Debt Outlook:

• We believe we have seen peak of inflation in January 2020 with head line CPI at 7.35% . However based on current prices we expect the same to ease of to 7% and gradually trend towards the comfort zone. This will be positive from interest rates point of view
• The government admitted to a fiscal slippage and pegged the Fiscal Deficit at 3.8% for FY20. But it stuck to the glide path the next year has been pegged the Fiscal deficit at 3.5%. To its credit, the government did not increase the market borrowing for the current year and next year borrowing program was also as per market expectations. We will have to see how soon India will be a part of Global Bond Index for further direction.
• The geo-political Risk has moved from US-Iran to china WRT to Wuhan – Coronavirus. As of now the risk of a global slowdown is increasing i.e positive for interest rates. • Global risk-off led to bond yields falling sharply in US Treasuries;. The yields of other developed economies also continue to remain low. This may, sooner than later, lead to chase for Indian sovereign assets which are still offering high real rates.
• As we said earlier, India is probably preparing for inclusion in Global EM bond indices. The union budget has paved the way for the same and hopefully this may see the light of the day by end of the year. This will be a huge positive for long bonds.
• Liquidity is in huge surplus mode but market is yet to price this new phase. Positive liquidity is a more important tool than repo rate cut.
• We maintain that due to ‘operation twist’ the rate cut cycle has been elongated by at least 6m. We expect at least 25-50 bps cut in the policy rates in CY20. Market may still be in denial mode which gives a window of opportunity for the long term investors.
• In a nut shell, key driver for returns will be corporate spread-compression or flattening of the yield curve. It will start with AAA/PSU followed by NBFC/HFC like Bajaj/HDFC; and then, it may percolate to lower grade NBFC and other corporate bonds.
• We believe that the investment opportunity in short duration bond funds, banking and PSU funds, credit funds and dynamically managed duration funds is still present and becoming more attractive. Investors may look to invest in the funds depending on the scale of risk appetite and the investment horizon.

Key Events:

• Steps will be taken to remove criminal liability for offences under the Income Tax Act, which are civil in nature, the Finance Minister said in her Budget speech.
• While delivering the second budget speech of Narendra Modi Government 2.0, Finance Minister Nirmala Sitharaman allocated Rs 1.7 lakh crores for transport, infrastructure including Railways and Rs 99,300 crore outlay for education sector in 2020-21 and Rs 3,000 crore for skill development.
• Budget 2020 has proposed a new tax regime slashing income tax rates and rejigging income tax slabs to reduce total tax payable by individuals. As per the new regime, 70 tax exemptions will be removed
• Passenger vehicle (PV) exports from India increased by 5.89 % in the first nine months of the current fiscal.
• The International Monetary Fund (IMF) noted that Indias domestic demand has slowed more sharply than expected amid stress in the nonbank financial sector and a decline in credit growth. Indias growth is estimated at 4.8% in 2019, projected to improve to 5.8% in 2020 and 6.5% in 2021 (1.2 and 0.9 % point lower than in the October update), supported by monetary and fiscal stimulus as well as subdued oil prices.
• Net employment generation in the formal sector stood at 11.62 lakh in November 2019, shows provisional data released by the Employees~ Provident Fund Organisation (EPFO) on Wednesday. As per the latest data, 4.03 lakh jobs were created in the same month last year, while 6.48 lakh EPF subscribers were added in October 2019.
• Wholesale prices based inflation surged to 2.59 % in December, as against 0.58 % in November due to increase in prices of food articles like onion and potato. The annual inflation, based on monthly wholesale price index (WPI), was at 3.46 % during the same month a year ago (December 2018).
• India’s exports declined 1.8% in December to $27.36 billion, on the back of currency volatility and fluctuation in commodities prices coupled with the sluggish global economy. Exports had declined 0.34% in November. Echoing the general economic sluggishness and weak domestic demand, imports witnessed a sharper decline of 8.83% at $38.61 billion in December

Key Market Events:

• The Gross Domestic Product continued its downward spiral for the seventh consecutive quarter, falling to 4.5 per cent in the second quarter (July-September) of the year 2019-20
• CPI inflation jumps to 4.62% in October 2019. Core CPI inflation dips to 3.44% in October 2019
• Wholesale prices in India rose by 0.16 percent year-on-year in October of 2019, slowing from a 0.33 percent gain in the previous month and compared with market expectations of a flat reading.
• The fiscal deficit for the period April-October was recorded at 102.4% crossing the full year target underlining the fiscal concerns for the government
• India’s trade deficit narrowed to $11.01 billion in October from $18.0 billion a year ago, the trade ministry said on Friday, helped by lower oil imports.
• Industrial growth shrunk for the second straight month in September, contracting by 4.3%, the most in nearly 8 years. The slide was mainly due to poor performance in the manufacturing sector, according to official data released on Monday.
• India’s Manufacturing PMI rose to 51.2 in November from 50.6 in October, indicating little improvement in health of the sector.
• The Union Cabinet approved the sale of the government's stake in BPCL, SCI, and Concor, as well as decided to cut shareholding in select public sector firms below 51%.