August continued the uptrend of previous two months and became the 3rd consecutive month that gave positive returns. The Benchmark Nifty50 gave monthly returns of 1.71% and has continued its new found hobby of making fresh 52-week highs at month ends.
Though returns given by major indices were not as great as in July*, the numbers nevertheless were respectable. Nifty Next50 and Nifty500 did slightly better than Nifty50 and gave 2.44% and 2.19% returns respectively.
*July returns - Nifty50: 4.23%, Nifty Next50: 9.37%, Nifty500: 5.00%
One of the biggest economic reforms in last 2 decades saw light of the day. The Rajya Sabha passed the GST Bill on 3rd August 2016.(Update - At the time of writing, more than half of all the states had ratified the bill - which sets a clear path for Presidential approval).
GST is expected to give a boost of 0.9% to 1.7% of GDP in long term (source - study commissioned by 13th Finance Commission). The actual implementation is expected to happen on 1st April 2017 and will help simplify tax structure, encourage compliance, lower costs and broaden the tax base in India. (We have written extensively about GST implementation in last month’s newsletter too - .
Change in Guard at RBI
Other big news of the month was appointment of Mr. Urjit Patel as RBI’s next governor. Currently, he is serving as RBI’s Deputy Governor. Alumni of Oxford, Yale and LSE, Mr. Patel has also worked at IMF’s India office in early 90s.
Mr. Patel is known to have a zero tolerance for inflation. The Urjit Patel Committee headed by him, had recommended inflation targeting and shift to use of Consumer Price Index (CPI) as the main measure of inflation for the RBI (against earlier use of Wholesale Price Index i.e. WPI).
So this appointment sends clear message that government will continue to push its inflation agenda.
On Tap Banking License
August also saw release of recommendations for On-Tap licensing of Universal Banks. When implemented, this will do away with the current approach of bank licensing being once-in-a-decade kind of an event. Instead, the window for getting a bank license from RBI will remain open throughout the year. This is a big reformative step for the Indian banking sector.
But we are of the view that despite the new ‘on-tap’ regime, there will be no rush to establish new banks. Banking is a complex business and given the stringent guidelines, there will be very few takers in initial years. The commonly held view that NBFCs might be eager to convert into banking entities is also speculative and doesn’t hold much substance.
Quarterly GDP numbers came down
India’s GDP growth slowed down in the first quarter of 2016-17 - growing at 7.1% in Apr-Jun quarter against 7.9% in Jan-Mar quarter (Q4-2015-16).
The government is targeting 8% growth in current fiscal but a low figure in the first quarter has made the target difficult to achieve.
But it must be remembered that last year, 7.6% growth was achieved despite failures of two back-to-back monsoons. Fortunately, the monsoon has been good this year. So contribution of agriculture will be much better than previous two years.
So good monsoon combined with the anticipated boost to urban consumption from pay hike, are expected to significantly push economic growth in the remaining quarters of 2016-17.
RBI has also acknowledged that in absence of any worthwhile pickup in private sectors’ investment activity (due to excess capacity, high debt levels, etc.), only a boost from agriculture and consumption recovery can help economy clock an 8% plus growth.
RBI maintained status quo in its monetary policy meeting in August. With new governor joining in September, there might be a scope of rate cut (as early as in October) if inflation starts slowing* and if the monsoon signs off on a good note.
* July 2016 CPI inflation spiked unexpectedly to 6.07%, which is a new 23-month high.
Pre-Festive Push to Auto Sector
Sales figures of almost all automobile companies saw a good increase ahead of the upcoming festive season. The major passenger-vehicle makers saw year-on-year sales increase of 15% in August.
As rural sentiments improve due to better monsoon, the sales in festive season are expected to be better than previous two years. But there is a risk that people might postpone their large-ticket purchases like vehicles in light of the expectation that GST implementation will bring down vehicle prices.
Coming to our portfolio, we remain convinced about the long term India story in spite of the increase in valuations. Apart from the expected passage of GST bill, we believe that a lot of investments and economic/policy decisions taken in last 2 years have set the stage for the next upmove.
Our portfolio remains adequately diversified across sectors and themes. The month of July saw no change in our holdings and sector allocation remains the same.
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Thanks & Regards
Team Research and Ranking