>FUND FACTS JULY 2009 (JP MORGAN)

Equity review
After taking a breather in June, Indian equities resumed their upward movement in July. Both the Sensex as well as the broader BSE200 index advanced 8.1% through July. The CNX midcap index gained more by 9.6%. While the market briefly corrected following the presentation of the union budget, it bounced back strongly. During the month, IT services, consumers and material sectors outperformed the market while telecom, energy and industrials underperformed.

The finance minister made some changes in the taxation policies (e.g. increase in minimum alternate tax rate by 500 basis points) but the focus was clearly on continuing measures to stimulate the economy. However, the equity market took a negative view of higher estimates of fiscal deficit at 6.8% of GDP. Moreover, lack of much anticipated concrete announcement towards disinvestment, relaxing of foreign investment limits in various sectors, etc. might have added to the disappointment. However, the market quickly realized that many policy measures might be announced outside the budget. As the risk appetite improved, FII inflows into India increased after a dip in June.

Debt review
The fixed income markets were looking forward to two important events in the month of July '09- the Union Budget and the RBI's quarterly policy for 2009-10. Both the events did little to cheer the fixed income markets, particularly the government bond market.

The main focus of the Budget 2009-10 was to get growth back on track through high government spending and consequent higher fiscal deficit. The fiscal deficit for 2009-10 is expected to be at 6.8% of GDP vs. 5.5% of GDP estimated in the interim budget in 2009-10.

The Reserve Bank of India (RBI) announced the quarterly review of its annual policy for 2009-10. The policy signals a shift towards a neutral stance.

The RBI kept policy rates and the cash reserve ratio (CRR) unchanged. It also marginally improved its growth outlook. It now expects the GDP growth for 2009-10 at “6% with upside risk” compared to “around 6.0%” announced in April. The improved growth would mainly be driven by huge government spending announced in the Union Budget.

The RBI raised its WPI inflation forecast for end-March 2010 to around 5.0% YoY from around 4.0% in April. The increase in the WPI target is keeping in view the global trend in commodity prices and the domestic demand-supply balance. In order to anchor inflationary expectations, the RBI stated that the monetary policy will continue to “condition and contain” the perception of inflation in the range of 4.0–4.5%, in line with the medium-term objective of inflation of 3.0%.

In our opinion, even though the RBI was a bit hawkish in its policy stance, it would not get into rate hiking mode anytime soon. In the current environment of heightened economic uncertainties, the RBI would prefer to wait for consistent signs of improvement in the investment activities particularly in private investments. The pace of improvement in the global economy would also have a strong influence on the RBI's rate decisions.

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