ju

n/15

Sep/

15De

c/15

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

BSE 100 (ex OMCs YoY earnings growth, %)

While Short-term issues are dominating the market,There are reasons for medium to long-term optimism

Corporate Profits expected to improve in FY17

Source: MOSL, SBIMF Research

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

216 236 272361 446 540

720833 820 834

1,0241,120 1,182

1,339 1,354 1,366

1,643

FY01-08: 21% CAGR

FY08-15:7% CAGR

FY15-17E: 10% CAGR

1%

1%

20%

FY93-FY15: 14% CAGR

Sensex EPS (INR)

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

FY18

E

3.0

4.75.4

6.2

7.37.8

5.5

6.5 6.2

4.8 4.6 4.3 4.0 4.0 4.3 4.7Average of

5.4%

Corporate profit to GDP (%)

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

52

82 83

103

55

9588

7064 66

8070

Average of 76% for the period

Corporate profit likely to bounce back Market Capitalization to GDP (%)

Earnings growth likely to show cyclical recovery

Domestic money to keep pouring in

Source: NSDL, MOSL, SBIMF Research

Domestic MFs were buyers for sixth consecutive quarter DIIs (ex MFs) have also been net buyers for most months since 2015

Sep-

12No

v-12

Jan-

13M

ar-1

3M

ay-1

3Ju

l-13

Sep-

13No

v-13

Jan-

14M

ar-1

4M

ay-1

4Ju

l-14

Sep-

14No

v-14

Jan-

15M

ar-1

5M

ay-1

5Ju

l-15

Sep-

15No

v-15

-0.6-0.5-0.4-0.5

-1.0

-0.2-0.3

-0.3

-0.60.0-0.4

0.3

-0.4-0.7

-0.1-0.1

-0.4-0.2-0.6

-0.4

0.0

0.60.8

1.1

0.71.0

0.3

1.1

0.1

0.70.6

1.5

0.7

1.6

0.9

1.61.4

0.1

0.6

Chart Title

Sep-

12

Nov-

12

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep-

13

Nov-

13

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep-

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Nov-

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Jan-

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Mar

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Jul-1

5

Sep-

15

Nov-

15

-1.1

-0.4-0.5-1.1

-2.3

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-0.2

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1.5

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0.7

-1.0-1.4-1.4

-1.2

0.20.5

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-1.3 -1.4

-0.8-0.9

-0.3

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-1.4

-0.4-0.6

0.40.70.3

-0.7

0.9

0.10.0

0.7

Chart TitleUSD bn

Market outlook• Budget outcome has been broadly favorable for the equity market.

While some sectors reacted negatively on account of specific provisions, the support to the rural economy and increase in infrastructure spend augurs well for the growth and earnings in the long run.

• Now that the event is behind us, market will shift back its focus on global cues, economic data and earnings outcome.

• Global markets have stayed under pressure since the beginning of CY 2016. With commodity prices particularly crude oil bottoming out, we expect some stability in the global markets.

• On domestic front, fears about stress in balance sheets of corporate and banking sector, and quarterly earnings season accentuated the market woes.

• Valuations, relative to history and to emerging markets, have risen clearly implying expectations of an earnings recovery in the coming quarters. We believe the earnings cycle will pick up on the back of a mean reversion in the economic cycle, rate cuts and policy initiatives.

• By sticking to the fiscal consolidation path, government prevented any macro instability. India’s macro-fundamentals are currently placed on a strong footing helped by conscious policy decisions by both RBI and the government.

• We believe that India is nearing the end of earnings downgrade cycle and the current stress induced by global events is offering a good entry opportunity for investors with long horizon.

Market valuations in line with its long period average

Source: Bloomberg, SBIMF Research

Oct

/05

Apr/

06O

ct/0

6Ap

r/07

Oct

/07

Apr/

08O

ct/0

8Ap

r/09

Oct

/09

Apr/

10O

ct/1

0Ap

r/11

Oct

/11

Apr/

12O

ct/1

2Ap

r/13

Oct

/13

Apr/

14O

ct/1

4Ap

r/15

Oct

/15

7.0

9.0

11.0

13.0

15.0

17.0

19.0

21.0

23.0

25.0

Sensex 1Y fwd PE

Mean: 16x

+1 SD

-1 SD

FIXED INCOME MARKET

Rates Snapshot for February 2016

• 10 year G-sec rallied on account of favorable budget outcome.

• Money-market rates however, remained worse –off due to tight liquidity conditions

• Crude oil prices moved up by 9% during the month.

• Rupee depreciated by further 1% in February

Source: Bloomberg, PPAC, 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 YTD

Rates in % Dec-15 Jan-16 Feb-16 Change YTD (in bps)

1 Yr T-Bill 7.23 7.18 7.25 2

3M T-Bill 7.15 7.24 7.26 11

10 year GSec 7.76 7.78 7.63 -14

3M CD*** 7.20 7.65 8.49 129

12M CD*** 7.70 7.85 8.28 58

3 Yr Corp Bond* 8.34 8.30 8.53 19

5 Yr Corp Bond* 8.40 8.37 8.59 19

10 Yr Corp Bond* 8.42 8.43 8.67 25

1 Yr IRS 7.07 6.87 6.85 -23

5 Yr IRS 6.96 6.72 6.70 -26

Overnight MIBOR Rate 7.03 7.00 6.96 -7

INR/USD 66.2 67.8 68.4 3.4#

Crude Oil Indian Basket** 35.7 28.1 30.5 -14.4#

Budget outcome favorable for Bond Market

Supply of government bonds have risen sharply in FY16

Source: RBI, indiabudget.nic.in, SBIFM Research

• Despite RBI sounding accommodative in its monetary policy, bond yields- both state and central government- has inched up marginally since October 2015.

• The worsening of yields this year could be explained by unfavorable demand supply dynamics. While the supply of bonds and particularly state bonds have risen sharply in FY16, demand appetite for these bonds by banks (the largest buyer of government securities), mutual funds and FIIs has been very lack-luster.

• In this respect, central government projecting to lower borrowing in FY17 is positive for bond market. Additionally, government sticking to fiscal consolidation re-opens the likelihood of a rate cut by the central bank.

• The uncertainty around DISCOM bonds and likelihood of increased state bonds supply are preventing any sustained rally in bond markets.

FY13 FY14 FY15 FY16E -

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

0.01.02.03.04.05.06.07.08.09.010.0

Net Market Borrowings by GoI (in Rs. bn)Net Market Borrowings by State Govts (in Rs bn)Net borrowings by Central and State govt (% y-o-y)- LHS

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

2012

-13

2013

-14

2014

-15

2015

-16

RE

2016

-17

BE

- 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00

1.10 1.32

2.34

3.98

3.25

4.36 4.67 4.54 4.53 4.41 4.25

Net Market Borrowing (RS Tn)

In this light, lower borrowing by centre in FY17 is a huge positive

Currency: Rupee depreciation in line with emerging markets

Source: Bloomberg, SBIMF Research

Rupee depicted depreciation since start of 2016 in line with most other emerging markets

• Dollar’s broad strength against most currencies globally, fears related to China’s slowing economic growth and a likely further devaluation of the Yuan has kept the rupee and other Asian currencies under pressure since the start of this year.

• Rupee, along with other emerging markets, depicted depreciation in past two months. By February end, the currency depreciated by 3.3% despite a marginal appreciation post budget.

Mex

ican

Peso

Kore

an W

on

Colo

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an P

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Russ

ian

Roub

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Indi

an R

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Afric

an R

and

Polis

h Zl

oty

Turk

ey Li

ra

Braz

il Re

al

Taiw

anes

e Do

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Phili

ppin

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so

Chin

ese

renm

inbi

Thai

Bah

t

Hung

aria

n Fo

rint

Mal

aysia

n Ri

ngitt

Indo

nesia

n Ru

piah

-30-25-20-15-10

-505

-3.3

% change in 2015 % change YTD

Liquidity tightness in money market lifted the short-term rates

Source: RBI, Bloomberg, SBIFM Research

Tightness in banking system liquidity

• Liquidity conditions tightened since December with advance tax outflows, curtailed government spending (vis-a-vis revenue collection) and seasonal pick-up in currency demand and credit.

• To mitigate these conditions, the central bank increased the availability of liquidity under LAF and variable rate term repo.

• This helped weighted average call money rate to remain anchored around the repo rate. However, despite these efforts by RBI, the CP and CD rates –other segments of money market- moved up reflecting dearer short-term money and market expectations that liquidity will reflect tight for some time.

15-D

ec-1

328

-Dec

-13

10-Ja

n-14

23-Ja

n-14

5-Fe

b-14

18-F

eb-1

43-

Mar

-14

16-M

ar-1

429

-Mar

-14

11-A

pr-1

424

-Apr

-14

7-M

ay-1

420

-May

-14

2-Ju

n-14

15-Ju

n-14

28-Ju

n-14

11-Ju

l-14

24-Ju

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19-A

ug-1

41-

Sep-

1414

-Sep

-14

27-S

ep-1

410

-Oct

-14

23-O

ct-1

45-

Nov-

1418

-Nov

-14

1-De

c-14

14-D

ec-1

427

-Dec

-14

9-Ja

n-15

22-Ja

n-15

4-Fe

b-15

17-F

eb-1

52-

Mar

-15

15-M

ar-1

528

-Mar

-15

10-A

pr-1

523

-Apr

-15

6-M

ay-1

519

-May

-15

1-Ju

n-15

14-Ju

n-15

27-Ju

n-15

10-Ju

l-15

23-Ju

l-15

5-Au

g-15

18-A

ug-1

531

-Aug

-15

13-S

ep-1

526

-Sep

-15

9-O

ct-1

522

-Oct

-15

4-No

v-15

17-N

ov-1

530

-Nov

-15

13-D

ec-1

526

-Dec

-15

8-Ja

n-16

21-Ja

n-16

(3,000)

(2,000)

(1,000)

-

1,000

2,000

3,000

Daily banking system liquidity (in Rs. Billion)

1% of NDTL

-1% of NDTL

RBI’s current policy stance is accommodative. However, after having delivered 125bps of rate cut between January to September 2015, the central bank has stayed on hold in past two monetary policy meeting.

Evolution of Inflation trajectory and central budget outcome were pre-requisites cited for any further action.

We think the budget outcome has been conducive to deliver more rate cuts.

Barring the compulsory Pay and Pension increase, government has stayed away from any populist revenue spending. Effort to revive rural economy has been largely through investment spend. Infrastructure- the second key focus area- is non-inflationary as well.

The quantity and quality mix of budget outcome is likely to add to RBI’s confidence in delivering additional 25-50bps rate cut. Beyond that, the global aspect and evolution of CPI trajectory will determine any further easing.

Policy Rate Outlook

Source: RBI, CSO, SBIFM Research

Jan/1

2

Apr/12Jul/1

2Oct/

12Jan

/13

Apr/13Jul/1

3Oct/

13Jan

/14

Apr/14Jul/1

4Oct/

14Jan

/15

Apr/15Jul/1

5Oct/

15Jan

/16

6.506.757.007.257.507.758.008.258.508.75

-5.00-4.00-3.00-2.00-1.000.001.002.003.004.005.00

Real rate (%), RHS Repo rate (%)-LHS

Budget outcome has been taken favorably by the bond market. The commitment to 3.5% fiscal deficit target opened the possibility of rate cuts by RBI by as soon as in April. Reduction in net borrowing by the central bank also helped in marginal addressing of over-supply situation in the bond market causing the bond yields to rally by 10-15bps post budget.

The 10 year bond yield ended the month at 7.63% which is a marginal positive since the last month (7.78%). Cumulatively however, the yields have moved up since the last 50bps rate cut in October.

The likelihood of further rise in SDL supply and the uncertainty around UDAY bonds are keeping the bond yields under check. In this context, the near term movement of rates could largely be influenced by the further clarity on cumulative state borrowing numbers.

In the money market, liquidity conditions tightened at the margin on account of higher currency withdrawals and government building its cash balances (implying a lower expenditure than revenue collections). We expect the RBI to keep interbank liquidity in reasonable balance over the quarter.

We have positioned our portfolio in the front-end of the curve (5-7 year segment) that looks attractive from a valuation perspective.

Market Outlook

Source: Bloomberg, SBIFM Research

Jan/11

Apr/11Jul/1

1Oct/

11Jan

/12

Apr/12Jul/1

2Oct/

12Jan

/13

Apr/13Jul/1

3Oct/

13Jan

/14

Apr/14Jul/1

4Oct/

14Jan

/15

Apr/15Jul/1

5Oct/

15Jan

/16

6.00

6.50

7.00

7.50

8.00

8.50

9.00

9.50

10 year GSec yield (mth end, %) Repo Rate (mth end, %)

Average spread between G-sec and Repo in last 5 years: 50bps

Thank you

Disclaimer

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

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

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

Contact Details

SBI Funds Management Private Limited(A joint venture between SBI and AMUNDI)

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