October month was negative for stock markets globally. Indian markets were under pressure led by sell-off in global markets, subdued earnings and concerns around NBFC as well as real estate sectors. US markets were down 6-7% and Europe were down 6%. Indian markets too were down 6%. Amongst sectors IT and Auto underperformed the broader markets. Nifty Bank and financial services indices outperformed the broader markets.
CPI inflation came in at 3.8% for Sep '18. With this print, average retail inflation for Q2 and H1FY19 stand at 3.9% and 4.3% respectively. This is marginally lower than Monetary Policy Committees (MPC) revised forecast of 4% and 4.4% for the said time periods. CPI inflation in Sep '17 was 3.3% and in Aug '18 it was 3.7%. Continuing the past few months' trend, food inflation remained benign.
In Sep '18, food inflation came in at 0.5%, sharply down from 1.2% in YoY terms. In percentage terms, food (which accounts for 46% of the index) contributed only 49bps (or 13% of total inflation). Comparatively, in Sep ’17 food contributed 24% of total inflation. Increasing fuel costs and services inflation more than compensated the decline in food inflation, leading to 50bps y/y increase. Core inflation registered its third consecutive sequential decline in Sep '18. Core inflation eased to 5.8% from 5.9% last month although sharply higher than 4.6% twelve months ago.
Industrial production grew at its 3-month low of 4.3% year on year in Aug '18, down from 4.8% in Aug '17 and 6.5% in July 2018. In terms of industries, 16 out of 23 industry group saw positive growth. Sharp decline in manufacturing sector growth was the main driver of slowdown in IIP while negative growth in mining sector also played drag. On the use-based side, index heavyweight primary goods growth (weight 34%) registered the sharpest decline year on year (2.6% vs 7.1%).
Contrary to market expectations, MPC kept policy rates on hold by changing stance from “neutral” to “calibrated tightening. While the CPI forecast had been lowered on lower food inflation, MPC members expressed concerns over the upside risk to the inflation forecast arising out of higher oil, depreciated INR and closed output gap.
In October, while MFs were net buyers up to USD 3bn while, FII selling continued and stood at USD 3.8b. On year to date basis MF bought USD16.1b, while FII flows were net seller to the tune of USD6.5b.
Q2 earnings season is underway. Around half of BSE100 companies have reported earnings so far. Although topline growth is in line, EBITDA and earnings are trending marginally lower than street expectations. Besides earnings we are also heading in to elections. We have five state elections over Oct – Nov and the general elections in 2019. Market volatility is likely to remain high over the next few months.
Considering the recent correction, we are constructive on Indian equities on medium to long term horizon as reforms being implemented should start paying off over this period in terms of higher and sustainable growth and improved earning visibility.