budget and market outlook - sbi funds outlook_feb 2018.pdfbudget and market outlook february 2018....

Budget and Market Outlook

February 2018

Union Budget 2017-18

The Back Drop

Source: SBIMF Research

Rising Global Growth

Global growth has recovered to 3.7% (Q3 2017) and is expected hold the momentum in 2018

Moderating India Growth

India’s FY18 growth is pegged at 6.7% - lowest in last four years

Crude @ US$ 70 per barrel

Rising crude puts pressure on current account balance and government fiscal

GST Uncertainty Revenue collection has fallen short of desired targets coupled with pending refunds to businesses and complete devolution of states’ share

Twin Balance-Sheet Issues

Government has announced a mega Rs. 2.15 trillion recapitalization plan

Rising Bond Yields 10 Year G-sec is hovering at 7.40-7.45% since the start of the year ,raising the interest burden

Comfortable State Fiscal

The clause of keeping States’ revenue growth pegged at 14% for next 5 years is helping state government

Pre-election Year Budget

Government will head into general election in 2019 which may demand higher expenditure

Highlights: Relaxation of Fiscal deficit target by 30bps in FY18 and FY19

Source: indiabudget.nic.in, SBIMF Research; NB: RE – revised estimate, BE- budget estimate; Fiscal deficit is expenditure minus receipts, revenue deficit is revenue expenditure minus revenue receipts,

Key Budget Figures

• Union budget pencilled a slightly higher fiscal deficit than the pre-existing target, but with a promise to continue on the consolidationpath. The fiscal slippage is primarily due to spill-over impact of new indirect tax regime.

• The budget revised FY18 fiscal deficit to 3.5% in FY18 compared to initial Budget of 3.2%. FY19 deficit is targeted at 3.3% vs.FRBM vision of 3.3%. Revenue deficit will also be lowered from 2.6% in FY18 RE to 2.2% in FY19 BE.

• Largely Credible fiscal arithmetic (uncertainty from GST aside).

FY16 FY17 FY18 RE FY19 BE FY16 FY17 FY18 RE FY19 BE

1. Total Non Debt Receipts (A+B+C) 12,680 14,396 16,229 18,179 10.0 13.5 12.7 12.0A. Net tax revenue 9,438 11,014 12,695 14,806 4.4 16.7 15.3 16.6 Gross tax revenue 14,556 17,158 19,461 22,712 16.9 17.9 13.4 16.7 Direct tax (Income + Corporate Tax) 7,409 8,495 10,050 11,500 7.8 14.7 18.3 14.4 Corporate tax 4,532 4,849 5,637 6,210 5.7 7.0 16.3 10.2 Income tax 2,876 3,646 4,413 5,290 11.3 26.8 21.0 19.9 Indirect Tax (Customs+ Service+Excise+ GST) 7,098 8,620 9,364 11,160 30.5 21.4 8.6 19.2 Custom duties 2,103 2,254 1,352 1,125 11.9 7.1 -40.0 -16.8 Excise duties 2,881 3,821 2,770 2,596 53.1 32.6 -27.5 -6.3 Service tax 2,114 2,545 795 - 25.9 20.4 -68.8 GST - - 4,446 7,439 B. Non-tax Revenue 2,513 2,728 2,360 2,451 27.0 8.6 -13.5 3.9 of which dividend/profit transfer from RBI and other Fis, PSUs 1,121 1,230 1,064 1,073 24.8 9.7 -13.5 0.8 of which receipts from Economic services 910 1,017 888 896 40.6 11.8 -12.7 0.9C. Non Debt Capital Receipts 730 654 1,175 922 41.8 -10.4 79.7 -21.5 of which Disinvestment 421 477 1,000 800 11.6 13.3 109.5 -20.02. Total Expenditure (A+B) 17,908 19,752 22,178 24,422 7.6 10.3 12.3 10.1A. Revenue Expenditure 15,378 16,906 19,443 21,418 4.8 9.9 15.0 10.2B. Capital Expenditure 2,530 2,846 2,734 3,004 28.6 12.5 -3.9 9.9Fiscal Deficit 5,328 5,356 5,948 6,243 4.3 0.5 11.1 4.9Nominal GDP 1,36,820 1,51,837 1,67,847 1,87,223 9.9 11.0 10.5 11.5Fiscal Deficit (as % of GDP) 3.9 3.5 3.5 3.3Revenue deficit (as % of GDP) 2.5 2.1 2.6 2.2

Rs. Billion % growth

Fiscal Deficit: Broad consolidation to continue

Source: indiabudget.nic.in, SBIMF Research

Third miss in the Fiscal deficit target in last ten years

Lehman crisisEuro debt crisis

GST implementation

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

2012

-13

2013

-14

2014

-15

2015

-16

2016

-17

2017

-18

Gross fiscal deficit (% of GDP)

Actuals (% of GDP) BE (% of GDP)

Hits and Misses in FY18


Revenue shortfall explains the fiscal slippage (green denotes RE higher than BE, Red denotes RE lower than BE)

Rs. Billion FY18 BE FY18 RE RE- BE

Indirect Tax collection (ex GST cess) 9,316 8,798 -518

Direct Tax collection 9,800 10,050 250

Non-Tax Revenue: Dividend and Profit Transfer 1,424 1,064 -360

Non-Tax Revenue: Economic Receipts 922 888 -34

Disinvestment Receipts 725 1,000 275

TOTAL RECEIPTS (ex GST cess) 16,002 15,616 -386

Revenue Expenditure (ex GST cess) 18,369 18,830 461

Capital Expenditure 3,098 2,734 -364

TOTAL EXPENDITURE (ex GST cess) 21,467 21,565 97

• The fiscal slippage is primarily due to spill-over impact of new indirect tax regime leading to shortfall in indirect tax collection

• Lower than expected profit transfer from RBI is the second prime reason for the revenue shortfall

• In FY18, while the revenue expenditure was higher than budgeted, capital expenditure was lower than budgeted leading to nearlyunchanged total expenditure (marginally higher).

Budget in Charts

Fiscal deficit targeted at 3.3% in FY19 Revenue and primary deficit to reduce

Credible expenditure and receipts growth assumption Gross and Net market borrowing nearly flat as the burden shifts to other sources


5.66.15.8

4.44.04.0

3.4

2.6

6.16.6

4.9

5.9

4.94.5

4.13.93.53.53.3

2.0

3.0

4.0

5.0

6.0

7.0

- 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

RE

FY19

BE

Fiscal Deficit (Rs. Billion) Fiscal deficit (% of GDP)- RHS

4.0 4.4 4.33.5

2.5 2.51.9

1.1

4.65.3

3.3

4.53.7

3.2 2.92.5

2.12.6 2.7

0.91.5 1.1

0.0 0.00.4

-0.2-0.9

2.63.2

1.82.8

1.81.1 0.9 0.7 0.4

1.1 1.2

-2.0-1.00.01.02.03.04.05.06.0

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

RE

FY19

BE

Revenue deficit (% GDP) Primary Deficit (% GDP)

7 7

21

30

7

-3

23

33

-7

11

36

-4

17 159 10

14

49

9 1114 14

62

15

22 24

16 17

9 811

7 810 12 10

-10.0-5.00.05.0

10.015.020.025.030.035.040.0

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

RE

FY19

BE

Total Revenue Total Expenditure

% y-o-y

1.5 1.6

3.1

4.5 4.4 5.1

5.6 5.6 5.9 5.9 5.8 6.0 6.1

1.1 1.1

2.6

4.0 3.3

4.4 4.7 4.5 4.5

4.0 3.5

4.0 3.9

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

RE

FY19

BE

Gross Market Borrowing (Rs. trillion)Net Market Borrowing (Rs. trillion)- Net of Buybacks

Receipts target looks achievable


Tax collection assumptions look realistic- though GST uncertainty remains

Receipts Break-up

Disinvestment- record collection in FY18Non-tax revenue is projected to stay flat

400

400

300

558 63

4 695

565

725 80

0

228

181 25

9

294 37

7 421 47

7

1,00

0

-

200

400

600

800

1,000

1,200

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

Disinvestment (Budgeted) Disinvestment (Actual)

FY18 : 1000 bn is RE

300

1,367

387 437

677 647

910 1,017

888 896

503 480 506 538

904 898

1,121 1,230

1,064 1,073

-

200

400

600

800

1,000

1,200

1,400

1,600

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18RE

FY19BE

Economic Services Dividend and profits receipts

Rs. Billion

7.8

28.2

14.5

21.4

18

2

1417

0

5

10

15

20

25

30

Direct Tax Indirect Tax

FY16 FY17 FY18 RE FY19 BE

Gross Tax collections (% growth)

6.3 7.4 8.2 9.0 9.4 11.0 12.714.81.2

1.4 2.0 2.0 2.5

2.72.4

2.5

0.4 0.4

0.4 0.5

0.7 0.7

1.20.9

7.9 9.2

10.6 11.5

12.7 14.4

16.218.2

-

5.0

10.0

15.0

20.0

FY12 FY13 FY14 FY15 FY16 FY17 FY18 RE FY19 BE

Net Tax Revenue Non-Tax Revenue

Non-debt Capital Receipts Total Non Debt Receipts

Rs. Trillion

Tax Buoyancy to improve in FY19


Gross Tax collections (ex of GST cess) is projected to improve

Rs. Billion FY14 FY15 FY16 FY17 FY18 RE FY19 BENet tax revenue 8,159 9,036 9,438 11,014 12,081 13,906

Gross tax revenue 11,387 12,449 14,556 17,158 18,848 21,812 Corporate tax 3,947 4,289 4,532 4,849 5,637 ` Income tax 2,378 2,583 2,876 3,646 4,413 5,290 Custom duties 1,721 1,880 2,103 2,254 1,352 1,125 Excise duties 1,695 1,881 2,881 3,821 2,770 2,596 Service tax 1,548 1,680 2,114 2,545 795 GST 4,446 7,439

CGST 2,214 6,039 IGST 1,619 500 Compensation cess 613 900

Taxes of union territories 31 32 39 41 47 52 Less States' share in tax revenue 3,182 3,378 5,062 6,080 6,730 7,881 Less Contingency/Disaster Funds 47 35 57 65 37 25

Tax Break-up

8.7 8.9

8.1

8.7 9.1

9.6

10.1

11.2 12

.1

11.0

9.8

10.4

10.2 10.4

10.1

10.0 10

.6 11.3

11.2 11

.7

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

RE

FY19

BE

Gross tax revenue

% GDP

Expenditure (as % of GDP) at record low


Expenditure adjusted for cess transfer is at record low (as % of GDP), quelling market expectation of populist budget

Food and fertilizer subsidy scaled up, but petroleum kept unchanged

Rising interest payment

Higher capex growth on a relatively low base15

.415

.514

.7 16.0

15.8 17

.3 18.6 19

.818

.918

.518

.918

.316

.916

.116

.215

.714

.814

.4 15.1 15

.815

.115

.315

.7 16.7

16.9

15.7

14.0

13.9 14

.6 16.0

16.1

15.7

14.9

14.2

13.9

13.4

13.1

13.0

12.8

12.6

10

12

14

16

18

20

22

FY80

FY82

FY84

FY86

FY88

FY90

FY92

FY94

FY96

FY98

FY00

FY02

FY04

FY06

FY08

FY10

FY12

FY14

FY16

FY18

RE

Total Expenditure

% GDP

14.9

14.1

10.1

8.5 10

.3

6.9

4.8 9.

9 15.0

10.2

25.0

39.0

1.3 5.

2

12.5

4.8

28.6

12.5

-3.9

9.9

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

RE

FY19

BE

Revenue Expenditure Capital Expenditure

% growth

1,50

3

1,71

0

1,92

2

2,13

1

2,34

0

2,73

2

3,13

2

3,74

3

4,02

4

4,41

7

4807

5308

5758

3.6 3.5 3.53.4

3.1 3.1 3.13.3

3.2 3.2 3.2 3.23.1

2.0

2.2

2.4

2.6

2.8

3.0

3.2

3.4

3.6

3.8

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18RE

FY19BE

Interest Payment (Rs. Billion) % GDP- RHS

1102

1403

1693

663 650 701

275 245 249

0

200

400

600

800

1000

1200

1400

1600

1800

FY17 FY18 RE FY19 BE

Food Fertilizer Petroleum

Rs. Billion

Revenue expenses make 88% of center’s total spend


The committed expenditure of the center (Interest payments, Salaries & Pension, Defense, Subsidies and tax administration) accounts for ~60% of center’s total spend leaving limited space for discretionary and capex spend

Break-up of Expenditure


Rs. Billion FY16 FY17 FY18 RE FY19 BEEXPENDITURE 17,908 19,752 22,178 24,422

Pension 968 1314 1474 1685Defence 2,259 2518 2671 2827Subsidy 2,418 2040 2297 2643

Food 1,394 1102 1403 1693Fertilizer 724 663 650 701Petroleum 300 275 245 249

Agriculture 237 502 566 638Commerce & Industry 162 214 263 280Devt of North East 20 25 27 30Education 672 720 819 850Energy 211 310 417 411External Affairs 145 128 137 150Finance 712 415 294 203Health 341 390 532 547Home Affairs 678 784 881 935Interest Payment 4,417 4807 5308 5758IT & Telecon 151 180 178 224Others 460 637 695 728Planning & Statistics 60 45 51 52Rural Devt 902 1139 1356 1381Scientific Dept 174 195 224 249Social Welfare 317 318 386 442Tax Administration 260 221 777 1055Transfer to States 1,148 1327 1203 1429Transport 874 1022 1071 1346Union Territories 118 133 142 141Urban Devt 202 369 408 418

Resources of Public Sector Enterprises is funding the capex


… leading to higher borrowing by PSEs from the marketCapex through resources of PSEs is on the rise…

1,127 1,566 1,586 1,669 1,877 1,967 2,530 2,846 2,734 3,004 1,880

1,784 2,002 1,937 2,631 2,291

3,114 3,381

4,769 4,783

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18RE

FY19BE

Total Capital expenditure through Budget Resources of PSEs

Rs. Billion

1,234 1,207 1,071 1,722 1,167 1,247 1,675 1,695 1,656

405 703 733 614

614 1,266

1,672 1,932 1,726 2,036 2,368 2,390 2,576 2,370

3,216

4,064 4,769 4,783

-

1,000

2,000

3,000

4,000

5,000

6,000

2010

-11

2011

-12

2012

-13

2013

-14

2014

-15

2015

-16

2016

-17

RE

2017

-18

RE

2018

-19

BE

Internal Resources Bonds/Debentues E.C.B./Suppliers Credit

Others EBR of PSEs for Capex

• Capex through resources of PSEs (Rs.4.8 trillion) are much higher than capexthrough Budget (Rs. 3 trillion),

• Consequently, this has also lead tohigher bonds issuances by PSEs. Budgetexpects PSEs to raise Rs. 1.7 trillionthrough bonds vs. Rs. 1.9 trillion in FY18and 600-700 billion a couple of yearsago.

• Total capex after adding the resources ofPSEs are pegged at Rs. 7.8 trillion (4.3%of GDP) vs. 7.5 trillion (4.5% of GDP) inFY18.

Budgeted Bonds Issuances by PSEs (Rs. Billion)

Ministry/ Department Public Sector Enterprise FY18 BEMinistry of Railways Indian Railway Finance Corporation 549 Ministry of Road Transport and Highways National Highway Authority of India 520 Department of Food and Public Distribution Food Corporation of India 130 Ministry of Power Power Grid Corporation of India Limited 123 Ministry of Power National Thermal Power Corporation Limited 76 Total 1,399 Other PSEs 327 Grand Total 1,726

IRFC and NHAI are likely to be prime borrowers in FY18

Outlay on Major Schemes


Rs. Crore % ShareFY17 FY18RE FY19BE FY17 FY18RE FY19BE

National Highways Authority of India including Road Works 51,963 60,671 70,544 13 13 14

Mahatma Gandhi National Rural Employment Guarantee Programme 48,215 55,000 55,000 12 12 11

National Education Mission 27,616 29,556 32,613 7 6 6

National Health Mission (NHM) 22,870 31,292 30,634 6 7 6

Pradhan Mantri Awas Yojna 20,952 29,043 27,505 5 6 5

Umbrella ICDS 15,893 19,963 23,088 4 4 4

Pradhan Mantri Gram Sadak Yojna 17,923 16,900 19,000 4 4 4

Swachh Bharat Mission (SBM) 12,619 19,248 17,843 3 4 3

MRTS and Metro Projects 15,327 18,000 15,000 4 4 3

Interest subsidy for short term credit to farmers 13,397 14,750 15,000 3 3 3

Green Revolution 10,105 11,185 13,909 3 2 3

Crop Insurance Scheme 11,052 10,698 13,000 3 2 3

Urban Rejuvenation Mission : AMRUT 9,277 8,999 12,169 2 2 2

National Programme of Mid Day Meal in Schools 9,475 10,000 10,500 2 2 2

Bharatnet 7,226 7,000 10,000 2 1 2

National Social Assistance Programme 8,854 8,745 9,975 2 2 2

Pradhan Mantri Krishi Sinchai Yojana 5,134 7,392 9,429 1 2 2

National Rural Drinking Water Mission 5,980 7,050 7,000 1 2 1

National Livelihood Mission-Ajeevika 3,486 4,699 6,060 1 1 1

Umbrella Scheme for Development of Schedule Castes 4,863 5,114 5,183 1 1 1

Others 76,444 94,526 1,14,441 19 20 22

Grand Total 3,98,671 4,69,831 5,17,893 100 100 100

Amongst all schemes, NHAI and MGNREGs receive the maximum allocation

Capital Outlay on Infrastructure spending


GBS IEBR TOTAL GBS IEBR TOTAL GBS IEBR TOTALRai lways 25 400 800 1,200 531 934 1,465 33 17 22Road Transport and Highways 20 509 593 1,101 594 620 1,214 17 5 10Petroleum and Natura l Gas 16 15 873 889 37 892 929 140 2 5Power 9 9 643 652 13 535 548 47 -17 -16Affordable hous ing (Urban) 5 60 - 60 65 250 315 8 421Department of Higher Education 5 3 - 3 28 280 308 1000 12200Telecommunication 4 38 98 135 45 170 215 20 74 59MRTS and Metro Projects 3 178 15 193 149 19 168 -16 28 -13Coal 3 - 145 145 - 158 158 9 9Hous ing And Urban Develpoment Corporation 2 - 137 137 - 130 130 -5 -5Steel 2 - 114 114 - 113 113 -1 -1New and Renewable Energy 2 1 95 95 - 103 103 9 8Digi ta l India 1 14 - 14 31 57 88 115 515Department of Atomic Energy 1 14 78 92 17 57 73 16 -27 -21Defence (Misc) 1 49 - 49 55 - 55 12 12Shipping 1 1 32 33 3 40 43 100 28 30Civi l Aviation 1 2 25 27 - 41 41 61 52Development of North Eastern Region 0 3 - 3 6 - 6 82 82Grand Total 100 1,296 3,648 4,943 1,572 4,399 5,971 21 21 21

Ministry/Department.Change (% y-o-y)FY18 RE (Rs billion) FY19 BE (Rs billion)% share in

FY19

Railways, Roads and Energy receives the maximum thrust

Financing of Fiscal Deficit: A paradigm Shift

Source: indiabudget.nic.in, SBIMF Research;

Reduction in market borrowing is compensated by higher other capital receipts

• While Gross market borrowing is pegged at Rs. 6.06 trillion, net market borrowing (net of buybacks) has been lowered to Rs. 3.9trillion due to redemption of Rs. 1.4 trillion of G-secs maturing in FY18 and Rs. 720 billion of buybacks.

• Withdrawal from small savings funds have been lowered to Rs. 750 billion.

• 7PC also enabled higher employee contribution in GPF (Gross Provident Fund), thus enabling a higher financing from there(captured in other capital receipts)

FY16 FY17 FY18 RE FY19 BE FY16 FY17 FY18 RE FY19 BEFinancing of Fiscal Deficit 5,328 5,356 7,174 8,043 100 100 100 100Net market borrowings (dated securities) 4,041 3,497 4,024 3,901 76 65 56 49 Gross market borrowings 5,850 5,830 5,990 6,055 110 109 83 75 Repayment of domestic mkt borrowings 1,444 1,748 1,396 1,435 27 33 19 18 Net Buybacks 375 597 570 720 7 11 8 9Short-term borrowings 507 55 775 170 10 1 11 2Net external assistance 127 180 24 26 2 3 0 0Rcpts frm small savings, PPF & depst schms 525 674 1,026 750 10 13 14 9Receipts from state providend fund 119 177 150 170 2 3 2 2Other capital receipts -122 861 343 847 -2 16 5 11Drawdown on cash balances 132 89 -394 431 2 2 -5 5

Rs. Billion % Share in total Fiscal Deficit

The Budget Agenda

Agriculture and Rural Economy

Health, Education and Social Protection

MSMEs and Employment

Infrastructure and Financial Sector Development

Building Institutions and Public Service

Delivery

Fiscal management


Highlights of the Budget

Source: SBIMF Research

• Union budget pencilled higher fiscal deficit than the pre-existing target for both FY18 and FY19, but with a promise to continue on theconsolidation path in a medium-term basis. Largely Credible fiscal arithmetic (uncertainty from GST aside)

• Accordingly general government debt-to-GDP ratio of 60% is now aimed to be achieved by 2025 vs. 2023 previously

• Expenditure:• Expenditure as % of GDP are at historic low. Overall expenditure profile quite muted with limited impulse for growth• The thrust of spending remains on infrastructure, rural economy and agriculture sector• Total capital expenditure including Extra-budgetary resources (IEBR) has actually fallen to 4.2% of GDP from 4.5% of GDP in

FY8RE

• Taxation Measures:• Imposition of the 10% long term capital gains tax (LTCG) on equities• Reduction of corporate tax to 25% for small business.• Customs duty raised for certain agri and electronic products• In the personal income space, the tax exemption limit for senior citizens were increased by Rs. 50,000 while the salaried

individuals would get a flat taxable income deduction of Rs. 40,000 in lieu of repealed the travel and medical allowance.

• Positive in the Budget:• Taxation measures can likely help in increasing the disposable income.• Reduction of MSME taxes and introduction of fixed-term employment bodes well from the job creation perspective• The thought of having a unique ID for businesses (on the lines of Aadhar which is for individuals) can go a long way in

improving the ease of doing business.• With farm and rural thrust, consumption growth momentum should continue• The continued focus on the infrastructure (9% increases in monetary allocation) is positive for the related sectors• Health Insurance Scheme covering over 10 crore households• Resisted announcing a universal basic income scheme, which would have entailed a large fiscal cost• Law for fixing the salaries of Member of the Parliament

• What we miss• Inadequate subsidy allocation to oil subsidy• Greater focus is needed on employment generation• Education sector expenditure through the budget has stagnated over the past 3-4 years with allocations to elementary and

secondary education marginally declining

EQUITY MARKET

Global equity market returns: January 2018

Source: Bloomberg, SBIMF Research

• Equity continued to deliver positive returns across most markets in January 2018 (barring UK).

• Emerging Markets (MSCI EM index) has delivered 8%. NIFTY returns at 5% was relatively lower compared to other emergingmarket.

• Brazil and Russia are the best performing markets while UK under-performed.

Performance in January 2018

-1

2 2 23 3 4 4 4

5 5 5 6

89 9 9

10 11

(2)

0

2

4

6

8

10

12U

K

SRI L

AN

KA

GER

MA

NY

JAPA

N

FRA

NCE

IND

ON

ESIA

KORE

A

TAIW

AN

PHIL

IPPI

NES

IND

IA N

IFTY

CHIN

A

DO

W JO

NES

S&P

500

MSC

I EM

HA

NG

SEN

G

MSC

I EM

- EU

ROPE

PAKI

STA

N

RUSS

IA

BRA

ZIL

Indian stock market sector-wise returns: January 2018

Performance in January 2018


• Equity market continued to deliver positive returns in January 2018. Both Sensex and NIFTY were up 5% in January.

• Mid-cap (-2%) and Small cap (-2%) under-performed.

• IT and Capital goods emerged as the top performer

• Pharmaceuticals and Auto were the sector laggards

-3-2 -2

-1 -1

0 1 12

4 45

57 7

12

(4)

(2)

0

2

4

6

8

10

12

14A

UTO

SMA

LL C

AP

MID

CA

P

PHA

RMA

PSU

OIL

& G

AS

FMCG

REA

L ES

TATE

BSE

500

BSE

100

MET

ALS

NIF

TY

SEN

SEX

BAN

KEX

CAP

GO

OD

S IT

FIIs continue to invest in emerging marketsRussia topped the list in FIIs investment while India was somewhere in middle


India and Taiwan have been receiving net positive equity investment for six years in succession

Net FII- US$ billion 2012 2013 2014 2015 2016 2017Cumulative since Financial Crisis (2009-2017)

India 24.5 19.8 16.2 3.3 2.9 8.0 121.1 Indonesia 1.7 -1.8 3.8 -1.6 1.3 -3.0 7.1 Philippines 2.6 0.7 1.3 -1.2 0.1 1.1 7.5 S Korea 15.1 4.9 5.7 -3.6 10.5 8.3 76.7 Sri Lanka 0.3 0.2 0.2 -0.0 0.0 0.1 0.3 Taiwan 4.9 9.2 13.2 3.3 11.0 5.8 63.6 Thailand 2.5 -6.2 -1.1 -4.4 2.2 -0.8 -4.1 Brazil 2.4 4.9 9.0 5.7 3.9 4.2 42.9 Mexico 9.9 -0.9 4.8 3.6 9.5 NA 24.8 South Africa -0.4 0.1 1.5 0.7 -8.6 -2.6 2.0 Russia -0.3 6.7 13.8 7.9 7.9 7.9 57.4

(2,000)

-

2,000

4,000

6,000

8,000

10,000

Thai

land

Sri L

anka

Phili

ppin

es

Indo

nesi

a

Sout

h A

fric

a

Indi

a

S Ko

rea

Taiw

an

Braz

il

Russ

ia

2018 (till Jan)Net FII inflows in Equity (USD mn)

Continued inflow in the Indian equity space in January

FIIs invested US$ 2.1 billion in January 2018

Source: MOSL, SBIMF Research

Mutual fund Inflows continued to be positive… … and offset the insurance industry outflows

0.90.1

2.3

-0.1

2.9

1.41.71.2

-0.1-1.0

0.9

-2.6

-0.9

0.8

-1.1

0.0

-1.7-1.2

4.1

0.60.40.8

1.71.51.4

-0.7

-2.6

-1.2

0.0

1.6

5.1

-0.3

1.5

0.60.4

-2.0-1.7

0.3

3.0

-0.7

2.1

Sep-

14

Dec

-14

Mar

-15

Jun-

15

Sep-

15

Dec

-15

Mar

-16

Jun-

16

Sep-

16

Dec

-16

Mar

-17

Jun-

17

Sep-

17

Dec

-17

US$ billion

0.71.0

0.3

1.1

0.10.70.6

1.5

0.71.60.9

1.61.4

0.51.00.71.1

0.9

-1.5

-0.1

1.1

0.00.0

0.40.6

1.4

2.0

1.4

0.80.30.7

1.71.51.41.8

2.82.7

1.51.9

1.30.8

Sep-

14

Dec

-14

Mar

-15

Jun-

15

Sep-

15

Dec

-15

Mar

-16

Jun-

16

Sep-

16

Dec

-16

Mar

-17

Jun-

17

Sep-

17

Dec

-17

US$ billion

-0.9

-0.3

-1.5

-0.3

-1.4

-0.4-0.6

0.40.7

0.3

-0.7

0.9

0.1

-0.7

0.30.3

0.80.7

-1.0

-0.3

0.0

-0.3

-0.9-1.1

-0.3-0.2

0.7

0.0-0.1

-0.2

-1.3

-0.3

-0.8

-0.4

-1.1

-0.3

0.5

0.0

-0.4

0.0

-0.9

Sep-

14

Dec

-14

Mar

-15

Jun-

15

Sep-

15

Dec

-15

Mar

-16

Jun-

16

Sep-

16

Dec

-16

Mar

-17

Jun-

17

Sep-

17

Dec

-17

US$ billion

3Q FY18 earnings review

Source: Antique, SBIFM Research

Earnings growth for FY18 is expected at 13-15%. FY19 EPS expected to grow by +20%

• 29 out of 50 NIFTY companies has reported the result for3Q FY18 (as of Jan end). The earnings outcome thus farsuggests continued improvement in profit growth (~12%growth for 29 NIFTY companies that have reported results)along with higher top-line growth (12.2% y-o-y) andimproved operating profit (8.4% EBITDA growth).

• Qualitative trends of the results are encouraging and pointto on-going economic recovery.

• Robust volume growth across consumption driven sectors-FMCG, cement, strong performance from retail focussedprivate banks, strong operating performance in cyclical likeL&T, and continuity with the trend observed since the lastquarter led to stability in earnings estimates for FY18.

• Corporate profits as percentage of GDP has hit anextremely low point and logically should mean revert.

• Earnings revival is absolutely critical for such richvaluations to sustain.

95128

175207

239283

247284

330 351385

427391 402

427485

580

-20%

-10%

0%

10%

20%

30%

40%

0

100

200

300

400

500

600

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

e

FY19

e

Nifty EPS YoY, RHS

3.0

4.75.4

6.2

7.37.8

5.5

6.5 6.2

4.9 4.6 4.33.8

3.1 2.9

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

Average of 5.4%

Corporate profit as percentage of GDP

Earnings expectations have stabilized

Source: Bloomberg consensus estimates, SBIMF Research

390

410

430

450

470

490

510

530

550

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

FY15 FY16 FY17 FY18

NIFTY EPS expectation for the respective year

Market earnings expectations for FY18 have stabilized since October

Source: Morgan Stanley, SBIMF Research,

Indian Equity Valuations relative to emerging markets

India’s valuations relative to other EMs in line with historical 5 year average…

…and the relative RoE remains healthy

30%

40%

50%

60%

70%

80%

90%

Jan-

14

Apr

-14

Jul-1

4

Oct

-14

Jan-

15

Apr

-15

Jul-1

5

Oct

-15

Jan-

16

Apr

-16

Jul-1

6

Oct

-16

Jan-

17

Apr

-17

Jul-1

7

Oct

-17

Jan-

18MSCI India's P/E prem. wrt MSCI EM

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

Jan-

14

Apr

-14

Jul-1

4

Oct

-14

Jan-

15

Apr

-15

Jul-1

5

Oct

-15

Jan-

16

Apr

-16

Jul-1

6

Oct

-16

Jan-

17

Apr

-17

Jul-1

7

Oct

-17

MSCI India RoE relative to EM (in %)

Valuations have corrected in January; but still high

Valuations across the capitalization curve are rich when compared to history

Source: Bloomberg, MOSL, SBIMF Research,

82 83

103

55

9588

7164 66

8169

8089

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

E

Average of 76% for the period

Market Cap to GDP rose to eight year high

6

11

16

21

26

31

36

Sep/

11D

ec/1

1Fe

b/12

May

/12

Aug

/12

Oct

/12

Jan/

13M

ar/1

3Ju

n/13

Sep/

13N

ov/1

3Fe

b/14

May

/14

Jul/

14O

ct/1

4D

ec/1

4M

ar/1

5Ju

n/15

Aug

/15

Nov

/15

Feb/

16A

pr/1

6Ju

l/16

Sep/

16D

ec/1

6M

ar/1

7M

ay/1

7A

ug/1

7N

ov/1

7Ja

n/18

S&P Mid Cap 1Y fwdPE

7

9

11

13

15

17

19

21

23

Jan/

11M

ay/1

1Se

p/11

Jan/

12M

ay/1

2Se

p/12

Jan/

13M

ay/1

3Se

p/13

Jan/

14M

ay/1

4Se

p/14

Jan/

15M

ay/1

5Se

p/15

Jan/

16M

ay/1

6Se

p/16

Jan/

17M

ay/1

7Se

p/17

Jan/

18

Sensex…

Mean: 16

+1 SD

-1 SD

13

15

17

19

21

23

25

27

Apr

/15

May

/15

Jun/

15Ju

l/15

Aug

/15

Sep/

15O

ct/1

5N

ov/1

5D

ec/1

5Ja

n/16

Feb/

16M

ar/1

6A

pr/1

6M

ay/1

6Ju

n/16

Jul/

16A

ug/1

6Se

p/16

Oct

/16

Nov

/16

Dec

/16

Jan/

17Fe

b/17

Mar

/17

Apr

/17

May

/17

Jun/

17Ju

l/17

Aug

/17

Sep/

17O

ct/1

7N

ov/1

7D

ec/1

7Ja

n/18

S&P Small Cap 1Y fwd PE

Equity Market outlook

• Indian equity market continued to rally in January (though lower than otheremerging markets) helped primarily by the spur in FIIs inflow (US$ 2.1billion). Domestic Mutual Fund continued to invest while insurance sectorsold off.

• Some bit of the January gains were reversed post budget as market asthe imposition of 10% Long term Capital Gains tax dented the marketexuberance. We see this as a knee-jerk reaction. The grand-fatheringclause in the LTCG should help fray the market sentiments.

• The corporate tax rates for small businesses (with annual turnover lessthan Rs. 250 crore) were brought down to 25%. In the personal incomespace, the tax exemption limit for senior citizens were increased by Rs.50,000. These taxation measures can likely help in increasing thedisposable income. Along with farm and rural thrust, consumption growthmomentum should continue.

• The continued focus on the infrastructure (9% increases in monetaryallocation) is positive for the related sectors.

• The event is behind us, so the market should re-align its focus to globalcues sand earning trajectory.

• So far, the latest Q3 FY18 results are comforting. The revival in earningsis absolutely critical for such rich valuations to sustain.

• Last few years have favoured growth over value stocks. However, recentlywe have seen interest emerging in contrarian themes such as corporatelenders, telecom, IT and construction. After the stellar performance in2018, particularly in mid and small caps, it is very important to keep aneye on valuations. With easy gains drying out, one needs to focus onbottom up stock picking.

Valuations are at 20 times on 1 year forward earnings


7

9

11

13

15

17

19

21

23

Jan/

11

Jun/

11

Nov

/11

Apr

/12

Sep/

12

Feb/

13

Jul/

13

Dec

/13

May

/14

Oct

/14

Mar

/15

Aug

/15

Jan/

16

Jun/

16

Nov

/16

Apr

/17

Sep/

17

Sensex 1Y fwd PE

Mean: 16

+1 SD

-1 SD

Fixed Income Market

Global rates snapshot for January 2018


10 Year Gsec Yield (% mthend) 2016 end 2017 end Jan-18

m-o-m change (in bps)

Developed market

US 2.44 2.41 2.71 30

Germany 0.21 0.43 0.70 27

Italy 1.82 1.75 1.76 1

Japan 0.05 0.05 0.09 4

Spain 1.38 1.57 1.43 -14

Switzerland -0.19 -0.15 0.11 26

UK 1.24 1.19 1.51 32

Emerging Market

Brazil 11.40 10.26 9.72 -54

China 3.03 3.88 3.91 3

India 6.52 7.33 7.43 10

Indonesia 7.91 6.29 6.24 -5

Korea 2.07 2.47 2.78 31

Malaysia 4.19 3.91 3.95 4

Philippines 4.64 4.93 4.93 0

Russia 8.36 7.49 7.24 -25

Taiwan 1.20 1.03 0.97 -6

Thailand 2.65 2.32 2.35 2

Bond yields rose across most global markets

India Rates Snapshot for January 2018

Source: Bloomberg, PPAC, CCIL, SBIMF Research; NB: **Crude oil price is average $/barrel for the month, rest of the data are % month end; *Corporate bond rate is for AAA rated bonds ,*** Refers to PSU Banks CD rate; # INR and Oil price changes are % change

Rates across the yield curve and across the securities have risen in January 2018

Nov-17 Dec-17 Jan-18 m-o-m change (in bps)

1 Yr T-Bill 6.27 6.40 6.55 15

3M T-Bill 6.12 6.20 6.40 20

10 year GSec 7.06 7.33 7.43 10

3M CD*** 6.22 6.38 7.20 82

12M CD*** 6.63 6.75 7.45 70

3 Yr Corp Bond* 7.30 7.66 7.68 2

5 Yr Corp Bond* 7.45 7.68 7.88 20

10 Yr Corp Bond* 7.84 7.90 8.11 21

1 Yr IRS 6.30 6.44 6.48 4

5 Yr IRS 6.58 6.75 6.77 1

Overnight MIBOR Rate 6.00 6.20 6.00 -20

INR/USD 64.5 63.9 63.6 0.4#

Crude Oil Indian Basket** 61.3 62.3 67.1 7.7#

India 10 year G-sec yields are rising

Source: Bloomberg, SBIMF Research,

Factors driving the yields movement• Higher than expected fiscal deficit for FY19 • Inflation bottoming out in India. On top of that measures such as re-calibration of MSP, higher import duty on

certain agri-products were perceived as inflationary• RBI Policy stance: RBI is committed to keep inflation anchored around 4% • Hardening crude prices• Deteriorating G-sec demand-supply dynamics• Exhaustion of FPI debt limits• Global factors: Gradual rise in global policy rates along with liquidity tightening

Bond yields moved up by 18 bps on the budget day. Yields has risen by 28bps on YTD basis

7.10

7.20

7.30

7.40

7.50

7.60

7.70

India 10 year G-sec yield (In %)

Yield curve has risen in January 2018


Yields have risen across the curve in January; yields steepened right after the budget

6.00

6.20

6.40

6.60

6.80

7.00

7.20

7.40

7.60

7.80

8.00

3 M

onth

1 Ye

ar

2 Ye

ar

3 Ye

ar

4 Ye

ar

5 Ye

ar

6 Ye

ar

7 Ye

ar

8 Ye

ar

9 Ye

ar

10 Y

ear

01-Jan-18 31-Jan-18 01-Feb-18

India growth-inflation mix warrants an unchanged policy rate in 2018

Source: CMIE economic outlook, CSO, SBIMF Research

Inflation is bottoming out but to stay contained…

Risks to Inflation:• Rising commodity prices particularly crude prices• Exceptionally low food inflation leads to a risk of some mean-reversal• Rising share of revenue expenditure in government spending• Sharp growth rebound leading to higher corporate pricing power

.. And growth is expected to recover marginally

5.5

6.4

7.58.0

7.1

6.0

7.2 7.6

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

FY13 FY14 FY15 FY16 FY17 1H FY18 2H FY18e FY19e

Real GDP

% growthFY18: 6.7%

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Ap

r-1

2

Jul-

12

Oct-

12

Jan

-13

Ap

r-1

3

Jul-

13

Oct-

13

Jan

-14

Ap

r-1

4

Jul-

14

Oct-

14

Jan

-15

Ap

r-1

5

Jul-

15

Oct-

15

Jan

-16

Ap

r-1

6

Jul-

16

Oct-

16

Jan

-17

Ap

r-1

7

Jul-

17

Oct-

17

CPI % y-o-y

CPI target range 4% + 2%

Risk from rising crude prices

Source: PPAC, SBIMF Research

0.9 0.9

1.1 1.1 1.2 1.3 1.3 1.3

1.4 1.5 1.5

1.6

-

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E

Crude Import (billion barrel)

India crude import is rising at a CAGR of 6% in last 10 years Every US$ 10 rise in crude price increases CAD by ~US$ 16 billion…

9.511.0

13.315.4

17.519.1 19.4 19.7

21.519.5

3.65.0 6.0

8.010.3 10.7 11.8

13.8

17.315.3

0.0

5.0

10.0

15.0

20.0

25.0

Prio

r to

12

Nov

201

4

12-N

ov-1

4

02-D

ec-1

4

01-J

an-1

5

16-J

an-1

5

07-N

ov-1

5

16-D

ec-1

5

02-J

an-1

6

01-F

eb-1

6

03-O

ct-1

7

Petrol Diesel

Excise (Rs./ litre)

Rising Crude prices may lead centre to cut excise duty. Every 1 re cut leads to an annual excise revenue loss of Rs. 130 billion

Banking system indicators

Source: RBI, SBIMF Research

The situation of abnormal surplus liquidity (seen post demonetization) should fade away in 2018…

-4000

-2000

0

2000

4000

6000

8000

10000

Sep-

15O

ct-1

5N

ov-1

5D

ec-1

5Ja

n-16

Feb-

16M

ar-1

6A

pr-1

6M

ay-1

6Ju

n-16

Jul-1

6A

ug-1

6Se

p-16

Oct

-16

Nov

-16

Dec

-16

Jan-

17Fe

b-17

Mar

-17

Apr

-17

May

-17

Jun-

17Ju

l-17

Aug

-17

Sep-

17O

ct-1

7N

ov-1

7D

ec-1

7

Banking System Liquidity (Rs. Billion)

2.04.06.08.0

10.012.014.016.018.020.0

Jan/

13

May

/13

Sep/

13

Jan/

14

May

/14

Sep/

14

Jan/

15

May

/15

Sep/

15

Jan/

16

May

/16

Sep/

16

Jan/

17

May

/17

Sep/

17

Bank Deposit (% y-o-y) Bank Credit (% y-o-y)

… But credit growth could outpace deposit growth…

… and affect Banks’ appetite for Government securities

19.0 21.0 23.0 25.0 27.0 29.0 31.0 33.0

Apr

-11

Aug

-11

Dec

-11

Apr

-12

Aug

-12

Dec

-12

Apr

-13

Aug

-13

Dec

-13

Apr

-14

Aug

-14

Dec

-14

Apr

-15

Aug

-15

Dec

-15

Apr

-16

Aug

-16

Dec

-16

Apr

-17

Aug

-17

Dec

-17

Actual SLR Holdings of Bank (in %)

Required SLR Holdings by RBI (in%)

• Banks current SLR holding is 9% more than themandated norms

• Any pick-up in credit demand, if unmatched byparallel growth in deposit base, could reduce banks’appetite for Government securities

We see a hump shaped headline CPI trajectory in 2018 with CPIlikely to go to 6% by June 2018 and then taper off in 2H FY19.Although headline CPI is expected to be above RBI’s mediumterm target (4%) for most of 2018, it should be well within thetolerable limit of 4 – 6% and the expected real policy rate.

There are upside risks to Inflation emerging from a) risingcommodity prices particularly crude prices, b) exceptionally lowfood inflation leads to a risk of some mean-reversal, c) risingshare of revenue expenditure in government spending, and d)Sharp growth rebound leading to higher corporate pricing power.

RBI need not be in a hurry to tighten monetary policy despite therising inflation as the growth recovery in India is still nascent andthe overall actual growth till date is still weak (CSO just pareddown FY18 growth to 6.5%- lowest in last four years).

Further, as the recapitalization exercise has just begun, any rushto the rate hiking will be counter-productive and inhibit themonetary policy transmission.

Risks to our call emerges from a) growth improves faster than ourcurrent expectations or b) global monetary policy normalizationexposes any weakness in India’s external balance. In that casethe RBI MPC could act early.

Policy Rate Outlook

Source: RBI, SBIFM Research

4.00

5.00

6.00

7.00

8.00

9.00

10.00

Nov

-05

Aug

-06

May

-07

Feb-

08

Nov

-08

Aug

-09

May

-10

Feb-

11

Nov

-11

Aug

-12

May

-13

Feb-

14

Nov

-14

Aug

-15

May

-16

Feb-

17

Repo Rate (mth end, %)

Repo rate to stay unchanged in 2018

Budget slipped on the fiscal deficit target but printed a lower thanexpected market borrowing.

Despite the headline commitment to fiscal consolidation and lowerthan expected gross market borrowings, bond market sold off. 10year G-sec yield rose by 18 bps to 7.60%, suggesting the likelyconcern on MSP-hikes pushing inflation expectations higher andpossible change in RBI’s stance. Rising global bond yields andcrude oil prices are also weighing on the sentiments.

While the budget opens the door for large MSP revision, theeventual inflationary and fiscal impact will depend on themethodology for measuring the cost of production. A cursory studyof the current price setting mechanism suggests that most agri-products are already witnessing an MSP of nearly 1.5x of theirproduction cost.

The imposition of LTCG tax on equities and increased income taxexemption for senior citizens may attract more funds in the fixedincome space. However, one also needs to take cognizance of theincreased borrowings through public sector enterprises. Further theexpected credit recovery can reduce the banks’ appetite forgovernment bonds. Banks’ holding of G-Sec is already well abovethe SLR level and foreign investor limit on government securities isnearly used up. However, with increased penetration of insuranceand pension sector, one needs to keenly watch their demand forbonds. We believe, investor should build exposure gradually asbond yields are entering in an attractive zone.

.

Debt Market Outlook

Source: Bloomberg, SBIFM Research

Valuations look attractive at G-sec vs. Repo rate spread of 160 bps (as of 2nd Feb)

6.006.507.007.508.008.509.009.50

Jan-

11

Jun-

11

Nov

-11

Apr

-12

Sep-

12

Feb-

13

Jul-1

3

Dec

-13

May

-14

Oct

-14

Mar

-15

Aug

-15

Jan-

16

Jun-

16

Nov

-16

Apr

-17

Sep-

17

10 year GSec yield (mth end, %)

Repo Rate (mth end, %)

Thank you

Disclaimer

This presentation is for information purposes only and is not an offer to sell or a solicitation to buy anymutual fund units/securities. These views alone are not sufficient and should not be used for thedevelopment or implementation of an investment strategy. It should not be construed as investmentadvice to any party. All opinions and estimates included here constitute our view as of this date and aresubject to change without notice. Neither SBI Funds Management Private Limited, nor any personconnected with it, accepts any liability arising from the use of this information. The recipient of thismaterial should rely on their investigations and take their own professional advice.

Mutual Funds investments are subject to market risks, read all scheme related documentscarefully.

Asset Management Company: SBI Funds Management Private Limited (A joint venture with SBI andAMUNDI). Trustee Company: SBI Mutual Fund Trustee Company Private Limited.

Contact Details

SBI Funds Management Private Limited

(A joint venture between SBI and AMUNDI)

Corporate Office:9th Floor, Crescenzo, C-38 & 39, G Block,Bandra Kurla Complex,Bandra (East), Mumbai - 400 051Tel: +91 22 6179 3000Fax: +91 22 6742 5687/88/89/90/91Website: www.sbimf.com

Call: 1800 425 5425

Visit us @ www.youtube.com/user/sbimutualfund

SMS: “SBIMF” to 56161

Email: [email protected]

Visit us @ www.facebook.com/SBIMF

http://www.sbimf.com/

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