September was refreshing, as the rupee registered a smart bounce-back from the low of 68, closing the month at 62.78, a m-o-m gain of 6%.
The RBI also effected a change in its monetary policy stance, indicating a balancing between growth and inflation. Having said that, a reasonably good monsoon gives hope that cyclical blip in food inflation may get tempered. This might pave way for a more benign liquidity situation, if not interest rates, which will increasingly be dependent on inflation.
More importantly, the government now faces the challenge of reining in the current account deficit and accumulating resources to manage external liabilities. Around $170bn of India's external debt is maturing within the next one year (an increase of around $20 bn over the last year). Thus, outflows requires an increase in inflows. The manufacturing sector also needs to pick up.
The swings in the equities market continue to suggest uncertainty about the future outlook and expectation. For instance, the RBI survey on corporate sector performance indicates that the total sales of around 2700 companies, has appreciated by only 2.6% yoy in Q1FY14. For comparison, sales in Q1FY13 was around 13.4% yoy. Moreover, during Q1-FY14 interest cost of these companies increased by 12%, while profitability has de-grown by around 10% y-o-y.
We believe the operational rate (Marginal Standing Facility) that is driving the money markets today, could go back to repo rate by the end of the year, when the stability on the external front returns. Overall GDP growth in the current financial year could be under 5%. In this scenario, a softening interest rate environment would be warranted.
At the core, the fiscal spend has increased money velocity without an increase in productive capacities. This has led to rise in inflationary pressure, especially in agri-based commodities. To add to that, the decline in the rupee and consistent buoyancy in international crude oil prices has aggravated the price situationr. Thus, we continue to see divergence between WPI inflation and CPI inflation, despite the tough monetary stance. This happens because while the hawkish monetary policy can constrict industrial demand, it has minimal impact in freeing up the agricultural production.
From the mutual funds industry perspective, the average industry AUM grew by 8% y-o-y to Rs 8.08 lakh crore. The industry will continue to reflect the larger growth trend in the financial sector. This provides scope to outperform in the long run through innovation, outreach and simplification.
CEO, Kotak Mutual Fund
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