August witnessed the continuation of the volatility seen in July as renewed global geopolitical and trade war risks added to the uncertainty while a less than expected repo rate cut of 35 bps failed to enthuse investors. The market was not able to recoup losses even after the Finance Minister rolled back the FPI surcharge and announced reforms for the financial and auto sectors. Both the benchmark indices, the Nifty 50 and the Sensex came in for heavy selling once again with the Nifty closing down 0.9% for the month while the Sensex lost 0.4%. There was a slight revival in the Auto sector and it, along with IT and Consumer Durables were the key outperforming sectors for the month. On the other hand, selling was witnessed most in Banks, Metals and Power sectors. FIIs continued their selling spree to the tune of ~USD 2.5 bn while DIIs continued to support the market with net buys of ~USD 2.9 bn.
Industrial Production growth slowed to 2.0% YoY in June from 4.6% in May (revised-up from 3.1%). The slowdown was led by contraction in capital goods and consumer durables. Capital goods production contracted for the second consecutive month, declining by 6.5% Y-o-Y in June. Consumer durable goods contracted by 5.5%Y-o-Y in June from 0.3% rise in May, led by decline in auto components and two-wheeler production. Consumer non-durables production growth slowed to 7.8% in June from 8.1% in May, led by contraction in pharmaceuticals. Weakness was also seen in infrastructure goods production that contracted by 1.8% in June after witnessing a rise by 1.8% in May.
Headline CPI inflation held broadly steady at 3.15% in July from 3.18% in June. The slight moderation was primarily due to softening seen in fuel prices, which declined 0.4% in July as against a rise of 2.2% in June. Food inflation actually showed an uptick of 1.4% in July vs 1.3% in June, led by a pickup in vegetable prices (6.5% MoM). Core CPI inflation rose marginally to 4.2% in July from 4.1% in June led by broad-based pick-up across subcomponents. WPI inflation decelerated to 25-month low of 1.1% in July from 2.0% in June with the moderation being broad-based, across food, fuel and core.
On the fixed income side, yields rose for the first time in four months in Aug 2019 on concerns over a slowing domestic economy which could lead to amiss on the fiscal deficit target, uncertainty around the sovereign bond issue, depreciating currency and escalation of the global trade wars. Although there was some softening at the shorter end of maturities due to the repo rate cut, medium and longer maturity yields witnessed hardening with the benchmark 10 year old G-Sec rising 19 bps to 6.56% from 6.37% in July.
The early stages of September have seen volatility continuing in the market with a couple of very sharp selling sessions. Global cues have not been very positive with talks of yield inversion and continued trade wars. The FM has continued the Govt's push for further economic reforms by announcing mega consolidations of PSU banks. The market expects further reforms form the Govt's side on reviving the economy and addressing concerns around the auto sector and GST.
Chief Investment Officer
DHFL Pramerica Life Insurance.