A very supportive monetary policy

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The inflation in India has zoomed especially in the last two months. It had started to rise about five month ago from September-19. In December it increased to 7.35% and then higher in January, 2020 to 7.59%, compared to 2.1% and 2.0% a year back, respectively. The RBI forecasts an inflation rate of 6.5 percent for Q4 FY20 and, 5.4-5.0 percent for H1:2020-21 with the long-term target of 4% with +/-2%, based on the standard the ongoing degree of price is much above the forecast. In-terms of core inflation (ex-food and fuel) is up to 4.2% from 3.5% on a MoM basis indicating that RBI has to pause its rate cut plans in the medium-term.

Against the muted expectation, as a positive surprise, RBI has come out with additional constructive measures to increase financial liquidity in the banking sector and the economy. The steps undertaken were cut in CRR, open market operation of Rs.1lac cr and banks to not consider on-going real estate project as NPAs for a period of one year. This will reduce bond yield and is positive for stressed sectors like retail, automobiles, housing and MSMEs.

RBI states that the consumer inflation in India is high due to short-term factors. It also states that inflation in India has peaked and expects significant reduction in CPI in the coming months. RBI recognizes that there is a space for more policy actions in the future and maintained its accommodative stance and will cut interest rate in the future as and when necessary. The monetary policy of India is very accommodative and supportive during the slowdown, it is very positive for financial sector.

The third quarter FY20 is completed, all the companies in Nifty50 have given result, apart from Yes Bank, net profit has grown at a healthy rate of 21% on a YoY basis which is marginally below the expectation of 26% growth. From the 49 companies, the results of 12 were above expectation, 12 inline and 25 below the expectation. The best performing sectors were NBFCs due to improvement in liquidity which reduced the cost of funds and lower provisioning. Overall banks did well with strong PAT growth but still it was below expectation due to fall in asset quality leading to higher provisioning. FMCG did well in line with the expectation while IT was muted but marginally above the expectation. The weak performers were Auto due to weak demand, oil and gas due to lower GRMs (gross refinery margin) and higher prices, cement due to low demand and lower cement prices, Pharma due to fall in demand and pricing power in global market and Metals due to lower international prices and demand.   

Year till date, mid and small caps are outperforming large caps due to likely improvement in the domestic economy and last year is assumed as the bottom for the market. The economy is expected to be supported by the fiscal and monetary policies undertaken by the government and RBI. As a result, the broad market is expected to do well in which mid and small caps will outperform. The sectors which are placed well are consumption-oriented businesses, Chemical, Fertilizers and Banks.

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