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Dear Investors,

Warm Greetings!

The BSE Sensex and Nifty declined marginally in June compared to May. Post a strong closing in the month of March 2019, markets have been moving in a narrow band since then. Year to date Sensex is up 9%. BSE midcap and Small cap indices fell by 1.4% and 4% during the month. Amongst various sectors, financials services, metal and realty outperformed while Auto, FMCG and Pharma underperformed.

Geopolitical tension between the US and Iran, progress of US- China trade talks, retaliatory tariff from India on US goods and weak monsoon weighed on sentiments. The RBI cut repo rates by 25bps to 5.75% and changed the policy stance to accommodative vs neutral earlier. The markets though reacted negatively as RBI didn’t spell out on how it intends to handle the liquidity crisis faced by NBFCs. The Fed left interest rates unchanged but signalled a possible cut to support economy growth.

May CPI inflation inched higher to 3.05% as against an upward revised print of 2.99% in April. The continual gradual increase was on expected lines with food inflation contributing mostly to the increase. On a sequential basis, CPI inflation firmed up by 0.6% month on month (m-o-m) even with a favorable base effect led by food prices increasing 1.2% m-o-m. While prices of fruits, vegetables, cereals, pulses, spices and milk firmed up, price of eggs posted a sequential decline. High frequency data suggests that food prices have sustained their upward momentum in June.

Showing a contradictory trend to headline, core inflation eased to 4.2% from 4.5% in Apr. This is the 7th consecutive decline in core inflation. Almost all components of core basket recorded softening inflation. The largest drop came from ‘transportation and communication’ inflation followed by ‘household goods and services’ and healthcare costs.

Headline IIP for April came at 3.4%, much higher than 0.4% in March. The improvement was largely due to capital goods, which accelerated from -8.5% in March to 2.5% in April and explain nearly 250/300bps acceleration in IIP. On a three-month moving average basis (3MMA), IIP remained subdued at 1.2% and much lower than series average of 4%.

FPI flows continue to be positive for the fifth month in a row. YTD FPI flows stood at USD11.4bn. To recap, it was negative for the CY18. MFs have turned positive for year to date. Domestic Institutional Investors (“DIIs”) (including insurances, Banks) were also positive during the month. On a year to date basis though DIIs continue to be negative.

For the year, markets are up 9%. The focus now is on the quarterly result seasons. We remain constructive on Indian equities on medium to long term horizon as reforms being implemented are likely to start paying off over this period in terms of higher and sustainable growth and improved earning visibility.

Sanjay Chawla

Chief Investment Officer

Sources : Bloomberg, Economic Times

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