July 2020 Volume 2, Issue 7

Market Pulse

A monthly review of Indian economy and markets

Market Pulse July 2020 | Vol. 2, Issue 7

Indian view Economy and

A Monthly Re Monthly A Markets

Volume 2, Issue 7

This monthly publication is a review of major developments in the economy and financial markets during the month.

Online: www.nseindia.com

NATIONAL STOCK EXCHANGE OF INDIA LIMITED

Market Pulse July 2020 | Vol. 2, Issue 7

Market Pulse

Published by Economic Policy and Research, National Stock Exchange of India Ltd.

Copyright © 2020 by National Stock Exchange of India Ltd. (NSE) Exchange Plaza, Bandra Kurla Complex Bandra (East), Mumbai 400 051 INDIA

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Market Pulse July 2020 | Vol. 2, Issue 7

Table of Contents Executive Summary ...... 1 Story of the month ...... 3 Q4FY20 Earnings Review: Lock-down hits corporate earnings; estimates cut sharply ...... 3 Chart of the month ...... 23 The roller-coaster market ride of 2020 so far: Sector concentration and rotation ...... 23 Macro economy ...... 29 s target range ...... 29 Industrial production contracts for the third month in a row ...... 34 Trade balance turns surplus in June ...... 39 Current account balance turns surplus in Q4FY20; FY20 CAD at -0.9% ...... 42 Fiscal pressures mounting; deficit monetisation by RBI not ruled out ...... 47 Rainfall above normal thus far; sowing activity strong ...... 52 Insights ...... 55 Invited article: Asset Management is ripe for leadership evolution ...... 55 RBI Financial Stability Report: NPA woes to worsen in FY21 ...... 63 Prompt policy actions ease financial conditions after a sharp COVID19-led deterioration ...... 67 Market Performance ...... 70 Market Round-up ...... 70 Market performance across asset classes ...... 74 Institutional flows across market segments in India ...... 81 Fund mobilisation through NSE ...... 83 Market Statistics: Primary market ...... 83 New listings in the month ...... 84 ...... 85 Long term trends and impact of macro indicators ...... 85 Institutional investments through NSE platform ...... 89 Total turnover in CM and derivatives market ...... 91 Average daily turnover in CM and derivatives market ...... 91 Turnover of top traded symbols over the month...... 95 Client category-wise participation in total turnover ...... 96 Asset category-wise open interest (average daily volume) ...... 102

Market Pulse July 2020 | Vol. 2, Issue 7

Internet-based trading ...... 103 Spatial distribution of trading activities ...... 105 Region-wise distribution of new investors registered ...... 105 Region-wise distribution of individual investor turnover in the cash market ...... 107 Investment through mutual funds in India ...... 109 Policy developments ...... 111 Comparison of trading activities across major exchanges globally ...... 115 Economic calendar for major countries (August 2020) ...... 119 Annual Macro Snapshot ...... 120

Market Pulse July 2020 | Vol. 2, Issue 7

Executive Summary Risk-on rally continues for yet another month

As the number of COVID-19 cases in India continues to rise, states have resorted to localised lockdowns, even as restrictions continue to ease in areas with declining caseloads. The rapid spread this time in the hinterland is particularly concerning, posing downside risks to the agriculture sector which otherwise has thus far emerged as the only silver lining. An unprecedented contraction in the first quarter of FY21 followed by expectations of a slow and gradual recovery ahead is already reflected in several high frequency indicators such as industrial production, merchandise trade, PMI, amongst others. Equity markets worldwide, however, seem to be unwary of the ongoing macroeconomic downturn as they continue to derive comfort from a sharp surge in global liquidity something that is here to stay at least for the foreseeable future. Positive cues around development of a COVID-19 vaccine has also supported market sentiments. A portion of this ample global liquidity is finding its way into emerging market (EM) equities, resulting in India and the broader EM pack outperforming the developed markets in June as well as July thus far. The benchmark Nifty 50/Nifty 500 Index rose by 7.5%/8.3% in the month of June and further by 8.1% and 6.5% in July (as of July 27th).

Fixed income markets remained strong for yet another month amid continued liquidity injection by global central banks. While long-end remained largely steady, short-end of the curve came off further, resulting in further steepening of the yield curve. India was no different, with the decline in Government as well as corporate yields at the short-end being much higher than at the long-end. While the short-end benefited from a steep cut in policy rates and a slew of liquidity enhancement measures taken by the RBI, the long-end remained relatively elevated owing to growth and fiscal concerns. In fact, the short-end (3-month G-sec yield) has been hovering closer to or below the reverse repo rate (the de facto policy rate in a surplus liquidity environment) since April-end. India Rupee has remained broadly steady over the last couple of months, thanks to renewed foreign capital inflows and a surplus trade and current account balance.

Our Story of the Month features a review of the corporate performance for the Nifty 50 and Nifty 500 companies for the quarter ending March 2020. Aggregate net sales declined for the second consecutive quarter led by a sustained slowdown in consumption and investment demand that got accentuated by the COVID-19 outbreak and attendant containment measures as well as benign commodity prices. Operating profits declined at a steeper pace, resulting in margin contraction, as aggressive cost rationalisation failed to compensate for revenue contraction. Consequently, aggregate adjusted profits fell sharply, notwithstanding tailwinds from lower corporate tax rate. Consensus estimates have seen sharp downgrades, with aggregate FY21 profit for the top 200 covered companies pegged to fall by 0.2% YoY.

In the Chart of the Month section, we have taken a deeper look at the contributors to last 12-month period ending June 2020 and compared this with a similar period during the Global Financial Crisis. While Financials has contributed the most to the market movement this year, it was Energy and Materials that drove the markets during the GFC. Our analysis also shows how a part of this differed outcome is a derivative of the meaningful change in sector weightings and sector concentration during these two periods of study.

Meanwhile, incoming macro data (refer to the Macro economy section) remained weak, confirming our fears of a slow and gradual recovery ahead. Industrial production declined by 34.7% YoY in May marking the third consecutive month of contraction, merchandise imports fell by 48% YoY in June resulting in trade balance turning surplus for the first time in more than 18 years, and GST collections declined by a huge 41% YoY in Q1 FY21. An expected economic contraction s Financial Stability Report and the takeaways on both have been provided in detail in the Insights section.

Our invited article this month from the Arguden Academy articulates how asset managers can play an active role in having an impact on the environment, social and governance (ESG) issues. While they, being fiduciary owners of the companies they invest in, can help shape management decisions and thereby the final outcome, regulatory agencies as well as global stock exchanges can create standards to ensure there is trust in the system and fill the gap between investors and other market participants.

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We first analysed the impact of COVID-19 in the February edition of Market Pulse. Six months, and the pandemic continues to rage across the World, with India adding ~50k cases daily now. Even as the numbers continue to be a small fraction of our population, the spread of the Coronavirus measured in both number of cases and across states remains uncomfortably high. Even with ~1.5m cases, the doubling rate (Time for confirmed cases to double from current levels) is just 19 days. In contrast, while Brazil and the US have more cases, the rate of growth is meaningfully lower, implying we are on course to have the highest figures worldwide soon. One notes that the number of active cases remains below 500,000, and that the recovery rates are rising, but the civic/medical infrastr on gross cases. Further, marginal improvement in cities like Mumbai and Delhi is more than offset by the sharp rise seen recently in many states, with much relatively weaker facilities. Large parts of the country remain on intermittent lockdown, hampering the nascent recovery.

On that sobering note, we bring you the July issue of the Market Pulse. We hope you find it useful, and as always, we look forward to your comments and suggestions.

Dr. Tirthankar Patnaik Chief Economist

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Story of the month Q4FY20 Earnings Review: Lock-down hits corporate earnings; estimates cut sharply

Aggregate net sales fell by 4.4%/5.9% YoY in the fourth quarter of FY20 for the Nifty 50/Nifty 500 universe1, marking the second consecutive quarter of contraction. An already weak consumption and investment demand was accentuated by the COVID-19 outbreak and attendant containment measures, including a strict nation-wide lock-down. The contraction was largely led by Consumer Discretionary (continued demand weakness aggravated by supply chain disruptions from China), Materials (weak demand), Energy (lower realisations and inventory losses), Industrials (sustained weakness in private capex) and Real Estate. Notably, essential sectors such as Consumer Staples, Healthcare, Communication Services and Utilities fared relatively better. Operating profit also witnessed a contraction despite tailwinds from lower input costs and cost rationalisation by companies. Consequently, aggregate adjusted PAT2 fell by 42%/57% YoY for the Nifty 50/Nifty 500 universe in Q4 FY20.

The Consensus earnings estimate (from Refinitiv) for the top 200 covered companies by market cap has been downgraded by nearly 36% since the beginning of 2020 and 35% in this fiscal year thus far. This has translated into an expected YoY contraction in FY21 profits of 0.2% vs. +19% growth in mid-June. The downgrades have been largely led by Consumer Discretionary, Materials, Industrials, Financials and Energy, reflecting expectations of a lacklustre consumption and investment demand, sustenance of benign commodity prices and elevated credit cost for financials. However, downgrades in FY22 earnings have been relatively modest, potentially indicating the impact of COVID-19 to be temporary in nature. The sharp cut in earnings post the COVID-19 outbreak is also evident in the Earnings Revision Indicator3 trend for Nifty 50 which fell deep into the negative zone and touched the lower limit of -1 in mid-May, implying downgrades across the board.

Earnings are expected to see a meaningful contraction this year, in-line with an expected drop in nominal GDP growth. That said, a confluence of fiscal and monetary measures taken thus far should provide some respite to the ailing economy in the medium-term, even as a meaningful recovery looks quite hazy and far-fetched at this point.

 Top-line contraction in Q4FY20 the weakest since the GFC: Aggregate net sales for Nifty 50 companies declined by 4.4% YoY the steepest contraction in the last Aggregate net sales for the Nifty 50 universe contracted 18 quarters, as a persistent weakness in consumption demand was further by 4.4% YoY the steepest impacted by the imposition of a strict nation-wide lockdown towards the end of the since September 2015. quarter to contain the COVID-19 outbreak, leading to supply chain bottlenecks and disruptions in economic activities. Sales growth for Nifty 500 companies also The contraction was led by declined by 5.9% YoY the first in the last four years. The contraction in sales was non-essential sectors largely led by Consumer Discretionary (continued demand weakness aggravated by including Consumer Discretionary, Materials, supply chain disruptions from China), Materials (weak demand), Energy (lower Industrials and Real Estate, realisations and inventory losses), Industrials (sustained weakness in private while essential sectors fared capex) and Real Estate. somewhat better. Sectors that supported revenue growth in the March quarter amid a weak economic environment included Utilities (robust pre-lockdown power demand), Healthcare (increased demand) and Communication Services (higher tariffs and limited impact of lockdown). Baring Insurance companies, Financials witnessed a decent revenue growth of 7% YoY, despite muted credit growth. Consumer staples companies engaged in the manufacturing of food and beverages fared better compared to household and personal items.

1 49/50 companies in the Nifty 50 Index and 478/500 companies in the Nifty 500 Index reported earnings data for Q4FY20 as on July 21st, 2020. 2 Refers to as calculated by Prowess after adjusting for all prior period and extraordinary transactions. It is derived by deducting all prior period and extraordinary (P&E) income from PAT and adding all P&E expenses to PAT. 3 Earnings Revision Indicator over a period is calculated as (no of upgrades no of downgrades)/(total number of upgrades and downgrades). A value less than zero indicates downgrades outnumbering upgrades.

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 Operating profits declined despite cost rationalisation: EBITDA for the Nifty 50/Nifty 500, ex-Financials and Communication Services, contracted in the March quarter by 22.8%/21.0% YoY respectively. Operating margins for the same universe witnessed a decline by 281 bps/267 bps YoY, thanks to lower revenue realisation partly offset by cost cutting initiatives undertaken by the companies.

EBITDA growth in Communication Services (55.3%/58.2% YoY) and Utilities (306%/87.4% YoY) was optically high due to low base; barring these sectors the negative growth in operating profits and margin compression was broad-based.

 PAT growth plunged on weak consumption and commodity prices: Aggregate Aggregate adj. PAT growth adj. PAT growth for the Nifty 50/Nifty 500 universe nosedived -42.1%/-56.8% YoY. plunged partly attributed to This was largely owing to a sharp drop in profits reported by Energy, Consumer huge decline in profits Discretionary, Financials and Industrials. While the upstream companies in the reported by Energy (low Energy sector got hit from lower realisations in the wake of a sharp drop in crude crude oil prices), Financials oil prices, the oil marketing companies suffered owing to weak demand amid travel (high COVID-19 related restrictions and a complete lockdown towards March-end as well as significant provisions) and Consumer inventory losses. Significant increase in provisioning on account of COVID-19 Discretionary (lackluster impacted profitability for the Financials sector. Continued demand weakness, demand) sectors. supply chain bottlenecks from China and domestic supply issues were the key factors hurting profitability of Consumer Discretionary companies. Decline in order flows and deferred private corporate capex adversely impacted Industrials sector. Within the Nifty 500 universe, Information Technology was the only sector to report a modest growth in profits, partly attributed to a weak currency, while the Healthcare sector benefited from a strong domestic demand.

 Consensus FY21 PAT estimates slashed sharply this year: The COVID-19 outbreak and attendant control measures including lockdown and complete Consensus aggregate FY21 shutdown of non-essential activities have accentuated the downgrade cycle. The PAT estimate for top 200 Consensus earnings estimate (from Refinitiv) for the top 200 covered companies companies by market cap by market cap has been downgraded by nearly 36% since the beginning of the year has been downgraded by ~35% in this fiscal year and 35% in this fiscal year thus far. This has translated into expected YoY thus far. contraction in FY21 profits of 0.2% vs. an estimated growth of 19% in mid-June. The downgrades have been largely led by Consumer Discretionary, Materials, Industrials, Financials and Energy, reflecting expectations of a lacklustre consumption and investment demand, sustenance of benign commodity prices and elevated credit cost for financials. However, downgrades in FY22 earnings have been relatively modest, potentially indicating the impact of COVID-19 to be temporary in nature. Consequently, FY22 profit growth is estimated at a strong 45% YoY which appears optimistic and is therefore susceptible to downside risks.

 ERI fell deep into the contraction zone: The ERI fell deep into the negative zone to the lowest level since the data is available (2007) as corporate earnings outlook got adversely impacted due to massive supply and demand disruptions caused by mass-scale COVID-19-induced lockdowns worldwide. In fact, except for one or two companies, rest all the Nifty 50 companies witnessed significant earnings downgrades until May 2020, taking ERI to its lower limit of -1 in mid-May, implying downgrades across the board. The ERI has since improved led by upward revisions in Healthcare and Information Technology.

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Nifty 50 Q4FY20 results

Top-line contracted sharply on weak consumption demand and lower commodity prices: Aggregate net sales for Nifty 50 companies declined by 4.4% YoY the steepest contraction in the last 18 quarters, as a persistent weakness in consumption demand was further impacted by the imposition of a strict nation-wide lockdown towards the end of the quarter to contain the COVID-19 outbreak, leading to supply chain bottlenecks and disruptions in economic activities. Within the Nifty 50 universe, 26/49 companies reported negative YoY sales growth in the March quarter.

Sectors that contributed to the sharp decline in aggregate sales in Q4FY20 included: a) Consumer Discretionary: Sustained weak demand in auto sales was aggravated by a nation-wide lockdown announced by the Government in late-March, with supply chain bottlenecks from China further adding to the woes. Excluding Automobiles, net sales for Nifty 50 companies contracted by a much lower 1.7% YoY. b) Materials: lockdown- induced demand contraction. c) Energy: The highest quarterly decline in crude oil prices (-65.9% QoQ/-67% YoY) impacted realisations of upstream oil companies, while weak demand owing to travel restrictions and lockdown as well as inventory losses impacted profitability of downstream oil marketing companies. d) Consumer Staples: Excluding companies engaged in food and beverages, revenues were impacted due to weak demand and logistical constraints owing to the lockdown. Notably, essential sectors such as Consumer Staples, Healthcare, Communication Services and Utilities fared relatively better, while Information Technology benefited from rupee depreciation.

Net sales in the first quarter of FY21 are expected to see a much sharper contraction in the wake of a stringent and extended lockdown that lasted for more than two months in some areas. Rural demand, however, is expected to fare better than urban, thanks to a favourable monsoon and expectations of a bumper Kharif harvest. An impending recovery in private investment cycle has also got de-railed meaningfully as companies delay capex spending amid uncertainty around domestic and global economic recovery.

Figure 1: Net sales growth of Nifty 50 companies in Q4FY20 QoQ growth (%) YoY growth (%)

Sector Mar-19 Dec-19 Mar-20 Mar-19 Dec-19 Mar-20 Communication Services 0.7 3.0 7.6 6.6 6.3 14.0 Consumer Discretionary 7.8 9.7 (14.2) 7.8 (3.6) (23.4) Consumer Staples 2.2 (0.3) (6.7) 15.3 3.5 (5.6) Energy (7.5) 8.5 (6.1) 37.6 (6.8) (5.4) Financials 5.5 1.0 (1.8) 24.5 14.8 6.9 Health Care (0.1) (2.4) 0.5 9.6 8.4 9.1 Industrials 25.2 2.6 20.5 5.8 5.6 1.7 Information Technology 1.2 2.8 0.7 16.9 7.9 7.4 Materials 9.1 2.7 (0.4) 29.7 (5.1) (13.4) Utilities (3.3) 4.0 8.3 13.1 (0.7) 11.2 Nifty 50 0.5 5.3 (3.2) 24.5 (0.7) (4.4) Nifty 50 ex-Energy 6.1 3.3 (1.4) 17.6 3.6 (3.8) Nifty 50 ex-Financials (0.3) 6.1 (3.5) 24.5 (3.3) (6.4) Nifty 50 ex-energy ex-fin 6.3 4.2 (1.3) 15.6 (0.0) (7.2) Nifty 50 ex-Comm Svcs. 0.5 5.3 (3.4) 24.9 (0.8) (4.7)

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Source: CMIE Prowess, Refinitiv Datastream, NSE

Figure 2: Sector-wise net sales growth of Nifty 50 companies in Q4FY20 Net sales growth (%YoY)

Cons. Disc. (23.4%) Materials (13.4%) Nifty 50 ex-Energy ex-Fin (7.2%) Nifty 50 ex-Fin (6.4%) Cons. Stap. (5.6%) Energy (5.4%) Nifty 50 (4.4%) Nifty 50 ex-Energy (3.8%) Industrials 1.7% Financials 6.9% IT 7.4% Healthcare 9.1% Utilities 11.2% Comm. Svcs. 14.0%

-30% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20%

Source: CMIE Prowess, Refinitiv Datastream, NSE.

Figure 3: Net sales YoY growth trend of Nifty 50 companies Sales growth trend for Nifty 50 companies 50% Nifty 50 Nifty 50 ex-Energy Nifty 50 ex-Fin Nifty 50 ex-energy ex-Fin

40%

30%

20%

10%

0%

-10% Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Source: CMIE Prowess, Refinitiv Datastream, NSE.

Lower revenues offset cost savings from lower input prices and cost rationalisation: EBITDA for the Nifty 50 universe, excluding Financials and Communication Services, contracted in the March quarter by 22.8% YoY. Operating margins for the same universe witnessed a decline by 281 bps YoY, thanks to lower revenue realisation partly offset by cost cutting initiatives undertaken by the companies. Within the Nifty 50 universe, 25/49 companies reported negative YoY sales growth in the March quarter.

Sectors that dragged down the aggregate EBITDA growth and margins are: a) Energy: lower refining margins for the oil marketing companies, and weak realisations for the upstream oil companies, b) Consumer Discretionary sustained weak demand in auto sector was further impacted by the nation-wide lockdown due to the COVID-19 situation, c) Materials: weak demand and lower metal prices, and d) Industrials: decline in orders owing to the lockdown and deferred capex spending amid an imminent gloom in the economy.

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EBITDA growth in Communication Services and Utilities looked optically high due to a favourable base. Information Technology reported a modest growth in operating profits, as the sector benefited from a~6% rupee depreciation in the March quarter.

Figure 4: EBITDA growth of Nifty 50 companies in Q4FY20 QoQ growth YoY growth Sector Mar-19 Dec-19 Mar-20 Mar-19 Dec-19 Mar-20 Communication Services (6.0) (0.5) 11.8 (10.5) 27.5 55.3 Consumer Discretionary 6.2 9.0 (53.2) (13.9) 6.4 (53.1) Consumer Staples 10.0 1.1 (6.9) 16.9 12.5 (4.8) Energy 25.2 9.8 (52.1) 44.5 5.2 (59.7) Financials (4.0) 3.3 (14.1) 45.8 14.4 2.3 Health Care (19.4) (13.1) (21.2) 2.7 (3.9) (6.1) Industrials 15.6 8.7 (2.7) 9.8 5.7 (11.0) Information Technology (0.9) 3.7 (1.6) 14.4 7.1 6.4 Materials 11.6 4.5 5.5 22.0 (14.2) (18.9) Utilities (67.3) 16.7 13.5 (59.2) 17.4 306.7 Nifty 50 0.8 5.4 (17.6) 23.4 8.7 (11.1) Nifty 50 ex-Energy (5.0) 4.5 (9.8) 18.1 9.5 3.9 Nifty 50 ex-Financials 4.0 7.0 (20.2) 12.6 4.8 (19.5) Nifty 50 ex-energy ex-fin (5.9) 5.8 (5.1) (1.0) 4.6 5.6 Nifty 50 ex-Comm Svcs. 1.0 5.6 (18.6) 24.7 8.1 (12.8) Source: CMIE Prowess, Refinitiv Datastream, NSE.

Figure 5: EBITDA margin of Nifty 50 companies in Q4FY20 Sector EBITDA Margin QoQ change (bps) YoY change (bps) Communication Services 48.9 182 1298 Consumer Discretionary 7.6 (632) (481) Consumer Staples 32.8 (8) 25 Energy 6.6 (630) (886) Financials 61.3 (885) (273) Health Care 18.0 (497) (290) Industrials 19.2 (456) (272) Information Technology 26.5 (62) (25) Materials 19.0 106 (129) Utilities 44.0 201 3197 Nifty 50 23.1 (402) (173) Nifty 50 ex-Energy 33.0 (307) 247 Nifty 50 ex-Financials 15.4 (321) (251) Nifty 50 ex-energy ex-fin 22.6 (91) 275 Nifty 50 ex-Comm Svcs. 22.5 (419) (209) Source: CMIE Prowess, Refinitiv Datastream, NSE.

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Figure 6: Sector-wise EBITDA growth of Nifty 50 Figure 7: Sector-wise EBITDA margin of Nifty 50 companies in Q4FY20 companies in Q4FY20 EBITDA growth (%YoY) EBITDA margin (%) Energy (59.7%) Energy 6.6% Cons. Disc. (53.1%) Cons. Disc. 7.6% Nifty 50 ex-Fin (19.5%) Nifty 50 ex-Fin 15.4% Materials (18.9%) Healthcare 18.0% Nifty 50 (11.1%) Materials 19.0% Industrials (11.0%) Industrials 19.2% Healthcare (6.1%) Nifty 50 ex-energy ex-Fin 22.6% Cons. Stap. (4.8%) Nifty 50 23.1% Financials 2.3% IT 26.5% Nifty 50 ex-Energy 3.9% Cons. Stap. 32.8% Nifty 50 ex-energy ex-Fin 5.6% Nifty 50 ex-Energy 33.0% IT 6.4% Utilities 44.0% Comm. Svcs. 55.3% Comm. Svcs. 48.9% Utilities 306.7% Financials 61.3%

-30% -20% -10% 0% 10% 20% 30% 0.0% 20.0% 40.0% 60.0% 80.0%

Source: CMIE Prowess, Refinitiv Datastream, NSE.

Figure 8: EBITDA growth trend of Nifty 50 companies

EBITDA growth trend for Nifty 50 companies 50% Nifty 50 Nifty 50 ex-Energy Nifty 50 ex-Fin Nifty 50 ex-energy ex-Fin 40%

30%

20%

10%

0%

-10%

-20%

-30% Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20

Source: CMIE Prowess, Refinitiv Datastream, NSE. Figure 9: EBITDA margin trend of Nifty 50 companies EBITDA margin trend for Nifty 50 companies 45% Nifty 50 Nifty 50 ex-Energy Nifty 50 ex-Fin Nifty 50 ex-energy ex-Fin 40%

35%

30%

25%

20%

15%

10% Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20

Source: CMIE Prowess, Refinitiv Datastream, NSE.

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PAT growth plunged due to further deterioration in consumption demand and lower commodity prices: Aggregate adjusted PAT growth for the Nifty 50 companies declined 42.1% YoY in the March quarter. This was largely on account of a) an extant slowdown in auto sales worsened by a nation-wide lockdown and supply chain disruptions from China, leading to the sector reporting losses in Q4 FY20, b) highest quarterly decline in global crude oil prices, c) weak commodity prices including metals, and d) decline in order intake in industrials sector as private capex got deferred due to lockdown and rising economic uncertainty. Within the Nifty 50 universe, 33/50 companies reported negative YoY PAT decline in the March quarter. Sectors that aided profit growth of Nifty 50 companies are: a) Health care: Increased demand in the wake of COVID-19 outbreak, b) Information Technology: Tailwinds from rupee depreciation and limited impact in business activities due to the lockdown

Figure 10: PAT growth of Nifty 50 companies in Q4FY20 QoQ growth (%) YoY growth (%)

Sector Mar-19 Dec-19 Mar-20 Mar-19 Dec-19 Mar-20 Communication Services (589.6) 57.0 93.4 (135.9) 1382.2 NA Consumer Discretionary (12.7) 55.9 (158.6) (36.8) (0.6) (166.7) Consumer Staples 13.2 (3.0) (5.6) 19.0 21.3 1.2 Energy 30.7 17.6 (92.6) 36.5 (0.2) (94.4) Financials (15.0) 14.4 (45.4) NA 56.7 0.6 Health Care (33.7) (17.7) (24.4) (16.3) (6.3) 6.9 Industrials 36.6 22.6 (5.5) 16.5 7.7 (25.5) Information Technology (0.2) 4.4 (1.4) 15.7 3.8 2.5 Materials 20.4 (35.0) (17.0) 10.0 (40.5) (59.0) Utilities 50.9 13.5 11.4 64.9 25.5 (7.4) Nifty 50 9.2 9.5 (44.4) 39.7 13.8 (42.1) Nifty 50 ex-Energy 2.0 7.4 (30.8) 41.1 18.4 (19.7) Nifty 50 ex-Financials 16.3 7.4 (43.9) 15.0 1.2 (51.3) Nifty 50 ex-energy ex-fin 9.4 3.2 (21.0) 5.5 1.9 (26.6) Nifty 50 ex-Comm Svcs. 9.9 9.0 (46.1) 43.3 12.2 (44.9) Source: CMIE Prowess, Refinitiv Datastream, NSE. NA: Not Applicable

Figure 11: PAT margin of Nifty 50 companies in Q4FY20 Sector PAT Margin QoQ change (bps) YoY change (bps) Communication Services 10.5 468 1430 Consumer Discretionary (3.4) (842) (734) Consumer Staples 22.3 27 149 Energy 0.4 (487) (656) Financials 9.8 (785) (61) Health Care 9.5 (314) (19) Industrials 7.8 (216) (287) Information Technology 17.6 (39) (85) Materials 3.4 (68) (377) Utilities 15.5 43 (311) Nifty 50 5.3 (395) (348) Nifty 50 ex-Energy 8.3 (352) (164) Nifty 50 ex-Financials 4.4 (320) (409) Nifty 50 ex-energy ex-fin 7.8 (193) (204) Nifty 50 ex-Comm Svcs. 5.2 (413) (381)

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Source: CMIE Prowess, Refinitiv Datastream, NSE.

Figure 12: Sector-wise PAT growth of Nifty 50 Figure 13: Sector-wise PAT margin of Nifty 50 companies in Q4FY20 companies in Q4FY20 PAT growth (%YoY) PAT margin (%) Cons. Disc. (166.7%) Cons. Disc. (3.4%) Energy (94.4%) Energy 0.4% Materials (59.0%) Materials 3.4%

Nifty 50 ex-Fin (51.3%) Nifty 50 ex-Fin 4.4%

Nifty 50 (42.1%) Nifty 50 5.3%

Nifty 50 ex-energy ex-Fin (26.6%) Nifty 50 ex-energy ex-Fin 7.8%

Industrials (25.5%) Industrials 7.8% Nifty 50 ex-Energy 8.3% Nifty 50 ex-Energy (19.7%) Healthcare 9.5% Utilities (7.4%) Financials 9.8% Financials 0.6% Comm. Svcs. 10.5% Cons. Stap. 1.2% Utilities 15.5% IT 2.5% IT 17.6% Healthcare 6.9% Cons. Stap. 22.3% -30% -20% -10% 0% 10% (10.0%) 0.0% 10.0% 20.0% 30.0% Source: CMIE Prowess, Refinitiv Datastream, NSE

Figure 14: PAT growth trend of Nifty 50 companies PAT growth trend for Nifty 50 companies

60% Nifty 50 Nifty 50 ex-Energy Nifty 50 ex-Fin Nifty 50 ex-energy ex-Fin

40%

20%

0%

-20%

-40%

-60% Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20

Source: CMIE Prowess, Refinitiv Datastream, NSE

Figure 15: PAT margin trend of Nifty 50 companies PAT margin trend for Nifty 50 companies 14% Nifty 50 Nifty 50 ex-Energy Nifty 50 ex-Fin Nifty 50 ex-energy ex-Fin

12%

10%

8%

6%

4%

Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Source: CMIE Prowess, Refinitiv Datastream, NSE

10/123 Market Pulse July 2020 | Vol. 2, Issue 7

Nifty 500 Q4FY20 results

Net sales for Nifty 500 companies contracted sharply: Aggregate sales growth for the Nifty 500 companies was in-line with the Nifty 50 universe and came in at -5.9% YoY marking the first YoY contraction in the last 17 quarters led by a sharp slowdown in discretionary spending by households, deferment in investment activities by corporates and fall in global metal and energy prices. Within the Nifty 500 companies 277/478 companies reported negative YoY sales growth in the March quarter.

Sectors that were laggards included Consumer Discretionary (an extant demand slowdown accentuated by the lockdown situation), Materials (weak demand and decline in global commodity prices), Energy (lower crude oil prices and slowdown in demand for petrochemicals) and Real Estate (lower property sales and office leasing in the month of March due to lockdown). Sectors that supported sales growth of Nifty 500 companies include Information Technology, Healthcare, Communication Services. Figure 16: Net sales growth of Nifty 500 companies in Q4FY20 QoQ growth YoY growth Sector Mar-19 Dec-19 Mar-20 Mar-19 Dec-19 Mar-20 Communication Services (1.0) 3.6 3.5 24.6 (0.4) 5.7 Consumer Discretionary 2.5 (4.0) (8.3) 7.5 (4.2) (14.5) Consumer Staples 6.0 8.4 (7.0) 19.6 13.4 (0.9) Energy (7.3) 9.0 (6.1) 31.2 (6.6) (5.4) Financials 8.9 3.7 (10.4) 25.6 15.4 (4.8) Health Care 2.9 8.1 (0.9) 12.5 10.1 6.1 Industrials 19.3 5.0 13.2 13.6 (1.2) (9.6) Information Technology 1.8 5.6 (1.0) 15.9 9.6 6.5 Materials 8.1 5.4 (3.2) 22.0 (1.7) (12.0) Real Estate 45.7 30.0 (8.2) 17.2 10.1 (30.0) Utilities (3.0) (0.8) 4.1 19.9 0.6 8.0 Nifty 500 2.7 4.6 (4.6) 21.2 1.4 (5.9) Nifty 500 ex-Energy 6.8 3.1 (4.0) 18.0 4.6 (6.1) Nifty 500 ex-Financials 1.3 4.8 (3.0) 20.2 (1.8) (6.2) Nifty 500 ex-energy ex-fin 6.1 2.8 (1.3) 15.5 0.8 (6.5) Nifty 500 ex-Comm Svcs. 2.8 4.6 (4.7) 21.1 1.4 (6.1) Source: CMIE Prowess, Refinitiv Datastream, NSE

Figure 17: Sector-wise net sales growth of Nifty 500 companies in Q4FY20 Net sales growth (%YoY) Reality (30.0%) Cons. Disc. (14.5%) Materials (12.0%) Industrials (9.6%) Nifty 500 ex-Energy & Fin (6.5%) Nifty 500 ex-Fin (6.2%) Nifty 500 ex-Energy (6.1%) Nifty 500 (5.9%) Energy (5.4%) Financials (4.8%) Cons. Stap. (0.9%) Comm. Svcs. 5.7% Healthcare 6.1% IT 6.5% Utilities 8.0% (33%) (28%) (23%) (18%) (13%) (8%) (3%) 2% 7% 12% Source: CMIE Prowess, Refinitiv Datastream, NSE

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Figure 18: Net sales YoY growth trend of Nifty 500 companies Sales growth trend for Nifty 500 companies

35% Nifty 500 Nifty 500 ex-Energy Nifty 500 ex-Fin Nifty 500 ex-energy ex-Fin

30%

25%

20%

15%

10%

5%

0%

-5%

-10%

-15% Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Source: CMIE Prowess, Refinitiv Datastream, NSE.

Slowdown in revenue realisation drag down aggregate operating profits for Nifty 500 companies: Contraction in revenues compressed operating margins for the Nifty 500 companies, partly offset by lower commodity prices and cost cutting initiatives. EBITDA for the Nifty 500 universe, excluding Financials and Communication Services, contracted by 21.0% YoY, translating into a decline in EBITDA margin of 267bps YoY. Within the Nifty 500 universe, 276/478 companies reported negative YOY EBITDA growth in the March quarter. The contraction in EBITDA was broad-based, with all sectors except Information Technology (thanks to rupee depreciation) reporting a decline.

Figure 19: EBITDA growth of Nifty 500 companies in Q4FY20 QoQ growth YoY growth Sector Mar-19 Dec-19 Mar-20 Mar-19 Dec-19 Mar-20 Communication Services 0.2 3.2 8.4 (1.9) 42.4 58.2 Consumer Discretionary 4.9 5.8 (40.6) (6.6) 5.0 (41.7) Consumer Staples 10.7 8.1 (13.4) 25.9 13.8 (11.4) Energy 30.9 11.7 (62.6) 44.1 6.0 (69.7) Financials (8.1) 6.5 (21.9) 70.5 16.3 (0.4) Health Care 4.5 0.3 (21.2) 15.9 17.5 (11.4) Industrials 26.0 13.7 (2.1) 15.3 (4.4) (27.4) Information Technology 0.6 4.6 (1.4) 14.4 8.8 6.6 Materials 9.9 5.7 13.0 13.2 (10.9) (7.9) Real Estate 23.6 (36.8) (10.0) (26.6) (0.7) (27.0) Utilities (42.8) 3.8 (6.8) (31.4) 15.1 87.4 Nifty 500 0.7 6.4 (20.5) 30.9 10.4 (12.7) Nifty 500 ex-Energy (3.5) 5.7 (14.8) 28.6 11.0 (1.7) Nifty 500 ex-Financials 8.0 6.3 (19.3) 12.4 5.5 (21.4) Nifty 500 ex-energy ex-fin 1.4 4.8 (6.5) 3.8 5.3 (3.0) Nifty 500 ex-Comm Svcs. 0.7 6.5 (21.4) 32.0 9.6 (14.4) Source: CMIE Prowess, Refinitiv Datastream, NSE.

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Figure 20: EBITDA margin of Nifty 500 companies in Q4FY20 Sector EBITDA Margin QoQ change (bps) YoY change (bps) Communication Services 42.2 192 1400 Consumer Discretionary 7.7 (420) (361) Consumer Staples 21.1 (156) (251) Energy 4.6 (698) (981) Financials 51.0 (747) 227 Health Care 19.5 (504) (385) Industrials 15.1 (235) (369) Information Technology 23.3 (9) 2 Materials 20.5 295 92 Real Estate 33.0 (68) 137 Utilities 33.9 (397) 1436 Nifty 500 21.8 (439) (171) Nifty 500 ex-Energy 28.0 (357) 125 Nifty 500 ex-Financials 14.5 (294) (281) Nifty 500 ex-energy ex-fin 19.4 (106) 71 Nifty 500 ex-Comm Svcs. 21.4 (455) (206) Source: CMIE Prowess, Refinitiv Datastream, NSE.

Figure 21: Sector-wise EBITDA growth of Nifty 500 Figure 22: Sector-wise EBITDA margin of Nifty 500 companies in Q4FY20 companies in Q4FY20 EBITDA growth (%YoY) EBITDA margin (%)

Energy (69.7%) Energy 4.6% Cons. Disc. (41.7%) Cons. Disc. 7.7% Industrials (27.4%) Nifty 500 ex-Fin 14.5% Reality (27.0%) Industrials 15.1% Nifty 500 ex-Fin (21.4%) Nifty 500 ex-Energy & Fin 19.4% Nifty 500 (12.7%) Healthcare 19.5% Cons. Stap. (11.4%) Materials 20.5% Healthcare (11.4%) Cons. Stap. 21.1% Materials (7.9%) Nifty 500 21.8% Nifty 500 ex-Energy & Fin (3.0%) IT 23.3% Nifty 500 ex-Energy (1.7%) Nifty 500 ex-Energy 28.0% Financials (0.4%) Reality 33.0% IT 6.6% Utilities 33.9% Comm. Svcs. 58.2% Comm. Svcs. 42.2% Utilities 87.4% Financials 51.0%

(75%) (55%) (35%) (15%) 5% 25% 0.0% 15.0% 30.0% 45.0%

Source: CMIE Prowess, Refinitiv Datastream, NSE.

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Figure 23: EBITDA growth trend of Nifty 500 companies EBITDA growth trend for Nifty 500 companies 40% Nifty 500 Nifty 500 ex-Energy Nifty 500 ex-Fin Nifty 500 ex-energy ex-Fin 30%

20%

10%

0%

-10%

-20%

-30% Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20

Source: CMIE Prowess, Refinitiv Datastream, NSE.

Figure 24: EBITDA margin trend of Nifty 500 companies EBITDA margin trend for Nifty 500 companies

Nifty 500 Nifty 500 ex-Energy Nifty 500 ex-Fin Nifty 500 ex-energy ex-Fin 40%

35%

30%

25%

20%

15%

10% Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20

Source: CMIE Prowess, Refinitiv Datastream, NSE.

Contraction in Nifty 500 profitability was broad-based: Aggregate adjusted PAT growth for Nifty 500 companies came in at -56.8% YoY the lowest in 21 quarters. This was largely led by huge losses reported by Energy, Consumer Discretionary and Financials. While the upstream companies in the Energy sector got hit from lower realisations in the wake of a sharp drop in crude oil prices, the oil marketing companies suffered owing to weak demand amid travel restrictions and a complete lockdown towards March-end as well as significant inventory losses. Significant increase in provisioning on account of COVID-19 impacted profitability for the Financials sector. Continued demand weakness, supply chain bottlenecks from China and domestic supply issues were the key factors hurting profitability of Consumer Discretionary companies. Within the Nifty 500 universe, Information Technology was the only sector to report a modest growth in profits, partly attributed to a weak currency, while the Healthcare sector benefited from a strong domestic demand.

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Figure 25: PAT growth of Nifty 500 companies in Q4Y20 QoQ growth YoY growth Sector Mar-19 Dec-19 Mar-20 Mar-19 Dec-19 Mar-20 Communication Services NA NA NA (375.1) NA NA Consumer Discretionary (1.6) 23.9 (113.4) (22.6) (6.0) (112.8) Consumer Staples 23.4 4.4 (15.5) 39.2 19.3 (19.0) Energy 40.5 23.9 (111.7) 38.9 1.1 (108.4) Financials (94.7) 50.8 (104.5) NA 111.3 (2344.3) Health Care 3.7 (13.3) (25.6) (32.9) 11.8 (19.8) Industrials 34.6 26.5 (16.3) 12.9 (28.4) (53.5) Information Technology 1.2 5.6 (1.8) 15.5 5.0 1.9 Materials 8.5 (17.7) 14.6 (6.9) (28.5) (23.8) Real Estate 34.0 (68.1) (8.6) (50.5) (13.9) (40.3) Utilities 11.7 (12.4) (38.5) 10.3 45.1 (20.0) Nifty 500 (0.2) 14.2 (63.0) 78.2 15.4 (56.8) Nifty 500 ex-Energy (10.6) 12.3 (52.3) 101.7 19.0 (35.5) Nifty 500 ex-Financials 17.5 4.0 (46.3) 3.2 (2.6) (55.3) Nifty 500 ex-energy ex-fin 10.1 (1.4) (24.3) (6.7) (3.8) (33.4) Nifty 500 ex-Comm Svcs. 0.3 13.1 (62.2) 86.7 15.2 (56.2) Source: CMIE Prowess, Refinitiv Datastream, NSE. NA: Not applicable.

Figure 26: PAT margin of Nifty 500 companies in Q4FY20 Sector PAT Margin QoQ change (bps) YoY change (bps) Communication Services (5.9) 277 439 Consumer Discretionary (0.6) (501) (491) Consumer Staples 12.7 (129) (286) Energy (0.6) (533) (723) Financials (0.5) (998) (49) Health Care 8.1 (269) (261) Industrials 4.7 (165) (445) Information Technology 15.2 (12) (69) Materials 6.0 94 (93) Real Estate 10.6 (5) (181) Utilities 6.9 (480) (243) Nifty 500 2.8 (436) (326) Nifty 500 ex-Energy 4.0 (403) (182) Nifty 500 ex-Financials 3.6 (289) (393) Nifty 500 ex-energy ex-fin 5.7 (172) (228) Nifty 500 ex-Comm Svcs. 3.0 (449) (338) Source: CMIE Prowess, Refinitiv Datastream, NSE.

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Figure 27: Sector-wise PAT growth of Nifty 500 Figure 28: Sector-wise PAT margin of Nifty 500 companies in Q4FY20 companies in Q4FY20 PAT growth (%YoY) PAT margin (%) Financials (2344.3%) Comm. Svcs. (5.9%) Cons. Disc. (112.8%) Cons. Disc. (0.6%) Energy (108.4%) Energy (0.6%) Nifty 500 (56.8%) Financials (0.5%) Nifty 500 ex-Fin (55.3%) Nifty 500 2.8% Nifty 500 ex-Fin 3.6% Industrials (53.5%) Nifty 500 ex-Energy Reality (40.3%) 4.0% Industrials 4.7% Nifty 500 ex-Energy (35.5%) Nifty 500 ex-Energy & Fin 5.7% Nifty 500 ex-Energy & Fin (33.4%) Materials 6.0% Materials (23.8%) Utilities 6.9% Utilities (20.0%) Healthcare 8.1% Healthcare (19.8%) Reality 10.6% Cons. Stap. (19.0%) Cons. Stap. 12.7% IT 1.9% IT 15.2% -50% -40% -30% -20% -10% 0% (5%) 0% 5% 10% 15% 20% Source: CMIE Prowess, Refinitiv Datastream, NSE.

Figure 29: PAT growth trend of Nifty 500 companies PAT growth trend for Nifty 500 companies

200% Nifty 500 Nifty 500 ex-Energy Nifty 500 ex-Fin Nifty 500 ex-energy ex-Fin

150%

100%

50%

0%

-50%

-100% Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Source: CMIE Prowess, Refinitiv Datastream, NSE.

Figure 30: PAT margin trend of Nifty 500 companies PAT margin trend for Nifty 500 companies 10% Nifty 500 Nifty 500 ex-Energy Nifty 500 ex-Fin Nifty 500 ex-energy ex-Fin

8%

6%

4%

2%

0% Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20

Source: CMIE Prowess, Refinitiv Datastream, NSE.

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Earnings revision analysis

Consensus FY21 PAT estimates slashed by 33%+ in this fiscal year thus far: We have analysed earnings revisions for top 200 companies by one-year average market cap ending June 30th, 2020 covered by at least five or more analysts during the last one year using IBES estimates from Refinitiv Datastream. Our analysis shows that consensus profit estimate for these companies for FY21 have been downgraded by 33.5% since the beginning of the fiscal and 36.2% since January 2020 (as of July 24th), translating into an expected YoY contraction in aggregate profits of 0.2% for the full year vs. an estimated profit growth of +19% in mid-June. Consumer cyclicals have witnessed the sharpest downgrades, followed by Materials, Industrials, Financials and Energy, reflecting expectations of a lacklustre consumption and investment demand, sustenance of benign commodity prices and elevated credit cost for Financials. Aggregate profit growth for Financials, however, is still estimated at a strong 39.5% for FY21, and is therefore susceptible to earnings downgrades, particularly if asset quality pressures intensify once the moratorium expires. Besides Financials, Healthcare, Consumer Non-Cyclicals and Utilities are the only sectors expected to post a modest profit growth this year.

Despite significant cut in FY21 earnings estimates, risks remain to the downside, as Q1 profits are expected to see a significant contraction reflected in several high frequency indicators including industrial production, PMI, merchandise trade, amongst others.

Aggregate earnings estimate for FY22 for the top 200 companies, however, has been downgraded by a much lower 19%, potentially indicating the impact of COVID-19 to be temporary in nature. Consequently, consensus profit growth estimate for FY22 currently stands at ~45% (as of July 24th, 2020), albeit off a low base. This appears quite optimistic given our expectations of a slow and gradual recovery ahead and is therefore prone to significant downward revisions. That said, a confluence of monetary and fiscal measures that have been already taken and are in the offing, coupled with expectations of a faster recovery in global demand, should provide some support to the ailing economy and consequently corporate earnings.

Figure 31: Aggregate consensus profit growth estimate Figure 32: Aggregate consensus earnings revisions in for top 200 covered companies (% YoY) 2020 till date for top 200 covered companies Aggregate consensus profit growth estimate for top Aggregate consensus earnings revisions for top 200 200 covered companies covered companies since the beginning of 2020 50% 10% FY21 FY22 44.9% FY21 FY22

40% 0%

30% -10% 20% -20.5% -20% 10%

0% -30% -0.2%

-10% -40% -36.2% Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Source: CMIE Prowess, Refinitiv Datastream, NSE. Note: Based on IBES earnings estimates of top 200 companies by one-year average market cap ending June 30th, 2020, covered by at least five analysts at any given point of time over the last one year.

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Figure 49: Monthly trend of sector-wise FY21 consensus earnings growth estimate (% YoY) Sectors Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Basic Materials 21.9 26.9 25.9 8.9 (11.0) (35.3) (46.6) Consumer Cyclicals 23.1 23.6 23.5 16.8 (0.9) 0.4 (17.0) Consumer Non-Cyclicals 16.3 15.2 15.2 14.0 10.0 8.7 4.4 Energy 17.8 20.7 17.4 12.0 8.1 (0.0) (13.5) Financials 45.9 46.0 48.1 44.1 49.2 51.3 39.5 Healthcare 17.9 18.5 18.4 16.2 18.0 11.5 9.1 Industrials 22.2 20.5 16.1 9.8 12.4 (14.1) (20.7) Technology 10.0 9.9 9.6 4.2 (2.4) (3.4) (1.2) Utilities 10.6 10.4 10.0 9.3 9.4 4.8 0.8 Total 28.9 29.9 29.3 23.5 18.7 9.1 (0.2) Source: Refinitiv Datastream, NSE. Note: Based on IBES earnings estimates of top 200 companies by one-year average market cap ending June 30th, 2020, covered by at least five analysts at any given point of time over the last one year.

Figure 49: Monthly trend of sector-wise FY22 consensus earnings growth estimate (% YoY) Sectors Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Basic Materials 15.2 16.6 18.8 29.3 51.4 75.4 85.7 Consumer Cyclicals 20.2 22.0 22.6 27.9 44.5 76.8 103.8 Consumer Non-Cyclicals 14.7 13.5 13.5 13.7 15.3 16.4 19.5 Energy 8.1 10.0 14.7 17.3 22.6 29.7 43.0 Financials 23.1 22.8 23.7 25.6 31.9 38.6 47.2 Healthcare 13.8 16.2 16.2 16.6 17.1 20.0 22.0 Industrials 16.8 17.6 20.0 24.0 18.7 68.3 76.0 Technology 9.3 9.6 9.6 10.1 12.6 13.3 13.4 Utilities 9.5 10.7 10.9 10.7 11.1 14.9 18.7 Total 16.4 17.2 18.9 21.7 27.5 36.6 44.9 Source: Refinitiv Datastream, NSE. Note: Based on IBES earnings estimates of top 200 companies by one-year average market cap ending June 30th, 2020, covered by at least five analysts at any given point of time over the last one year.

Nifty 50 2020 Consensus EPS downgraded by 35% YTD: The chart below shows how Consensus estimates usually begin the year (calendar) with a bullish view on earnings, but are then brought back to terra firma with downgrades, year after year, as the macro environment overhang prevails over optimism. The market was most optimistic on corporate performance in 2014, partly explained by increasing hopes of a decisive BJP victory in the 2014 General Elections. While electoral expectations were comfortably met that year, corporate earnings failed to pick up, with 2016 earnings eventually coming in 17% lower than the estimate at the beginning of the year.

While the market believed that corporate performance has hit bottom and is bound to witness a strong recovery, first the Bank AQR (Asset Quality Review) weighed on systemic to the path-breaking GST reform in 2017 delayed a broad-based recovery.

An already weak domestic and global slowdown has now got accentuated by the COVID- 19 outbreak and attendant containment measures undertaken to control the spread of the virus including large-scale and stringent lockdowns across the globe. This has resulted in a 35% downgrade in 2020 (calendar year) Nifty 50 consensus EPS estimate since the beginning of the year and 29% since March 2020.

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Figure 33: Yearly trend of NIFTY 50 Consensus EPS estimates

Source: Refinitiv Datastream, NSE.

Nifty 50 Earnings Revision Indicator falls deep into the negative zone: The Earnings Revision Indicator (ERI)4 for the Nifty 50 universe has remained in the negative zone for more than five years now, implying more downgrades of earnings estimates than upgrades. In fact, the 12-month moving average trend points to a negative ERI since 2011. The number of downgrades peaked out in March 2016 and kept on declining until September 2018. However, the pace of downgrades increased since October 2018, thanks to worsening domestic and global economic activity, declining commodity prices and tightness in domestic liquidity post the IL&FS crisis, leading to ERI falling back deep into the negative zone. The ERI moved back into the positive territory for the first time in five years following the corporate tax cut announcement in September 2019, albeit for a brief period, only to fall back into the negative zone owing to sustained weakness in reported earnings.

The COVID-19 outbreak and attendant control measures including lockdown and complete shutdown of non-essential activities have accentuated the downgrade cycle. The ERI fell deep into the negative zone to the lowest level since the data is available (2007) as corporate earnings outlook got adversely impacted due to massive supply and

4 The ERI -1 to 1.

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demand disruptions caused by mass-scale COVID-19-induced lockdowns worldwide. In fact, except for one or two companies, rest all the Nifty 50 companies witnessed significant earnings downgrades until May 2020, taking ERI to its lower limit of -1 in mid- May, implying downgrades across the board. The ERI has since improved led by upward revisions in Healthcare and Information Technology.

Figure 34: Nifty 50 Earnings Revision Indicator (since January 2019)

Source: Refinitiv Datastream, NSE

Figure 35: Nifty 50 Earnings Revision Indicator (10-year trend)

Source: Refinitiv Datastream, NSE.

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Figure 36: Short-term trend of Earnings Revision Indicator across MSCI sectors

Source: Refinitiv Datastream, NSE.

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Figure 37: Long-term trend of Earnings Revision Indicator across MSCI sectors

Source: Refinitiv Datastream, NSE.

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Chart of the month The roller-coaster market ride of 2020 so far: Sector concentration and rotation The Coronavirus outbreak has led to global equities witnessing some of the highest volatilities ever in 2020, and Indian markets are no exception. From life-time high levels in January to the fastest ever drop to a bear market in March, and then a dizzying recovery in April, markets have oscillated to the global economic uncertainty in the wake of an unprecedented crisis. While the recovery might have stalled in May, the rally resumed in earnest in June as a sharp rise in global liquidity moved all risk assets. Indian equity markets rose 7.5% (Nifty 50) in June, after a tepid May (-2.8%) and July has been steady thus far.

On the lines of our work on market concentration in in the previous edition of Market Pulse (refer to the detailed report here (Jan-Jun 2020). Sector-wise, the divergence across sectors has been stark; Pharma (~+24%) and IT (~+12%) have improved at the expense of Financials (-31%). Our analysis below shows this in somewhat greater detail, for the NIFTY 50 Universe of companies.

Analysis

To delve deeper into the mechanics of sector contribution to the NIFTY, we compare the 12-month period ending in June 2020 with the 12-month period ending in May 2009 from the GFC. Significantly high levels of volatility apart, both the periods differed in their final outcome; markets were up 10% by May 2009 as liquidity measures announced by global central banks appeared, while the NIFTY remains ~7% below July 2019 levels.

Sector contribution to index movement has typically been directly proportional to weights, and this year, Financials have led both in the sharp drop of the NIFTY50 and its rise since April. Comparing the period to a similar one in the Global Financial Crisis (GFC) of 2008 shows similar behavior, but by different sector leaders. It was Energy and Materials then reflecting the (relatively) external nature of the crisis.

Another, major cause of such an outcome was also the relative weighting across sectors in the NIFTY basket then. In 2008-09 the top sectors in the index were Energy (~25% avg. over the 12-month period of study), Financials (~12%), Communications (~11%), Information Technology (~10%) and Materials (~8%). The top five sectors thus constituted ~66% of the index. constitute an avg. 38% share of the market - risen steadily over the last 12 years, at the expense of all other sectors: Energy at ~13% has lost ~50% of relative share, Communications (~3%) and Materials (~6%) are shadows of their former selves, while Technology has remained steady at ~13%. Sectors like Consumer Staples have ~9% of the NIFTY basket now. The market churn has translated in a sharp drop in the weightage of Financials in the index, despite the recovery; 40% in July 2019 is now ~34%. Energy has gained favour again, at ~15% of the portfolio.

Our analysis echoes a clear trend of rising concentration in the Indian markets, first illustrated in the previous edition of Market Pulse. While the recent drop and the partial recovery has served to balance the portfolio to some extent, the market remains relatively more concentrated, as evident in quick measures of concentration like the Herfindahl- Hirshman Index (HHI) or the C4. While the simpler C4 metric (total share of the top four sectors) hovered around 61% in 2008- comprehensive sector HHI was ~1335 in our initial period of study in 2008-09, it has since increased considerably to 2100 levels in 2019-20.

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In the last one year ending June 2020, Financials have led both in the sharp drop of the NIFTY50 and its rise since April 2020. During the and Materials drive the market movement on either side, reflecting the (relatively) external nature of the crisis.

Figure 38: -J NIFTY 50 index returns (%) across sectors (Jul 2019-Jun 2020) Comm. Cons. Disc Cons. Stap Energy Financials Health Industrials IT 30% Materials R.Est Utilities Change

20%

10%

0%

-10%

-20%

-30% Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Source: CMIE Prowess, Refinitiv Datastream, NSE

Figure 39: Nifty 50 Index returns (%) across sectors during the period Jun 08-May 09 NIFTY 50 index returns (%) across sectors (Jun 2008-May 2009) Comm. Cons. Disc Cons. Stap Energy Financials Health Industrials IT 30% Materials R.Est Utilities Monthly Change

20%

10%

0%

-10%

-20%

-30% Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Source: CMIE Prowess, Refinitiv Datastream, NSE

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Figure 40: Sector-wise break- -

Source: CMIE Prowess, Refinitiv Datastream, NSE

Figure 41: Sector-wise break- -

Source: CMIE Prowess, Refinitiv Datastream, NSE

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A part of this differed outcome between the two periods is attributed to relative weighting across sectors in the Nifty 50 basket. In 2008-09, Energy had the highest weight (~25% average over the 12-month period of study), followed by Financials (~12%), Communications (~11%), Information Technology (~10%) and Materials (~8%), together

Financials weight rising steadily over the last 12 years to constitute an average 38% share -

Figure 42: Nifty 50 sector weightage in July 2019 Figure 43: Nifty 50 sector weightage in June 2020 NIFTY 50 Sector Weightage, July 2019 NIFTY 50 Sector Weightage, June 2020 Comm., Utilities, Comm., Utilities, Cons. Disc, Materials, 3.89 Materials, 2.84 2.35 2.54 6.13 6.54 Cons. Disc, 6.40 6.44 Cons. Stap, 8.52

Cons. Stap, IT, 14.16 IT, 14.80 10.80 Industrials, Industrials, 3.26 Energy, 4.44 11.94 Energy, Health, 14.96 Health, 2.31 3.03

Financials, Financials, 40.25 34.38

Source: CMIE Prowess, Refintiiv Datastream, NSE

Figure 44: Nifty 50 sector weightage in June 2008 Figure 45: Nifty 50 sector weightage in May 2009 NIFTY 50 Sector Weightage, June 2008 NIFTY 50 Sector Weightage, May 2009

Cons. Disc, Cons. Disc, R.Est, 3.92 3.23 Utilities, Comm., 2.46 Utilities, Comm., 9.38 11.18 R.Est, 3.05 Cons. Stap, 12.89 9.27 Cons. Stap, 4.76 4.28 Materials, Materials, 9.83 8.26

IT, 12.07 IT, 8.18 Energy, Energy, 25.29 26.29

Industrials, Financials, Industrials, 8.37 14.21 7.95 Health, Financials, Health, 3.12 10.02 1.94

Source: CMIE Prowess, Refintiiv Datastream, NSE.

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Figure 46: Nifty 50 index percentage change across sectors (Jul 2019-Jun 2020) Cons. Cons. Real Month Return Comm. Energy Financials Health Industrials IT Materials Utilities Disc Staples Est. Jul-19 -5.7% 0.0% -1.1% -0.2% -1.2% -2.4% 0.0% -0.5% 0.2% -0.4% 0.0% -0.2% Aug-19 -0.9% 0.1% 0.3% -0.2% 0.3% -1.1% 0.0% -0.2% 0.4% -0.4% 0.0% -0.1% Sep-19 4.1% 0.0% 0.5% 1.5% 1.0% 1.4% -0.2% 0.4% -0.9% 0.4% 0.0% 0.0% Oct-19 3.5% -0.1% 0.8% 0.4% 1.1% 1.6% 0.2% 0.0% -0.4% 0.0% 0.0% 0.0% Nov-19 1.5% 0.5% -0.5% -0.5% 0.4% 2.4% 0.1% -0.4% -0.5% 0.1% 0.0% -0.1% Dec-19 0.9% 0.1% 0.1% -0.2% -0.7% 1.1% -0.1% -0.1% 0.5% 0.2% 0.0% 0.0% Jan-20 -1.7% 0.4% -0.1% 0.2% -1.1% -1.2% 0.0% 0.2% 0.2% -0.2% 0.0% -0.1% Feb-20 -6.4% 0.0% -0.8% -0.5% -0.8% -2.3% -0.2% -0.5% -0.7% -0.4% 0.0% -0.1% Mar-20 -23.2% -0.7% -1.9% -0.4% -2.1% -13.9% 0.0% -1.2% -1.7% -1.1% 0.0% -0.3% Apr-20 14.7% 0.6% 1.2% 0.4% 3.5% 5.0% 0.8% 0.4% 1.6% 0.9% 0.0% 0.3% May-20 -2.8% 0.4% 0.3% 0.1% -0.1% -3.8% 0.1% 0.2% -0.2% 0.2% 0.0% 0.0% Jun-20 7.5% 0.2% 0.4% 1.0% 1.5% 3.6% -0.1% 0.0% 0.6% 0.2% 0.0% 0.1% Source: CMIE Prowess, Refintiiv Datastream, NSE.

Figure 47: Nifty 50 index percentage change across sectors (Jun 2008-May 2009) Cons. Cons. Real Month Return Comm. Energy Financials Health Industrials IT Materials Utilities Disc Staples Est. Jun-08 -17.0% -2.3% -0.5% -0.6% -2.2% -2.5% 0.0% -1.9% -1.7% -2.2% -1.4% -1.6% Jul-08 7.2% 1.1% 0.0% 0.3% 2.0% 1.7% -0.1% 1.3% -0.9% -0.2% 0.7% 1.3% Aug-08 0.6% -0.7% 0.2% 0.1% -0.4% 0.5% 0.2% 0.1% 0.6% 0.1% -0.2% 0.1% Sep-08 -10.1% -0.9% -0.1% 0.0% -1.7% -0.9% -0.8% -1.1% -2.3% -1.8% -1.2% 0.8% Oct-08 -26.4% -2.6% -0.7% -0.8% -8.0% -2.5% -0.6% -2.8% -1.1% -3.2% -1.4% -2.8% Nov-08 -4.5% -0.3% -0.2% 0.6% -1.9% -1.0% 0.2% -0.3% -1.0% -1.1% -0.4% 1.0% Dec-08 7.4% 1.2% 0.0% 0.1% 1.3% 1.7% 0.0% 0.5% -1.3% 1.1% 1.0% 1.7% Jan-09 -2.9% -1.8% 0.2% 0.3% 0.4% -0.5% -0.1% -0.6% 0.1% 0.0% -1.0% 0.2% Feb-09 -3.9% -0.2% 0.2% 0.0% -0.3% -1.7% -0.2% -0.2% -0.7% -0.3% -0.3% -0.2% Mar-09 9.3% 0.0% 0.5% -0.2% 3.9% 1.5% 0.2% 0.7% 0.9% 1.4% 0.2% 0.1% Apr-09 15.0% 1.9% 0.5% 0.0% 3.7% 2.9% 0.3% 1.3% 1.8% 0.8% 0.7% 1.1% May-09 28.1% 1.7% 0.9% -0.1% 7.6% 5.4% 0.1% 3.3% 1.1% 3.5% 1.7% 3.0% Source: CMIE Prowess, Refintiiv Datastream, NSE.

Figure 48: Nifty 50 index movement across sectors (Jul 2019-Jun 2020) Cons. Cons. Real Month Return Comm. Energy Financials Health Industrials IT Materials Utilities Disc Staples Est. Jul-19 -671 -5 -128 -22 -137 -287 3 -56 29 -43 0 -25 Aug-19 -95 7 29 -22 38 -123 0 -21 48 -39 0 -12 Sep-19 451 -5 52 169 113 156 -19 49 -101 42 0 -5 Oct-19 403 -12 97 46 124 181 18 -4 -47 -1 0 5 Nov-19 179 53 -62 -61 52 284 9 -46 -55 17 0 -14 Dec-19 112 13 17 -26 -89 135 -7 -14 64 23 0 1 Jan-20 -206 53 -17 20 -131 -145 3 21 21 -22 0 -10 Feb-20 -760 1 -97 -57 -96 -271 -27 -60 -88 -51 0 -18 Mar-20 -2,604 -74 -217 -46 -233 -1,553 1 -133 -194 -119 0 -34 Apr-20 1,262 49 107 33 299 429 73 34 135 77 0 22 May-20 -280 38 30 12 -6 -374 14 17 -23 16 0 0 Jun-20 722 17 43 99 142 348 -9 -1 54 19 0 10 Source: CMIE Prowess, Refintiiv Datastream, NSE.

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Figure 49: Nifty 50 index movement across sectors (Jun 2008-May 2009) Cons. Cons. Real Month Return Comm. Energy Financials Health Industrials IT Materials Utilities Disc Staples Est. Jun-08 -830 -110 -23 -30 -108 -120 -2 -95 -85 -108 -71 -79 Jul-08 292 44 2 10 80 69 -3 54 -38 -7 30 52 Aug-08 27 -27 9 3 -15 21 6 3 23 5 -7 4 Sep-08 -439 -40 -4 -1 -73 -38 -36 -48 -102 -78 -52 34 Oct-08 -1036 -100 -28 -32 -314 -99 -24 -108 -42 -124 -56 -108 Nov-08 -131 -8 -6 16 -55 -30 5 -9 -28 -32 -13 28 Dec-08 204 34 1 4 37 48 1 14 -37 31 28 46 Jan-09 -84 -53 5 8 12 -14 -2 -19 3 1 -31 5 Feb-09 -111 -6 7 -1 -9 -49 -6 -6 -19 -10 -8 -5 Mar-09 257 0 15 -5 109 43 7 18 25 40 5 2 Apr-09 453 57 14 1 112 88 8 39 53 25 22 32 May-09 975 60 30 -5 263 188 3 113 38 120 59 106 Source: CMIE Prowess, Refintiiv Datastream, NSE.

Figure 50: Nifty 50 index weights across sectors (Jul 2019-Jun 2020) Cons. Real Month Comm. Cons. Disc Energy Financials Health Industrials IT Materials Utilities Staples Est. Jul-19 2.35 6.13 8.52 11.94 40.25 2.31 4.44 14.80 6.40 0.00 2.84 Aug-19 2.43 6.45 8.39 12.39 39.48 2.33 4.29 15.36 6.10 0.00 2.76 Sep-19 2.29 6.65 9.53 12.89 39.29 2.07 4.55 13.88 6.23 0.00 2.61 Oct-19 2.11 7.24 9.59 13.50 39.48 2.15 4.36 13.01 6.01 0.00 2.56 Nov-19 2.52 6.62 8.94 13.73 41.25 2.19 3.91 12.36 6.06 0.00 2.41 Dec-19 2.60 6.70 8.64 12.87 41.98 2.11 3.76 12.77 6.19 0.00 2.40 Jan-20 3.09 6.67 8.96 12.00 41.49 2.17 4.00 13.17 6.11 0.00 2.36 Feb-20 3.31 6.26 9.06 11.96 41.89 2.08 3.74 13.28 6.07 0.00 2.36 Mar-20 3.45 5.63 11.27 12.87 36.51 2.72 3.33 15.04 6.52 0.00 2.68 Apr-20 3.51 5.99 10.16 14.25 36.19 3.11 3.25 14.48 6.47 0.00 2.56 May-20 4.01 6.48 10.58 14.60 33.34 3.35 3.52 14.66 6.83 0.00 2.63 Jun-20 3.89 6.44 10.80 14.96 34.38 3.03 3.26 14.16 6.54 0.00 2.54 Source: CMIE Prowess, Refintiiv Datastream, NSE.

Figure 51: Nifty 50 index weights across sectors (Jun 2008-Man 2009) Cons. Real Month Comm. Cons. Disc Energy Financials Health Industrials IT Materials Utilities Staples Est. Jun-08 11.18 2.46 4.76 25.29 10.02 3.12 7.95 12.07 9.83 3.92 9.38 Jul-08 11.44 2.33 4.68 25.43 10.94 2.85 8.67 10.39 9.00 4.35 9.94 Aug-08 10.74 2.52 4.72 24.93 11.36 2.98 8.68 10.86 9.06 4.16 9.96 Sep-08 10.93 2.71 5.23 25.86 11.66 2.40 8.42 9.48 8.08 3.29 11.95 Oct-08 11.37 2.71 5.99 24.26 12.40 2.42 7.70 11.43 6.67 2.54 12.49 Nov-08 11.62 2.63 6.86 23.41 11.91 2.73 7.74 10.96 5.83 2.20 14.10 Dec-08 11.97 2.48 6.51 23.04 12.72 2.57 7.67 8.95 6.46 2.98 14.68 Jan-09 10.48 2.72 6.97 24.15 12.59 2.58 7.23 9.30 6.68 1.98 15.29 Feb-09 10.69 3.08 7.22 24.81 11.33 2.48 7.31 9.00 6.60 1.77 15.71 Mar-09 9.79 3.32 6.43 26.32 11.79 2.49 7.29 9.05 7.35 1.80 14.44 Apr-09 10.15 3.28 5.62 26.11 12.79 2.40 7.47 9.39 7.12 2.20 13.47 May-09 9.27 3.23 4.28 26.29 14.21 1.94 8.37 8.18 8.26 3.05 12.89 Source: CMIE Prowess, Refintiiv Datastream, NSE.

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Macro economy

Headline CPI inflation moderated from imputed prints of 7.2%/6.3% in April/May to 6.1% in June 2020, higher than consensus estimate of 5.3% (source: Refinitiv Datastream). This was primarily on the back of a decline in food inflation, particularly for vegetables and fruits, partly offset by a sharp rise in pan, tobacco & intoxicants and fuel inflation as well as a modest pick-up in core inflation. That said, headline inflation has remained -point target and the upper end of its target range of 6% for the ninth and third month in a row.

Headline inflation should gradually taper off amid expectations of a normal monsoon, continued easing of supply chain bottlenecks and a significant and prolonged deterioration in aggregate demand. This should facilitate frontloading of rate cuts by the RBI to support an ailing economy. We expect another 25-50bps cut in policy rates, ceteris paribus.

 Retail inflation moderates but rema target range: Retail Retail inflation moderated inflation (CPI) inflation moderated from the imputed prints of 7.2%/6.3% in in June 2020 but remained April/May to 6.1% in June, higher than consensus estimate of 5.3% (source: -6% Refinitiv Datastream). The moderation was largely on account of a further decline target range. in food inflation to an eight-month low of 7.3% led by price normalisation of vegetables/fruits as supplies improved following a temporary lockdown-induced disruption. This was partly offset by a sharp surge in inflation in pan, tobacco and

intoxicants to a 59-month high of 9.7%, higher fuel inflation reflecting a pick-up in crude oil prices, and a spike in personal care & effects inflation to 95-month high 12.4%. Headline inflation -point target and the upper end of its target range of 6% for the ninth and third month in a row.

 Core inflation inches up: Imputed core inflation (ex-food and fuel) inched up for the third month in a row to 5% in June 2020. This was primarily on account of a Core inflation inched up for sharp rise in personal care & effects inflation, reflecting a surge in gold prices, and the third month in a row in higher transportation inflation due to hike in petrol and diesel prices. This was June 2020. partly offset by a significant drop in inflation in household goods & services and

recreation & amusement, reflecting a collapsed demand owing to lockdown restrictions. That said, weak aggregate demand should gradually bring down core inflation over the coming months.

 RBI to ease further: Continued surge in COVID-19 cases despite an extended and stringent lockdown is likely to significantly de-rail an economic recovery, notwithstanding policy intervention. While supply-side situation is expected to continue to improve, aggregate demand is expected to remain weak in the foreseeable future as the second-order effect of the lockdown in the form of decline in disposable incomes and job losses feeds in. This, along with expectations of a normal monsoon, should bring down retail inflation lower over the coming months. This should facilitate frontloading of rate cuts by the RBI to support an ailing economy. We expect a cut in policy rates by another 25-50bps, ceteris paribus.

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Figure 52: Consumer price inflation in June 2020 (%YoY) Weight (%) Jun-20 May-20 Jun-19 FY21TD FY20TD CPI 6.1 6.3 3.2 6.5 4.8 Food & Beverages 45.9 7.3 7.4 2.4 7.8 3.1 Pan, Tobacco & Intoxicants2 2.4 9.7 6.3 4.2 7.3 8.0 Clothing & Footwear2 6.5 3.5 3.4 1.5 3.5 5.4 Housing 10.1 3.5 3.7 4.8 3.7 8.5 Fuel & Light 6.8 2.7 1.4 2.2 2.3 6.1 Miscellaneous2 28.3 5.7 5.8 4.5 5.6 5.3 Core CPI inflation1, 2 44.9 5.0 4.9 4.1 4.9 6.1 Source: CSO, NSE. NA = Not Available. Note: 1 Headline inflation excluding food & beverages, pan, tobacco & intoxicants and fuel & light. 2 Inflation data for these components for April and May 2020 are based on the imputed index calculated by MOSPI.

Figure 53: Headline CPI inflation trend % Headline inflation remains elevated led by a pick-up in core and fuel inflation 13 CPI Food & Beverages Fuel & Light Core inflation

11

9

7

5

3

1

(1)

(3) Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Source: CMIE Economic Outlook, NSE.

Figure 54: Real interest rates have remained negative for quite some time now

Source: Refinitiv Datastream, NSE.

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Figure 55: Category-wise contribution to India consumer price inflation (CPI)

Source: Refinitiv Datastream, NSE.

Figure 56: Category-wise contribution to India Food and Beverages inflation (CPI)

Source: Refinitiv Datastream, NSE.

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 Wholesale prices remained in deflation for the third month in a row: Wholesale price inflation (WPI) remained in the negative zone for the third month in a row, WPI inflation remained in even as the pace of deflation moderated on a sequential basis. WPI inflation in June the negative zone for the came in at -1.8% vs. -3.2% in the previous month. This was primarily led by a third month in a row in continued sharp drop in prices of crude, petroleum & natural gas as well as mineral June. oils, deflation in non-food primary articles and benign inflation in manufactured

products, partly offset by an increase in food and electricity inflation. Within primary articles, food inflation inched up to 2.0% in June after moderating to a 17-month low of 1.1% in May, non-food primary articles remained in deflation at -2.8% for the third consecutive month, fell to a 35-month low of -2.9%, crude, petroleum & natural gas prices fell by 33.7% YoY reflecting lower crude oil prices, while inflation in minerals also moderated to 0.5%. Fuel & power inflation stood at -13.6%, led by drop in mineral oils prices by 27.5% YoY, partly offset by a surge in electricity inflation to 5.2%. Manufactured products inflation remained benign at 0.1%, marking the 12th month of a sub-1% reading.  Gap between CPI and WPI inflation widens: Gap between retail and wholesale price inflation widened to 55-month high of 9.5% in May 2020 and remained elevated at 7.9% in June 2020. This was primarily on the back of a) a much higher weight of food in the retail basket (45.9%) as compared to the wholesale basket (15.3%), where prices shot up over the last few months due to supply-side issues, and b) a higher weightage of manufactured goods in the wholesale basket (64.2%) as compared to the retail basket, where prices have fallen sharply in the wake of a plunge in commodity prices and a significant drop in consumption demand. Sustained drop in wholesale prices should ideally feed into final consumer prices, albeit with a delay, further supporting the prognosis of a decline in consumer inflation trajectory ahead. Figure 57: Wholesale price inflation for May 2020 (%YoY) Weight (%) Jun-20 May-20 Jun-19 FY21TD FY20TD WPI (1.8) (3.2) 2.0 (2.2) 2.7 Primary articles 22.6 (1.2) (2.9) 6.4 (1.7) 6.6 Food articles 15.3 2.0 1.1 7.3 2.3 7.0 Non-food articles 4.1 (2.8) (3.5) 5.1 (3.1) 5.7 Minerals 0.8 0.5 2.2 24.5 0.0 18.3 Crude petroleum & natural gas 2.4 (33.7) (46.2) (7.3) (42.2) (1.6) Fuel & power 13.2 (13.6) (19.8) (2.1) (15.4) 1.2 Coal 2.1 2.0 2.3 0.8 2.2 0.6 Mineral oils 8.0 (27.4) (37.4) (3.4) (30.3) 1.8 Electricity 3.1 5.2 2.9 (1.2) 4.7 0.3 Manufactured products 64.2 0.1 (0.4) 1.0 (0.1) 1.5 Food group 24.4 3.1 2.3 5.4 3.2 5.1 Source: CSO, NSE.

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Figure 58: India wholesale price inflation (WPI)

Source: Refinitiv Datastream, NSE.

Figure 59: Gap between wholesale and retail inflation percentage points Gap between CPI and WPI inflation

12.0

10.0

8.0

6.0

4.0

2.0

0.0

-2.0

-4.0 Apr-12 Jun-13 Aug-14 Oct-15 Dec-16 Feb-18 Apr-19 Jun-20 Source: CMIE Economic Outlook, NSE.

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Industrial production contracts for the third month in a row Industrial production contracted by 34.7% YoY in May 2020 marking the third consecutive month of contraction, albeit lower than the 57.7% decline seen in the previous month, and Reuters poll of 37.8% drop. All sectors of the industrial economy witnessed a huge decline, led by manufacturing as a significant part of discretionary manufacturing was largely shut for the second month in a row in May. Electricity and mining sectors fared relatively better. Within the manufacturing sector, the contraction was far more severe in capital goods and consumer durables while essential categories such as primary goods and consumer non-durables performed somewhat better. During Mar-May 2020, industrial production fell by 36% YoY. With incremental lifting of restrictions on non-essential activities, industrial activity is expected to improve over the coming months, even as contraction is likely to persist for now. Initial signs of this are visible in manufacturing PMI, electricity generation and e-way bills for the month of June. However, downside risks remain significant in the wake of continued rise in COVID-19 cases and consequent potential tightening of restrictions.  Lockdown impacts data collection: Like consumer prices, data flow from factories and establishments has also got impacted due to lockdown, even as the response rate has improved for the month of May. The weighted average response in April was 87% in the provisional estimates, which has now been revised upwards to 91% in the first revision, albeit still lower than 94%/93% in the final revision for December 2019/January 2020.  Industrial production contracts for the third month in a row: Following a sharp Industrial production 57.7% YoY contraction in the previous month, industrial production fell by 34.7% declined by 34.7% in May YoY in May 2020, marginally higher than the consensus estimate of -37.8% after a 57.7% drop in the (source: Reuters poll). This translates into a decline of 36% YoY in March-May previous month, marking 2020. This was primarily led by a huge 39.3% YoY decline in manufacturing output the third consecutive as a significant part of discretionary manufacturing was largely shut during the month of contraction. month in the wake of an extended lockdown. The YoY decline in electricity and mining sectors, however, was much lower at 15.4% and 21% respectively. While mining activity was hit by limited labour availability despite being categorised as an

essential activity, electricity production got impacted due to reduced demand from industrial and commercial establishments. 13 out of 23 sub-sectors within the manufacturing space recorded more than 50% YoY contraction, led by transport equipment (-84% YoY), motor vehicles, trailers and semi-trailers (-80% YoY), textiles (-73% YoY) and electrical equipment (-71% YoY). Pharmaceuticals was the only sub-sector within the manufacturing space to register a growth in May. On the use-based side, consumer durables and capital goods got impacted the most, contracting by 68.5% and 64.3% respectively, followed by intermediate and infrastructure/construction goods at -44.1% and -42% respectively. Primary goods and consumer non-durables, largely falling under essential categories, saw a relatively much lower YoY contraction of 20% and 11.7% respectively.  Industrial recovery de-railed: With incremental lifting of restrictions on non- essential activities, industrial activity is expected to improve over the coming months, even as contraction is likely to persist for now. Initial signs of this are visible in manufacturing PMI, electricity generation and e-way bills for the month of June. However, downside risks remain significant in the wake of continued rise in COVID-19 cases and consequent potential tightening of restrictions Further, a significant deterioration of aggregate demand is also likely to weigh on industrial production.

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Figure 60: India industrial production for May 2020 (%YoY) Weight (%) May-20 Apr-20 May-19 FY21TD FY20TD IIP (34.7) (57.7) 4.5 (45.8) 3.8

Sector- Mining 14.4 (21.0) (27.0) 2.3 (24.0) 3.7 based Manufacturing 77.6 (39.3) (67.1) 4.4 (52.7) 3.5 indices Electricity 8.0 (15.4) (23.0) 7.4 (19.0) 6.7 Primary Goods 34.0 (20.0) (26.6) 2.2 (23.2) 3.6 Capital Goods 8.2 (64.3) (92.6) (2.1) (77.9) (1.8) Intermediate Goods 17.2 (44.1) (65.4) 12.5 (54.1) 7.8 Use-based Infra/Construction Goods 12.3 (42.0) (84.7) 3.0 (62.6) 1.2 Goods Consumer Goods 28.2 (36.0) (69.1) 4.5 (52.1) 4.3 Consumer Durables 12.8 (68.5) (96.0) 0.2 (81.9) 1.2 Consumer Non-durables 15.3 (11.7) (48.7) 8.1 (29.6) 6.8 Source: CSO, NSE. Figure 61: India industrial production (3MMA)

Source: Refinitiv Datastream, NSE.

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Figure 62: Long-term industrial production trend (12MMA)

Source: Refinitiv Datastream, NSE.

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Figure 63: India industrial production use-based goods (3MMA)

Source: Refinitiv Datastream, NSE.

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Figure 64: India eight-core sector growth (3MMA)

Source: Refinitiv Datastream, NSE.

Figure 65: India Manufacturing and Services PMI improved further in June but remained in the contraction zone for yet another month Manufacturing PMI Services PMI 60

50

40

30

20

10

0 May-15 Nov-15 May-16 Nov-16 May-17 Nov-17 May-18 Nov-18 May-19 Nov-19 May-20 Source: CMIE Economic Outlook, NSE.

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Trade balance turns surplus in June surplus of US$ 793mn in June (vs. -US$ 3.1bn in May) the first since January 2002 led by a sharp fall in imports for the fourth month in a row, even as contraction in exports narrowed significantly .4% YoY in June much lower than the 43% drop seen over the previous three months, led by a significant recovery in exports of engineering goods as well as strong growth in exports of essential commodities (agri commodities, pharma and other chemicals). Imports on the other hand barely recovered, witnessing a contraction of 48% YoY in June, over and above the 47% drop seen during Mar-May 2020. While oil and gold imports led the drop for yet another month, a 41% YoY contraction in non-oil non-gold imports worse than the previous month despite continued easing of restrictions points to a significant and prolonged weakness in aggregate demand. Exports are expected to continue to recover as an aggressive global policy response globally should help revive global demand faster. Recovery in imports, however, is expected to be slow and gradual as a stringent and prolonged lock- down in India and its second-order impact in the form of job losses and decline in disposable incomes may keep discretionary demand weak for an extended period. This is expected to keep trade balance fairly low over the coming months, potentially translating into a current account surplus in FY21 the first in 17 years. Additionally, a surge in foreign exchange reserves to all-time high levels (US$ 513bn as of July 3rd, +US$ 56bn YTD) bodes well for the INR.

. : After registering a ~43% YoY drop during Mar-May 2020, thanks to a stringent nation- Exports recovered wide lockdown that got extended until May-end, exports recovered meaningfully in meaningfully in June, June, falling by just 12.4% YoY. This was led by a significant recovery in exports of falling by 12.4% YoY vs. engineering goods (-7.5% YoY), and a strong growth in exports of essential 43% YoY drop during Mar- May 2020. categories for yet another month, viz. agricultural commodities (rice, spices), ores, chemcials and pharmaceuticals. This was partly offset by a continued sharp decline in exports of petroleum products (-31.6% YoY) and labour-intensive commodities such as gems & jewellery (-50.1% YoY) and readymade textiles (-34.8% YoY), as limited labour availability and social distancing norms kept production levels low, despite further easing of restrictions during the month. Excluding these three, the contraction in exports was much lower at 1.4% YoY in June.

. Unlike exports, imports registered a lacklustre performance for the fourth month in a row, with the overall Imports fell by a much bill falling by 47.6% YoY in June, following a 47% YoY drop during March-May higher 48% YoY in June. An equivalent drop in non- 2020. Oil imports declined by a huge 55.3% YoY, reflecting weak domestic demand oil no-gold imports points and lower crude oil prices compared to the year-ago period. While gold imports to a significant and recovered on a sequential basis, the YoY contraction remains huge at 77.4% YoY prolonged weakness in despite a surge in gold prices. Excluding gold and oil, imports registered a huge consumption demand. 41.4% YoY drop in June higher than the 36.4% decline seen in the previous month reflecting a significant and prolonged weakness in aggregate demand. Like the trend seen in exports, imports of essential items including medicinal &

pharmaceutical products, and other chemicals were relatively less impacted.

. : A Trade balance turned much sharper contraction in imports as compared to exports, thanks to relatively surplus of US$ 793mn in faster reopening of global economies and an aggressive policy response as June the first since compared to India, resulted in a trade surplus of US$ 793mn in June the first since January 2002. January 2002.

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. Expect current account surplus in FY21: Exports are expected to fare better than imports in FY21, benefiting from an aggressive global policy response and relatively A significant deterioration in trade deficit is likely to lenient lockdown restrictions. India, on the other hand, has seen one of the most translate into a current stringent and extended lockdowns which not only brought the economic activity to account surplus in FY21 vs. a stand-still for a couple of months, but has significantly deteriorated consumption a current account deficit of as well as investment demand. In fact, discretionary demand is expected to remain 0.9% of GDP in FY20. weak in India for an extended period in the wake of falling disposable incomes and changing consumer behaviour. This, along with lower crude oil prices as compared to FY20, should result in a significant contraction in trade deficit in FY21, translating

into a current account surplus vs. a current account deficit of 0.9% of GDP in FY20. Moreover, a surge in foreign exchange reserves to all-time high levels (US$ 513bn as of July 3rd, +US$ 56bn YTD) bodes well for the INR.

Figure 66: India monthly trade balance for June 2020 Trade Exports Imports balance Oil Non-oil Gold Total US$ bn %YoY %YoY imports %YoY imports %YoY Import %YoY US$ bn (US$ bn) (US$ bn) (US$ bn) (US$ bn) Jun-20 21.9 -12.4 21.1 -47.6 4.9 -55.3 16.2 -44.7 0.6 -77.4 0.8 May-20 19.1 -36.2 22.2 -52.4 3.5 -72.3 18.7 -45.1 0.1 -98.4 -3.1 Jun-19 25.0 -7.9 40.3 -10.1 11.0 -13.6 29.3 -8.7 2.7 13.0 -15.3 FY21TD 51.3 -36.6 60.4 -53.3 13.1 -62.8 47.4 -49.7 0.7 -94.0 -9.1 Source: Ministry of Commerce, CMIE Economic Outlook, NSE.

Figure 67: India monthly trade balance trend

Source: Refinitiv Datastream, NSE.

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Figure 68: Non-oil, non-gold imports trend Figure 69: Oil imports trend Non-oil non-gold imports remained weak for yet another Oil imports fell by a much sharper 53% YoY in June, month, falling by 41% YoY in June reflecting lower crude oil prices and weak demand. US$bn Non-oil non-gold imports have nosedived % US$bn Oil imports trend % 35 Oil Imports % YoY (R) Non-oil non-gold imports % YoY (R) 18 110 30 40 15 25 20 60 12 20 0 9 10 15 (20) 10 6 (40) (40) 5 3

0 (60) 0 (90) Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Source: Ministry of Commerce, CMIE Economic Outlook, NSE.

Figure 70: Oil imports vs. Brent crude oil prices trend An increase in crude oil prices over the last few weeks, coupled with continued lifting of mobility restrictions, should translate into a pick-up in oil imports on a sequential basis over the coming months.

Source: Refinitiv Datastream, NSE.

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Current account balance turns surplus in Q4FY20; FY20 CAD at -0.9% of GDP in Q4FY20 the first in 13 years. This was primarily led by a sharp drop in non-oil imports (weak demand), strong growth in remittances, steady software earnings and lower overseas investment income payments. On the capital account, huge foreign portfolio outflows amid a strengthened risk-off environment in the wake of COVID-19 outbreak were largely offset by a higher FDI (foreign direct investment) and ECB (external commercial borrowings) inflows, resulting in a Balance of Payments (BoP) surplus of US$18.8bn in Q4FY20.

The Current Account Deficit (CAD) in FY20 moderated to three-year lows of 0.9% of GDP vs. 2.1% in FY19 due to a significant contraction in trade deficit and steady growth in services receipts and remittances. Record-high net FDI inflows (+40% YoY) and strong growth in ECB inflows more than compensated for lower foreign portfolio inflows and NRI deposits. Consequently, BoP surplus expanded to five-year high of US$59.5bn in FY20.

Exports are likely to fare better than imports as an aggressive policy response globally should help revive global demand faster. Moreover, a relatively more stringent and prolonged lockdown in India and its second-order impact in the form of job losses and decline in disposable incomes may keep discretionary demand weak for an extended period. This is expected to result in a significant contraction in trade deficit, aided by lower crude oil prices. Consequently, we expect a current account surplus in FY21 for the first time in 17 years (on an annual basis), partly offset by lower remittances. This would translate into a huge BoP surplus for yet another year, supported by strong FDI inflows, resulting in continued accretion to FX reserves (US$ 513bn as of July 3rd, +US$ 56bn YTD).

 Weak domestic demand keeps trade deficit contained: contracted to US$35bn in Q4FY20 from US$36bn in the previous quarter. This was Current account turned into surplus in Q4FY20 for largely led by a sharp drop in non-oil imports, reflecting weak domestic demand, the first time in 13 years. even as exports also contracted in Q4FY20 as COVID-19 outbreak led to large- scale disruptions in global supply chains and demand, thereby resulting in delays FY20 CAD contracts from and cancellations of orders. Oil imports, however, inched up, reflecting higher crude 2.1% of GDP in FY19 to oil prices during Dec- 0.9% in FY20. YoY to US$158bn led by a steeper fall in imports as compared to exports.

 Current account turns surplus in Q4FY20: Invisibles grew by a strong 16.5% YoY in Q4FY20 led by a steady growth in services receipts (+6.3% YoY), higher remittances (+13.9% YoY) and lower overseas investment income payments. This, along with lower trade deficit, led to current account turning surplus in Q4FY20 for the first time in 13 years to US$0.6bn or 0.1% of GDP. FY20 CAD also contracted to three-year lows of US$24.7bn or 0.9% of GDP from 2.1% in FY19 due to a huge contraction in trade deficit and steady growth in services receipts and remittances.  Strong FDI/ECB inflows compensate for FPI outflows, translating into strong BoP surplus: On the capital account, substantial outflows by foreign portfolio Strong FDI/ECB inflows investors (FPIs) in Q4FY20 amid a strengthened risk-off environment in the wake compensated for huge FPI outflows, translating into a of COVID-19 outbreak were largely offset by a sharp rise in FDI and ECB inflows, BoP surplus of US$19bn/ resulting in a Balance of Payments (BoP) surplus of US$18.8bn. In FY20, BoP US$59.5 in Q4FY20/FY20. surplus expanded to five-year high of US$59.5bn, thanks to record-high net FDI inflows (US$43bn; +40%) and strong growth in ECB inflows (+120%), more than compensating for lower foreign portfolio inflows and NRI deposits.

 Current account expected to remain in surplus in FY21: Exports are likely to fare better than imports as an aggressive policy response globally should help revive CAD is expected to remain global demand faster. Moreover, a relatively more stringent and prolonged in surplus in FY21 due to lockdown in India and its second-order impact in the form of job losses and decline further contraction in trade in disposable incomes may keep discretionary demand weak for an extended deficit. period. This, along with lower crude oil prices, is expected to result in a further

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contraction in trade deficit. Consequently, we expect a current account surplus in FY21 for the first time in 17 years (on an annual basis), partly offset by lower remittances from the Gulf nations (account for ~50% of total remittances) in the wake of a sharp drop in crude oil prices and muted software earnings amid weak global demand. This would translate into a huge BoP surplus for yet another year, supported by strong FDI inflows, resulting in continued accretion to FX reserves (US$506bn as of June 19th, +US$48bn YTD). Figure 71: Balance of Payments Quarterly account US$ bn Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Current account -15.8 -19.1 -17.8 -4.6 -15.0 -7.6 -2.6 0.6 CAD/GDP (%) -2.3 -2.9 -2.7 -0.7 -2.1 -1.1 -0.4 0.1 Trade balance -45.8 -50.0 -49.3 -35.2 -46.8 -39.7 -36.0 -35.0 Merchandise exports 83.4 83.4 83.1 87.4 82.7 80.0 81.2 76.5 Merchandise imports 129.1 133.4 132.4 122.6 129.5 119.6 117.3 111.6 Oil imports 34.8 35.3 38.5 32.4 35.4 29.9 31.5 33.8 Non-oil imports 94.3 98.1 93.9 90.2 94.1 89.7 85.8 77.8 Invisibles 29.9 31.0 31.5 30.6 31.8 32.1 33.4 35.6 Net services 18.7 20.3 21.7 21.3 20.1 20.9 21.9 22.0 Software earnings 18.6 19.3 19.9 19.9 21.0 21.1 21.5 21.1 Transfers 17.0 19.3 17.4 16.2 18.0 20.0 18.9 18.4 Other invisibles -5.8 -8.6 -7.6 -6.9 -6.3 -8.8 -7.4 -4.8 Capital account 4.8 16.6 13.8 19.2 28.6 13.6 23.6 17.4 Foreign investments 1.4 7.6 5.2 15.9 18.8 9.8 17.6 -1.8 FDI 9.6 7.4 7.3 6.4 14.0 7.3 9.7 12.0 FII -8.1 0.2 -2.1 9.4 4.8 2.5 7.8 -13.7 Loans -4.3 6.9 2.9 10.3 9.6 3.1 3.1 9.9 ECBs -1.3 2.2 2.0 7.5 6.1 3.3 3.2 10.3 Banking capital 10.1 0.5 4.9 -8.1 3.4 -1.8 -2.3 -4.6 NRI deposits 3.5 3.3 0.1 3.4 2.8 2.3 0.8 2.8 Others -2.4 1.5 0.7 1.2 -3.2 2.5 5.2 13.8 Errors & Omissions -0.3 0.6 -0.3 -0.4 0.4 -0.9 0.6 0.9 Overall balance (BoP) -11.3 -1.9 -4.3 14.2 14.0 5.1 21.6 18.8 Source: RBI, CMIE Economic Outlook, NSE Figure 72: Balance of Payments Annual account US$ bn FY16 FY17 FY18 FY19 FY20 Current account -22.2 -14.4 -48.7 -57.3 -24.7 CAD/GDP (%) -1.1 -0.6 -1.8 -2.1 -0.9 Trade balance -130.1 -112.4 -160.0 -180.3 -157.5 Merchandise exports 266.4 280.1 309.0 337.2 320.4 Merchandise imports 396.4 392.6 469.0 517.5 477.9 Oil imports 82.6 86.9 108.7 141.1 130.5 Non-oil imports 313.9 305.6 360.3 376.4 347.4 Invisibles 107.9 98.0 111.3 123.0 132.8 Net services 69.7 68.3 77.6 81.9 84.9 Software earnings 71.5 70.8 72.2 77.7 84.6 Transfers 62.6 56.0 62.4 69.9 75.2 Other invisibles -24.4 -26.3 -28.7 -28.9 -27.3 Capital account 41.1 36.4 91.4 54.4 83.2 Foreign investments 31.9 43.2 52.4 30.1 44.4 FDI 36.0 35.6 30.3 30.7 43.0 FII -4.1 7.6 22.1 -0.6 1.4 Loans -4.6 2.4 16.7 15.9 25.7 ECBs -4.5 -6.1 -0.2 10.4 23.0 Banking capital 10.6 -16.6 16.2 7.4 -5.3 NRI deposits 16.1 -12.4 9.7 10.4 8.6 Others 3.2 7.5 6.1 1.0 18.4 Errors & Omissions -1.1 -0.5 0.9 -0.5 1.0 Overall balance (BoP) 17.9 21.6 43.6 -3.3 59.5 Source: RBI, CMIE Economic Outlook, NSE

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Figure 73: Quarterly current account

Source: Refinitiv Datastream, NSE

Figure 74: -year low of 0.9% of GDP in FY20

Source: Refinitiv Datastream, NSE

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Figure 75:

Source: Refinitiv Datastream, NSE

Figure 76:

Source: Refinitiv Datastream, NSE

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Figure 77:

Source: Refinitiv Datastream, NSE

Figure 78: Forex reserves are all all-time high levels, leading to a sharp rise in import cover A significant accretion to forex reserves over the years, and particularly this year (+US$ 56bn in 2020 till date, as of July 3rd), has resulted in a significant improvement in import cover, further supported by moderation in domestic demand. more than 15 months now, thereby rability. US$ bn Forex reserves and import cover (months) # of months

550 FX reserves (US$bn) Import cover ratio (months, RHS) 16 15 500 14 450 13 12 400 11 350 10

300 9 8 250 7 200 6 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Jun-20

Source: CMIE Economic Outlook, NSE. Import cover is calculated as the ratio of forex reserves at the end of the period to average monthly imports over the last 12 months.

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Fiscal pressures mounting; deficit monetisation by RBI not ruled out T in the first two months of the fiscal reached Rs4.7trn or 58.6% of the budgeted target already vs. 47.7% in the same period last year. This was primarily on account of a sharp drop in tax collections, particularly income and indirect tax collections, as shutdown of small businesses and non-essential manufacturing and services as well as a collapsed consumption demand amidst an extended and stringent COVID-19-induced lockdown adversely affected incomes and sales. GST collections in the first quarter of FY21 declined by a huge 41% YoY/QoQ. The growth in capital expenditure, largely attributed to a significant jump in spending on road transport & highways, food & public distribution, petroleum & natural gas and railways. These together accounted for 73% of the total capital expenditure during the first two months vs. 30% in the same period last year. Revenue expenditure, however, witnessed a modest decline on the back of a huge drop in subsidy outgo.

The monthly fiscal figures suggest a significant slippage in the making even as budget estimates are irrelevant in current unprecedented times. Increase in the Cent which is expected to only make up for the revenue loss at best, is a testament of that. The States are also allowed to borrow up to 5% of the state GDP, albeit with certain conditions. In the first six months of the fiscal, the combined gross borrowing of the Centre and States is expected to exceed Rs10trn (Rs4.7trn in Q1FY21) based on the indicative borrowing calendars, with exercise of green shoe option imparting additional upside pressure. Expectations of a prolonged demand slowdown and a gradual recovery in industrial activity at best, tax collections are expected to remain below the pre-COVID levels for quite some time now. Spending, however, is unlikely to be meaningfully curtailed in a low growth environment. As such, market borrowing in the second half is expected to remain high, translating into combined (Centre + states) borrowing for the fiscal to exceed Rs20trn. This is likely to result in supply meaningfully exceeding demand by market participants, making it crucial for the RBI to continue doing OMO purchases. We also do not rule out direct deficit monetisation by the RBI as the FRBM Act allows its usage in exceptional circumstances.

 icit reached 59% of the budgeted target in Apr-May 2020: gross fiscal deficit during April-May 2020 came in at Gross fiscal deficit has Rs 4.7trn or 58.6% of the G budgeted target for FY21, meaningfully reached 58.6% of the higher than 52% for the same period last year. Revenue deficit, however, is only target in Apr-May 2020. marginally higher at 67.6% of the full-year target vs. 66.3% in the year-ago period, largely owing to lower revenue expenditure.  Tax collections witnessed a significant drop: Gross tax revenues during April-May

2020 declined by 41% YoY to Rs1.3trn, representing just 5.2% of the budgeted Gross tax collections fell by target. While direct tax collections fell by 14.6% YoY, thanks to lacklustre income 41% YoY in Apr-May 2020, tax receipts even as corporate tax collections were robust in the wake of but devolution to states significantly lower refunds as compared to last year, indirect tax collections fell by remained high. -51% YoY) as well as custom

duty collections (-66.1% YoY). Shutdown of businesses and non-essential manufacturing and services as well as a collapsed consumption demand impacted incomes and sales. Net tax collections, however, declined by a huge 70.7% YoY as transfer to states remained broadly steady despite strained finances of the Centre. In fact, tax devolution to states stood at 73% in the first two months of the fiscal vs. 46% in the same period last year.  GST collections remained below Rs1trn mark for the fourth month in a row: An extended and stringent lockdown implemented to contain the COVID-19 outbreak, GST collections fell by 41% coupled with limited supply of non-essential goods/services, has severely YoY in Q1 FY21. impacted sales, thereby hurting GST collections. Total GST collections have

remained below the Rs1trn mark for the fourth month in a row in June, declining by a huge 41% YoY in Q1 FY21. Gradual reopening of the economy in June and delayed

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filings have improved collections, even as it remains below the pre-COVID levels. has impacted sales.  Government capex remains strong amidst a pervasive economic slowdown: The remained broadly steady on an YoY basis in the first two months of the fiscal. This was led by a strong growth in capital expenditure, largely attributed to a significant jump in spending on road transport & highways (21.4% of total capex), railways (28.1%), food & public distribution (18.2%) and petroleum & natural gas (5.4%). These together accounted for 73.2% of the total capital expenditure during the first two months vs. 30% in the same period last year. Revenue expenditure, however, witnessed a modest decline on the back of a huge drop in subsidy outgo on food and petroleum, partly offset by higher interest payments, transfer to states and union territories and higher spending on rural development and health and family welfare.  Fiscal pressures mounting: The monthly fiscal figures suggest a significant slippage in the making even as budget estimates are irrelevant in current unprecedented times. Expectations of a prolonged demand slowdown and a gradual recovery in industrial activity at best, tax collections are expected to remain below the pre-COVID levels for quite some time now. Spending, however, is unlikely to be meaningfully curtailed in a low growth environment.  Deficit monetisation by the RBI is probably inevitable: borrowing plan for the year from Rs7.8trn to Rs12trn with upside risks, which is FY21 fisc to see massive expected to only make up for the revenue loss at best, is a testament of a significant slippage, as already fiscal slippage this year. The States are also allowed to borrow up to 5% of the state reflected in enhanced GDP, albeit with certain conditions. In the first six months of the fiscal, the borrowing plan for the year. combined gross borrowing of the Centre and States is expected to exceed Rs10trn (Rs4.7trn in Q1FY21) based on the indicative borrowing calendars, with exercise of green shoe option imparting additional upside pressure. Amid expectations of low tax collections and steady spending, market borrowing in the second half is expected to remain high, translating into combined (Centre + states) borrowing for the fiscal to exceed Rs20trn. This is likely to result in supply meaningfully exceeding demand by market participants, making it crucial for the RBI to continue doing OMO purchases. We also do not rule out direct deficit monetisation by the RBI as the FRBM Act allows its usage in exceptional circumstances. This is unlikely to be inflationary in nature in the wake of a massive demand destruction caused by the virus outbreak

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Figure 79:

Source: Refinitiv Datastream, NSE.

Figure 80: Gross fiscal deficit as % of budget targets during April-May % Gross fiscal deficit as a % of budget target during Apr-May

80.0 68.3 70.0 58.6 60.0 55.3 52.0 47.7 45.3 50.0 42.9 37.5 40.0 31.7 33.3 27.6 30.0 26.5

20.0

10.0

0.0 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 (BE) FY20 (RE) FY21 (BE) Source: CMIE Economic Outlook, CGA, NSE.

Figure 81: Figure 82: A quick glance at FY21 fiscal balances Fiscal deficit trend (% of GDP) Apr- 7.0 6.6 Rs bn FY20A* FY21BE %YoY** May % YoY 5.9 2020 6.0 Net tax revenues 13,559 16,359 8.7 339 -70.7 4.9 4.9 5.0 4.5 4.6 4.1 Non-tax revenues 3,262 3,850 11.4 108 -61.9 3.9 3.8 3.5 4.0 3.5 3.5 3.4 3.3 Non-debt cap rec. 686 2,250 175.7 8 -72.9 3.0 Total receipts 17,507 22,459 16.3 455 -69.0

2.0 Revenue Exp 23,496 26,301 11.9 4,566 -1.9

1.0 Capital Exp 3,367 4,121 18.1 552 15.7

- Total expenditure 26,864 30,422 12.7 5,118 -0.2

Fiscal deficit 9,356 7,963 3.8 4,663 27.4

FY14 FY10 FY11 FY12 FY13 FY15 FY16 FY17 FY18 FY19

FY20A

FY20RE FY21BE FY20BE % GDP 3.8 3.5 2.1

Source: CMIE Economic Outlook, CGA, NSE. BE = Budget Estimates, RE = Revised Estimates, A = Actual. * FY20 actual figures are provisional number released by CGA. ** Growth in FY21 BE figures are based on the revised estimates for FY20.

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Figure 83: Direct tax collections trend during Apr-May Figure 84: Indirect tax collections trend during Apr-May Rsbn Direct tax collections trend % Rsbn Indirect tax collections trend %

Indirect tax collections % YoY (R) 700 Direct tax collections % YoY (R) 200 1800 60 600 1600 150 40 1400 500 100 1200 20 400 1000 50 0 300 800 0 600 -20 200 400 100 -50 -40 200

0 -100 0 -60

FY18 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY20 FY21

FY16 FY11 FY12 FY13 FY14 FY15 FY17 FY18 FY20 FY21

Source: CMIE Economic Outlook, CGA, NSE. Figure 85: Gross tax collections trend during Apr-May Figure 86: GST collections trend Rsbn Gross tax collections trend % Rs bn Monthly trend of GST collections Gross tax collections % YoY (R) Monthly GST collections Monthly average 2500 50 1,200 40 1,000 2000 30 20 800 1500 10 600 0 1000 -10 400 -20 500 -30 200 -40 0

0 -50

Oct-19 Oct-17 Oct-18

Apr-18 Apr-19 Apr-20

Jun-18 Jun-19

Feb-18 Feb-19 Feb-20

Dec-17 Dec-18 Dec-19

FY15 FY11 FY12 FY13 FY14 FY16 FY17 FY18 FY20 FY21 Aug-17 Aug-18 Aug-19

Source: CMIE Economic Outlook, CGA, PIB, NSE.

Figure 87: Revenue and capital expenditure trend Figure 88: Expenditure mix during Apr-May Rs trn Share of revenue and capital expenditure in total % % Share of revenue and capital expenditure in total expenditure expenditure trend Capital exp Revenue expenditure Capital expenditure Rev exp 6 125 100 11.1 11.4 9.3 10.8 % YoY growth in rev exp 14.3 16.5 12.8 16.8 13.1 14.4 5 % YoY growth in capital exp 100

0.5 0.6 80 Millions 0.5 75 4 60 50 3 0.3 87.2 88.9 88.6 90.7 89.2 0.4 25 40 85.7 83.5 83.2 86.9 85.6 0.4 4.7 4.6 2 0.4 4.1 0.2 0 0.3 0.2 2.4 2.6 20 1 2.3 1.7 1.8 -25 1.3 1.4

0 -50 0

FY18 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY20 FY21

FY18 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY20 FY21

Source: CMIE Economic Outlook, CGA, PIB, NSE.

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Figure 89: A snapshot of government finances for April-May 2020 Items (Rs bn) FY20A FY21BE Apr-May 2020 % YoY on % YoY on Rs bn % YoY Rs bn Rs bn % YoY FY20RE FY20A Net tax revenues 13,559 4.2 16,359 8.7 20.7 339 (70.7) Gross tax revenues 20,099 (1.6) 24,230 12.0 20.6 1,261 (41.2) Of which: Direct Tax 10,372 (4.6) 13,060 12.8 25.9 527 (14.6) Corporation tax 5,569 (12.3) 6,810 11.5 22.3 170 1,408.1 Income tax 4,803 6.0 6,250 14.3 30.1 357 (41.0) Indirect Tax 9,727 1.8 11,170 11.0 14.8 734 (52.0) Goods and service tax 6,014 2.9 6,905 12.8 14.8 514 (51.0) Custom Duties 1,092 (7.3) 1,380 10.4 26.4 96 (66.1) Excise Duties 2,396 3.8 2,670 7.7 11.4 110 (36.8) Others 164 8.1 205 5.8 24.9 16 (12.6) States Share (6,507) (12) (7,842) 19.5 20.5 (921) (7.1) Transferred to NCCD (33) 82.8 (29) 5.0 (11.7) (2) 20.4 Non-Tax Revenue 3,262 50.0 3,850 11.4 18.0 108 (61.9) Dividends and profits 1,861 89.8 1,554 (22.3) (16.5) 22 6,124.4 Other non-tax revenues 1,401 17.3 2,296 57.7 63.9 87 (69.5) Central govt. revenue receipts 16,821 10.8 20,209 9.2 20.1 447 (68.9) Non-Debt Capital Receipts 686 (20.4) 2,250 175.7 227.8 8 (72.9) Recovery of Loans 183 (16.9) 150 (9.9) (18.3) 8 16.7 Misc. Receipts (inc. divestment) 503 (21.6) 2,100 223.1 317.5 0 (100.0) Total Receipts 17,507 9.1 22,459 16.3 28.3 455 (69.0) Revenue Expenditure 23,496 12.3 26,301 11.9 11.9 4,566 -1.9 Interest Payments 6,110 5.5 7,082 13.3 15.9 783 4.6 Major subsidies 2,232 (1.8) 2,278 0.2 2.1 675 (41.4) Food 1,087 (15.9) 1,156 6.3 6.3 360 (53.5) Fertilizer 811 10.3 713 (10.9) (12.1) 232 (1.2) Petroleum 334 36.0 409 6.1 22.5 83 (41.4) Capital Expenditure 3,367 40.9 4,121 18.1 22.4 552 15.7 Total Expenditure 26,864 15.2 30,422 12.7 13.2 5,118 -0.2 Fiscal Deficit 9,356 28.7 7,963 3.8 -14.9 4,663 27.4 Fiscal Deficit/GDP 4.6 3.5 2.1 Source: CMIE Economic Outlook, CGA, Budget Documents, NSE.

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Rainfall above normal thus far; sowing activity strong The Southwest monsoon season started on a strong note but faltered a bit in later June and early July. As per the Indian Meteorological Department (IMD), cumulative rainfall over India as a whole through July 21st is 6.6% above normal. Except for North West India which has received deficient rainfall in the season thus far largely due to deficient rainfall in West Uttar Pradesh, Rajasthan, Himachal Pradesh and J&K, the other three regions have received above normal rainfall. As of July 21st, 72% of the sub-divisional area in the country has received normal to excess rainfall.

An above normal rainfall thus far, coupled with already high reservoir levels when the season started owing to unseasonal rainfall in October-November 2019, has further improved reservoir levels. Live reservoir storage level as of July 16th of 27.1%. Sowing activity has also been pretty strong, with actual sown area rising by 21.2% YoY as of July 17th, albeit off a low base. All Kharif crops, except for Sugar Cane, has seen a sharp jump in sowing activity led by oilseeds, partly reflecting better MSP hikes (refer to the previous edition of Market Pulse here for a detailed note on MSP hikes).

Overall, agri sector is expected to emerge as the only silver lining in the current bloom and doom scenario, with our expectations of agri GDP growth in FY21 pegged at 2.8% (click here for the detailed report). A normal monsoon and consequent strong reservoir levels bode well for agri production. This, along with stable MSP hikes, should help keep farm incomes stable this year, notwithstanding the COVID-19 outbreak.

 Cumulative rainfall above normal thus far: The Southwest monsoon season started on a strong note but faltered a bit towards in the later part of June and early Cumulative rainfall for July. Nevertheless, cumulative rainfall for the country as a whole is 6.6% above India as a whole is 6.6% normal as of July 21st, as per the IMD. Except for North West India which has above normal as of July st received deficient rainfall in the season thus far largely due to deficient rainfall in 21 . West Uttar Pradesh, Rajasthan, Himachal Pradesh and J&K, the other three sub-

divisions have received above normal rainfall. Of the 36 subdivisions, 28 subdivisions have received normal to excess rainfall, accounting for 72% of the area of the country as a whole.  Sowing activity remains strong: Sowing has been pretty strong in this season, with Net sown area for Kharif actual sown area witnessing a growth of 21.2% YoY as of July 17th, albeit off a low crops has increased by base. All Kharif crops, except for Sugar Cane, has seen a sharp jump in sowing led 21.2% YoY as of July 17th. by oil seeds. The latter is partly attributed to relatively better MSP hikes for oil seeds this year 6.2% on an average basis for the 2020-21 marketing season even as it

18.6% YoY, sowing of coarse cereals has jumped by 12.2% YoY. Pulses on the other

prices over the last 10 months following a deflation over the previous two years.

 Reservoir levels highest in the last seven years: An above normal rainfall thus far, coupled with already high reservoir levels when the season started owing to Current reservoir levels as unseasonal rainfall in October-November 2019, has further improved reservoir a share of live storage at levels. Live reservoir storage level as of July 16th stood at 36% of the live storage at FRL is the highest in the last seven years FRL the highest in last seven years and level of 27.1%. This, in turn, bodes well for the Rabi season.  Agri sector expected to be the only silver lining this year: Agri sector is expected to emerge as the only silver lining in the current bloom and doom scenario, with our expectations of agri GDP growth in FY21 pegged at 2.8%. A normal monsoon and consequent strong reservoir levels bode well for agri production. This, along with stable MSP hikes, should help keep farm incomes stable this year, notwithstanding the COVID-19 outbreak.

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Figure 90: Daily mean rainfall milli metres Daily mean rainfall %

14 Actual daily rainfall Normal daily rainfall 12

12 10

10 8 8 6 6 4 4

2 2

0 0 1-Jun 7-Jun 13-Jun 19-Jun 25-Jun 1-Jul 8-Jul 14-Jul 20-Jul Source: CMIE Economic Outlook, IMD, NSE.

Figure 91: Cumulative rainfall (period: June 1st, 2020 to July 21st, 2020) milli metres % Cumulative rainfall

400 Cumulative actual rainfall Cumulative normal rainfall 120.0 Cumulative % deviation from normal (RHS) 350 100.0 300 80.0 250

200 60.0

150 40.0 100 20.0 50

0 0.0 3-Jun 8-Jun 13-Jun 18-Jun 23-Jun 28-Jun 3-Jul 9-Jul 14-Jul 19-Jul Source: CMIE Economic Outlook, IMD, NSE.

Figure 92: Subdivision-wise distribution of cumulative rainfall Cumulative rainfall (Period: June 1st to July 21st) Subdivisions Actual (mm) Normal (mm) % Deviation East and North East India 744.1 648.5 14.7% North West India 175.5 212.2 -17.3% Central India 406.3 381.7 6.4% South Peninsula 406.3 381.7 6.4% Total 380.2 356.7 6.6% Source: CMIE Economic Outlook, IMD, NSE.

Figure 93: Category-wise number of subdivisions and % area (sub-divisional) of the country Period: June 1st to July 21st Category No. of subdivisions % area of the country Large excess 2 5% Excess 10 28% Normal 16 39% Deficient 8 28% Large Deficient 0 0% No rain 0 0% Source: IMD, NSE.

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Figure 94: Actual sown area as % of normal area sown Figure 95: YoY change in actual sown area % Actual sown area as % of normal area sown % % YoY change in actual sown area

120.0 2016 2017 2018 2019 2020 50.0 2016 2017 2018 2019 2020 40.0 100.0 30.0 80.0 20.0

60.0 10.0 0.0 40.0 -10.0 20.0 -20.0

0.0 -30.0 Cereals Pulses Sugar cane Oilseds Fibres Cereals Pulses Sugar cane Oilseds Fibres Source: CMIE Economic Outlook, NSE.

Figure 96: Live reservoir storage levels % Reservoir levels as of July 17th Share of current live reservoir storage in live capacity at full reservoir level (FRL) 40 Storage as % of live capacity at FRL: Last 10 years average 35

30

25

20

15

10

5

0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: CMIE Economic Outlook, NSE.

Figure 97: Trend of reservoir storage levels % Trend of reservoir levels

100.0 Share of current live reservoir storage in live capacity at full reservoir level (FRL)

90.0 Storage as % of live capacity at FRL: Last 10 years average

80.0

70.0

60.0

50.0

40.0

30.0

20.0

10.0

0.0 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Source: CMIE Economic Outlook, NSE.

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Insights Invited article: Asset Management is ripe for leadership evolution

There are different ways an organization can attract and engage its various stakeholders. Having an inspiring purpose articulated in the form of a mission statement may be one of the most effective ways. An even simpler concept is presented by Simon Sinek, the British- as an influential notion in his impactful book

When trying to sell their goods and services, organizations often guide their customers on value propositions using clever marketing strategies on pricing and promotions. However, using marketing subterfuge in order to draw customers to make a purchase usually ends up only achieving short term gains. On the other hand, sustainable sales and long-term growth is often enabled when an organization is truly capable of inspiring trust in its customers and stakeholders to the extent that they look up to the organization to define their needs and solutions for the same. Therefore, Simon Sinek makes the following entity does in the business environment. They need to establish the needs, wants and

Asset managers are the same. Just like in any other business, asset managers also need they are offering their services. They not only have to deliver on performance, but also need to figure out how they can inspire their clients to entrust their life savings with them. This is responsibility, more so given the asymmetric nature of information available to an asset manager over what his or her client has access to. Accordingly, there are plenty of possible mission statements an asset manager may articulate the concept of Environment, Social and Governance investing (ESG) is one, and we believe offers the most opportunity for leadership and the ability to resonate with clients and thereby build that trust bond.

Unlike many corporations, asset managers find it exceedingly difficult to commit to a single statement of purpose because of certain contradictions. For instance, it is easy for asset managers to focus on fiduciary duty and hide behind mandates which they have to abide by, instead of looking to define their mission statement built on a set of shared sustainability values. Regulators also do not make it easy. For example, in the United financial return, while there is no written law to ensure ESG integration into investment decisions.

Asset management firms manage funds for individuals and institutions by making investment decisions on their behalf with an objective of delivering returns. At the same

Historically, discerning managers used to integrate ESG issues into their risk management practices to ensure the sustainability of their investment processes. As ESG issues are becoming mainstream, the challenge they face now is to move it from an internal process to their goals.

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similar personal situation. As individuals, there are times when we find difficult to minds. The reason is because delivering on a purpose is easier than receiving endorsement and buy-in from other parties. Acceptance from others requires leadership skills to convert ideals into actionable goals.

Unlike many other industries, the asset management industry operates in an eco-system where they not only have to satisfy customer expectations, but also operate within boundaries defined by regulators. Consequently, any change requires leadership and an ability to convincingly articulate ideas to multiple stakeholders. Also, asset managers may have to balance the expectations of their shareholders, who may view ESG investments as exclusionary and limiting to organizational growth.

The good news is that all parties are increasingly recognizing the need for ESG primacy, though the inability to arrive at a common template is creating dissonance, which requires further leadership for bridgebuilding.

The industry needs to step forward. Otherwise, they will have to live with consequences of templates which are defined by stakeholders whose understanding of their needs may be limited and many a times overwhelmed by extraneous circumstances.

REGULATORY MOMEN

Asset managers can play an active role in having an impact on ESG issues. As fiduciary owners of companies they invest in, they can help shape management decisions and thereby the final outcome. Regulatory agencies as well as global stock exchanges are considered key stakeholders. Exchanges are capable of creating standards to ensure there is trust in the system and fill the gap between investors and other market participants. These initiatives when handled correctly lead to better and fair investment decisions. Funds are consequently allowed to flow where they could make a difference.

 Regulatory Challenges

One of the challenges asset managers face is the fact that regulations and practices are developing in isolation from each other and not based on an adequate understanding of investment practice. ESG policies must move away from the assumption that the impact of an investment strategy is the same as the characteristics of the underlying portfolio. Instead they should support and develop the full range of tools investors have available to influence real-economy outcomes, including capital allocation, stewardship and real- economy policy engagement.5

In their current form, ESG policies seem to be lacking two core elements: first, a universal consensus on what constitutes an ESG investment and a way for asset managers to assess ESG compliance in their portfolio; and second, reporting on ESG in a consistent framework, which is comparable and helps measures impact.

5 https://esgclarity.com/a-generational-opportunity-pri-issues-recommendations-for-renewed-sustainable-finance-strategy/

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Global bodies like the UN Principles for Responsible Investment (UN-PRI) have helped develop the European Union taxonomy. They are aware of the challenges and urge investors to support the drive towards a common sustainability taxonomy. One of the main goals is to prevent green-washing. It is not just about the carbon saved, or the waste diverted from a landfill, but whether the economic activities we finance are consistent with the future environmental state to which society and governments are committed. 6

The challenge towards coming to a common ground was highlighted in a Morningstar

con

Even the EU, which is a leader in ESG initiatives, is struggling to come up with common standards. The Technical Expert Groups (TEGs) on sustainable finance set up in 2018, published reporting guidelines in 2019, but they only provide non-binding advice for disclosing climate change mitigation investments and activities. In order to express their frustration with a lack of consensus on climate change, 631 institutional investors with more than $ 37 trillion in assets organized the largest ever joint call on climate change during the 2019 COP 25 in Madrid. These investors wrote and signed a petition reiterating their full support for the Paris agreement. They urged all governments to implement the actions that are needed to achieve the goals of the Agreement, with the utmost urgency.

MSCI in a recent study found that increasingly governments around the world are becoming more active and writing new guidelines and regulations at a rapid pace to ensure the industry is delivering on ESG commitments (as shown in the chart below). In an environment where common templates are still being debated, the industry needs to step forward to frame a common ground. Otherwise, very soon it will have to live with the consequences of having to work with diverging guidelines issued by different regulators who are responding to different pressures in their respective home countries.

6 https://www.ipe.com/how-the-eus-sustainability-taxonomy-will-work-for-investors/10031623.article

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 Some regulatory convergence is happening in spite of a Trans-Atlantic divide:

Concerns for ESG issues is global but practices and priorities vary around the world. This is the biggest challenge that the asset management industry has to deal with especially as many investing mandates are more global in their outlook than regulators who are locally driven.

On a positive note, there is some regulatory convergence happening on how to approach ESG in mandates and fiduciary duties in spite of a still existing Trans-Atlantic divide.

Europe represents almost half of the current $30.7 trillion of investable assets in sustainability funds, according to the Global Sustainable Investment Alliance. The rise of eco- have compelled a wave of responsiveness.

Awareness is also growing among investors and companies in the United States. Despite the fact that there is no consensus on ESG regulation on a federal level, some states in the U.S. like California and Illinois are taking the lead in promoting sustainable investing and setting standards via asset managers such as CalPERS and CalSTRS.

California has historically served as a pioneer for ESG integration in the management of its pension systems and developing frameworks. This includes CalSTRS 21 Risk Factors, which have served as a guide for other state pension funds for incorporating ESG considerations. Additionally, Illinois later signed the Sustainable Investing Act into law, signalling the next step in state ESG January 2020, requires all public or government agencies that manage public funds to implement responsible investment policies covering all public funds under their control. 7

CLIENT MOMENTUM MAY HELP

Client driven trends could propel asset managers in articulating their purpose. First of all, there is an anticipation that the pool of wealth in the hands of ESG conscious millennials will grow faster than the amount available in the hands of older generation asset owners who have been less sustainability driven. Secondly, a pandemic that has upended our lives is highlighting the value of ESG investments as the ensuing health crisis has reminded society of the dangers of ignoring expert advice on sustainability.

7 https://malk.com/the-rise-of-esg-regulation/

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 Wealth of Transfer: Millennial Investors vs Investors aged over 60:

World Wealth Report 2020, more than a quarter (27%) of high net worth individuals those with investible assets of $1 million or more said they were interested in sustainable products. More than two-fifths (41%) of high net worth individuals aged under 40 were drawn to sustainable investments compared with just

With millennials now accounting for the new wealth generation and many more estimated to become beneficiaries of the so-called as baby boomers pass on their possessions to their heirs more sustainable investments are over the next 25 years, according to a report from financial services research firm Cerulli Associates.

 COVID-19 & ESG-compliant companies outperforming in a major crisis: survey of investors with combined assets of more than $13 trillion found that 71% of investors thought Covid-19 could increase awareness for risks such as climate change and biodiversity losses. 8

In another study, HSBC analyzed 140 stocks with highest ESG scores above the global average. To evaluate Covid19 impact, it looked at performance from 23 March to 10 December 2019, the onset of the crisis. The ESG shares beat others by approximately 7%.9

An explanation for these results is quite obvious. A key part of environmental, social and governance is to look at how companies serve society, and what this may mean for the future. When a crisis like COVID-19 rears its face investors can appreciate the defensive

8 https://www.jpmorgan.com/global/research/covid-19-esg-investing

9 https://www.gbm.hsbc.com/-/media/gbm/insights/images/climate-and-esg-shares-beat-the-market-thumb1.png

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quality of ESG with its emphasis on stronger governance. Companies which have pre- established monitoring systems for the well-being of their employees and customers can quickly adapt to a major crisis.

No wonder retail investors are putting more of their money into funds which are classified as sustainable, as seen from the chart above. This is a trend which is incipient and something that managers can no longer ignore as a fad.

 Client Education is essential:

ESG objectives may be simple, but their implementation through investment funds can be complex in terms of impact and performance measurement. There is a need to use a longer-term horizon than would be the norm for traditional products. Therefore, client handholding and education may be required to ensure that they stay the course. important to align their investments with their personal values and ethics. About 50% say they do just that, but the other half say they lack the information needed to choose those investments. An even greater percentage of financial advisors 68% globally say they would be more likely to recommend ESG products to clients if there were better data and reporting on these investments, while 71% of U.S. advisors worry that investments labelled 10

This clearly shows that the market demand exists but the ability to satisfy it requires all stakeholders to come together and help deliver on a common taxonomy so that the dissonance between client expectations, regulatory mandates and what asset managers can deliver is narrowed.

RECENT COLLECTIVE ACTION BY REGULATORY AGENCIES AND EXCHANGES

Inspired by lessons learned from the Covid-19 crisis, the London Stock Exchange has started a new collective climate change action in collaboration with SSE (United Nations

10 https://www.thinkadvisor.com/2019/06/27/esg-data-is-missing-link/

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Sustainable Stock Exchanges Initiative) and supported by CalPERS. This partnership intends to engage other global exchanges. It will be a coalition working to improve the environmental data reported by global companies trading on these exchanges. 11

On another note, the Monetary Authority of Singapore (MAS) just issued a consultation to ensure that asset managers: (a) incorporate environmental issues in their risk management processes, (b) have a robust capacity building to ensure that their organizations over time incorporate these principles and lastly (c) as part of their stewardship responsibility engage with investee companies on environmental issues.

Additionally, Nasdaq recently lead by example by announcing an immediate action plan to better deal with social issues. The statement was also meant as a response to recently highlighted social issues in the U.S. where the health crisis has been turning into a crisis of confidence and trust. Nasdaq is setting up a multi-dimensional approach that would resources as well as a promise to release a new workforce diversity metrics. 12

The Colombia Securities Exchange has also been engaged in separate ESG initiatives within July of 2020: (a) launch of their sustainability guidance, (b) a three-day virtual event organized together with GRI and PRI to engage financial institutions, insurers as well as government representatives and finally (c) announcement of their commitment to task force for responsible investment which is a dialogue between public and private actors to promote responsible investing in Colombia.

B3 (Bolsa do Brasil) recently got approved a new ESG Strategic Plan by its Sustainability Committee. In the context of this plan, a climate strategy has also been created. The ambition in the climate agenda is to be a hub on the theme in Brazil, connecting customers, market players and specialized partners to develop the market, strengthen their existing climate products portfolio (ISE, ICO2, Green Bonds) and opening new

More of these initiatives are needed to be designed and promoted by regulatory agencies, global exchanges, corporations, investors and even individuals. According to an impact research called Academy, which evaluates companies through a governance lens, only 35% of leading ESG-compliant global corporations align their overall strategy with SDG 17 (Partnership for Goals.) The study therefore highlights an urgent need for many more collective action plans. 13

According to Rajesh Chhabara, managing director of CSRWorks International, a Board- level buy-in is still a big missing piece and delays acceptance from various stakeholders. -up the Boardroom competence in sustainability. Directors should be required to complete regular training to build the necessary sustainability skills and knowledge. ESG should also be made part of the

11 https://sseinitiative.org/all-news/sse-launches-climate-disclosure-work-with-mark-carney-and-lseg/ 12 https://www.nasdaq.com/articles/adena-friedman-believes-now-is-the-time-to-build-a-more-inclusive-economy-2020-06-19 13 https://sgscorecard.argudenacademy.org/

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Indeed, when personally invested and sincerely involved, board members could become an most thorough supporters and strategists. Then it would be likewise easier to bring to life such collective initiatives leading to stronger contribution to SDG17.

IN CONCLUSION

Asset management is at cross-roads, a time where circumstances are leading to rapid adoption of ESG as a mainstream concept. Yet, as an industry it is torn between conflicting pressures and responsibilities, and thus requires leadership to find a collective common ground.

Asset management industry needs to come forward before it is too late. Without proper leadership, it will face the difficult challenge of having to live with rules defined by a varied set of stakeholders working to deliver on their own narrow set of goals. And those goals can consequently be at cross purpose with the ultimate purpose of delivering a better future for humanity today.

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RBI Financial Stability Report: NPA woes to worsen in FY21 -yearly Financial Stability Report (FSR)14 highlights the unprecedented uncertainty faced by the domestic as well as global economies induced by the COVID-19 pandemic. A combination of fiscal, monetary and regulatory interventions, however, have helped keep financial markets stable even as risks remain to the downside emanating from an expected economic contraction, overleveraged non-financial sector and sustained geopolitical tensions. A considerable and broad-based weakness in credit growth in FY20 shows clear signs of risk aversion. Deposit growth also uncertain environment. Asset quality improved meaningfully in FY20 despite muted credit demand, but the improvement has been halted by the COVID-19 outbreak, with macro stress tests indicating an increase in GNPA ratio from 8.5% in March 2020 to 12.5% by March 2021 under the baseline scenario. Regulatory interventions in the form of loan moratoriums may have implications for the financial health of the banking sector. Unlike banks, the NBFC sector, witnessed a deterioration in asset quality and capital position in FY20, accompanied with persistence of liquidity challenges which got accentuated by the COVID-19 outbreak. However, contagion risks to the financial system have moderated amid declining bilateral exposures and shrinking inter-bank market.

 Credit growth weakened, suggesting rising risk aversion and weak demand: The slowdown in bank credit worsened in the second half of FY20, falling from 8.7% Bank credit growth -based deteriorated further in H2FY20, thereby hurting moderation across bank groups, reflecting risk aversion on the part of banks and profitability. lacklustre demand. Deposit growth also weakened in the second half, largely led by private banks, even as it has improved in the early months of FY21, reflecting in an uncertain macroeconomic environment. Weak credit growth impacted net interest margins, thereby hurting profitability, partly offset by an increase in other operating income and cost cutting initiatives.

 Asset quality improved in FY20 but macro stress tests point to a significant deterioration in FY21: The overhang of stressed assets reduced further in H2 Asset quality at the system FY20, with gross and net non-performing assets (GNPA and NNPA) ratios for all level improved further in H2FY20 but is expected to and better than the results of macro stress tests in the deteriorate meaningfully in June 2019 FSR. This was largely led by meaningful reduction in NPAs for public tests point to GNPA ratio sector banks (PSBs) from 12.7% to 11.3% and foreign banks (FBs) from 2.9% to 2.3%, while private banks (PVBs) witnessed an increase from 3.9% to 4.2% during the same period. Sector-wise, GNPAs for the industry sector continued to decline the baseline scenario while that in the Services sector swelled up further. Receding quarterly slippages reduced the provisioning requirement for banks, resulting in an improvement in

The improvement in asset quality seen over the last couple of years, however, has been halted by the COVID-19 outbreak and the attendant regulatory interventions by the RBI to mitigate the impact of debt servicing. Macro-stress tests for credit

baseline scenario and 14.7% in a very severe stress scenario the highest in nearly two decades.  Capital position weakened in FY20 and is expected to fall further in FY21: After witnessing an improvement in the first half of FY20, facilitated by recapitalisation of PSBs and enhanced resolution by the Insolvency and Bankruptcy Code (IBC),

14 Please refer to the detailed report here.

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capital adequacy at the system level deteriorated in the second half, with capital to CRAR is expected to risk- decline from 14.6% in reduction was largely led by PSBs and foreign banks, even as private banks Ma recorded a marginal improvement. Amid expectations of ballooning NPAs in FY21, capital position is also expected to deteriorate, with CRAR at the system level scenario.

under the very severe stress scenario. Common equity Tier 1 (CET 1) capital ratio

under the baseline/very severe stress scenarios.  Systemic Risk Survey (SRS) hints at deteriorating prospects for the banking sector: In the latest SRS 18th in the series risks to domestic growth and fiscal Nearly 56% of the

systemic risk survey expect reversal or slowdown of foreign capital and direct inflows, corporate sector the health of the Indian vulnerabilities, sharp drop in real estate prices and decline in household savings banking sector to weaken considerably in FY21. the health of the Indian banking sector to deteriorate considerably in FY21 owing to a slow post-lockdown economic recovery, muted credit growth, rising NPAs and consequent increase in provisioning requirements. Tourism and hospitality, construction & real estate and aviation are expected to be the most adversely affected sectors by the COVID-19 pandemic, with corporates likely to favour localisation over globalisation.  Liquidity challenges for NBFCs accentuated by COVID- In the aftermath of the IL&FS crisis and consequent waning of market confidence, the share of long- from the market has term market debt in declined further, with part to 40.8% at end- of the slack getting picked over the by the banking sector. same period. Over-reliance on bank funding and declining share of market funding not only increases liquidity risk for NBFCs, thereby making them uncompetitive over a host of financial products where they compete with banks, it also poses contagion risks on the banking system by idiosyncratic failure of the former. -rated NBFCs that have been able to borrow from banks/markets, while smaller/mid-sized and AA and lower-rated NBFCs have been facing liquidity issues, reflected in lacklustre response to TLTROs.  Following an Asset quality and capital improvement in the first half of FY20, asset quality of the NBFC sector, deteriorated position of the NBFC sector deteriorated in H2FY20 . and further to

 Contagion risks moderated on reducing bilateral exposures and shrining inter- bank market: The total outstanding bilateral exposures among constituents of the financial system narrowed during 2019-20. The size of the inter-bank market has been persistently declining over the last few years, thanks to excess liquidity in the banking system. This, along with better capitalisation of PSBs, has led to a reduction in exposure to contagion losses that could result from a hypothetical idiosyncratic failure of a bank/NBFC/HFC and macroeconomic distress.

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Figure 98: YoY credit growth trend distribution Figure 99: YoY deposit growth trend distribution by bank groups by bank groups % YoY Credit growth % YoY deposit growth Mar-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 25 Mar-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 25

20 20 17.5 15 11.3 15 10 7.2 5.9 11.1 5 3.0 10 8.6 6.9 0 5 -5

-10 0 PSBs PVBs FBs All SCBs PSBs PVBs FBs All SCBs

Source: RBI Financial Stability Report, NSE. PSBs = Public Sector Banks, PVBs = Private Sector Banks, FBs = Foreign Banks

Figure 100: Asset quality of SCBs improved in H2 Figure 101: Services and Agriculture sectors saw FY20 but expected to deteriorate in FY21 an increase in NPAs % SCBs GNPA ratios % Asset quality of broad sectors Mar-17 Mar-18 Sep-18 Mar-19 (% to total advances of the respective sector) 18 Sep-19 Mar-20 Mar-21E* 25 Mar-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 15.2 15 12.5 20 12 11.3 14.1 8.5 15 9 7.3 10.1 10 6 7.2 4.2 3.9 2.3 5 3 2.0

0 0 PSBs PVBs FBs All SCBs Agriculture Industry Services Retail

Source: RBI Financial Stability Report, NSE. PSBs = P under the baseline scenario.

Figure 102: Provision covered improved in FY20 Figure 103: Capital position weakened marginally in FY20 and is expected to worsen further in FY21 % Provision coverage ratio % Capital to risk-weighted asset ratio Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Mar-17 Mar-18 Sep-18 Mar-19 100 20 Sep-19 Mar-20 Mar-21E* 16.7 17.1 79.4 80 14.8 67.5 15 64.8 65.4 13.1 13.3 60 10 40

5 20

0 0 PSBs PVBs FBs All SCBs PSBs PVBs FBs All SCBs

Source: RBI Financial Stability Report, under the baseline scenario

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Figure 104: Figure 105: Annualised Return on Assets (RoA)

% Components of SCBs' profit: YoY growth % Annualised RoA Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 40 2.0 28.5 1.4 30 24.8 1.5

20 13 1.0 0.7 10 0.5 0.2 0 -10 0.0 -8.4 -20 -0.5 -0.2

-30 -1.0 Net Other EBPT Provisions Interest Operating -1.5 Income Income PSBs PVBs FBs All SCBs Source: RBI Financial Stability Report, NSE. PSBs = Public Sector Banks, PVBs = Priv under the baseline scenario. EBPT = Earnings before provisions and tax.

Figure 106: Asset quality trend of NBFCs Figure 107: CRAR for NBFCs % NBFCs: Asset quality trend % CRAR for NBFCs GNPA ratio NNPA ratio 7.0 6.4 28.0 5.9 26.2 6.1 5.8 6.1 5.6 6.0 26.0 24.3 5.0 4.5 4.1 4.4 24.0 3.8 22.1 22.8 4.0 3.3 3.2 2.9 3.1 22.0 2.6 3.0 2.5 20.1 2.5 19.9 19.5 19.6 20.0 2.0 1.4 18.0 1.0

0.0 16.0 Mar Mar Mar Mar Mar Mar Sep Dec Mar Mar Mar Mar Mar Mar Sep Dec Mar '15 '16 '17 '18 '19 '20 '19 '19 '20 '16 '17 '18 '19 '20 '19 '19 '20 Source: RBI Financial Stability Report, NSE.

Figure 108: Total bilateral exposures between Figure 109: Fund and non-fund based inter-bank entities in the financial system market Rs trn Bilateral exposures % Rs trn Inter-bank market % #REF! #REF! Fund based 37.0 20 Non-fund based 36.4 10.0 8.0 36.3 Inter-bank exposures as % of bank assets (R) 35.8 35.8 36.0 16.6 16 Fund-based inter-bank expsosures as % of bank assets (R) 15.4 8.0 35.0 1.3 6.0 35.0 12 0.9 10.4 6.0 0.8 1.2 1.1 1.0 8.5 1.2 34.0 7.7 8 4.0 33.0 4.0 33.0 4 6.8 6.1 5.7 5.5 5.7 5.1 4.8 2.0 2.0 32.0 0 -1.3 31.0 -4 0.0 0.0 Dec'18 Mar'19 Jun'19 Sep'19 Dec'19 Mar'20 Mar'17 Sep'17 Mar'18 Sep'18 Mar'19 Sep'19 Mar'20 Source: RBI Financial Stability Report, NSE.

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Prompt policy actions ease financial conditions after a sharp COVID19-led deterioration

Global financial condition has improved in the recent months after a significant fall over the first quarter of the year. There are several reasons behind the ease in financial situation including a significant fall in interest rates, prompt fiscal and monetary policies, and a strong recovery in the Stability Update (June 2020).15 Among others, the equity market recovered around 85% of their mid-January levels. Though there are variations across several economies, most of them have bounced back to recoup all their losses, while 25% are still lower than their mid-Jan level. The overall volatility level has also fallen in tandem from their respective peaks but remains above the long-term average level.

According to the report, prompt monetary policy responses helped securities market to recover at a faster rate. For instance, the US Federal Reserve provided an additional liquidity of US$2.3trn in the financial system, while the fed funds rate was slashed by a total of 150bps in March alone to 0-0.25%. In India, the RBI announced a slew of measures including policy rate cuts as well as conventional and unconventional liquidity enhancement measures to cope up with the crisis. The Targeted Long-term Repo Operations (TLTROs) of up to three years for a cumulative amount of up to Rs1trn, reduction in Cash Reserve Ratio and expansion of borrowing limit under Marginal Standing Facility provided additional liquidity in the system.

This, in turn, has reduced the spread in the credit market. However, there is a considerable variation in spreads across regions and credit ratings. Bond issuance of high-rated issuers increased significantly, while speculative bond market has reopened in the liquidity surplus economy.

Post record outflows of portfolio inv sentiments have improved significantly. Countries with higher credit rating have attracted much more FII money than economies with lower ratings. Further, the market sentiments have augmented with the unlock announcements across countries and accompanied with a speedy recovery of the economy. Investors risk appetite has increased with an expectation of continuing support from the central banks with cheap and easy availability of liquidity for a long period of time. Central banks of several emerging economies have purchasing government bonds, state-guaranteed bonds, corporate debt and mortgage- backed securities.

Besides, countries have taken fiscal measures to provide essential support to people as well as firms. According to the IMF estimate, fiscal measures worth of $11trn has been

However, there is a wide gap between the market performance and the real economy, which has increased the probability of a further correction in risky asset prices. Market valuation has also been stretched across many equity and bond prices due to easy and cheap access to liquidity post monetary policy actions.

The IMF has raised serious concerns over the market valuation and the sudden jump in corporate debts with a rise in probability of default across many countries. Data also reveal that household debts and corporate debts have reached to an unmanageable level which can trigger a deeper and longer recession in case of a severe economic recession

15 https://www.imf.org/en/Publications/GFSR/Issues/2020/06/25/global-financial-stability-report-june-2020-update

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due to the unprecedented pandemic. Further, the non-banking financial companies are vulnerable to the sudden crisis as a substantial shock in the market could exacerbate investment outflows and fire sales which can further deteriorate market risk profile.

During this pandemic, many countries have become more dependent on external financing requirements and recent credit rating downgrades may pose additional pressure on them given portfolio outflows, particularly if they do not have flexible exchange rate regime. In such situation, it becomes utmost important for policy makers to continue to support the economic recovery while maintaining sound financial institutions and sustaining financial stability. The IMF has suggested prioritising the following financial policies to overcome from the crisis. (i) Central banks should maintain their accommodative stance while controlling inflation and financial stability mandates. They should continue conventional and unconventional policy measures to support the flow of credit to households and firms. These policy actions should emphasise on maintaining adequate liquidity in the money, foreign exchange and securities market. (ii) Emerging market and developing economies should use flexible exchange rate to incorporate all external pressure. (iii) Banks should deploy their capital and liquidity to absorb losses and mange liquidity crunch in the economy. (iv) Asset managers should apply robust and efficient liquidity management framework. (v) Insurance companies need support from regulators to cope up with the extreme market stress with some flexibility in their regulatory requirements and financial support.

Figure 110: Equity markets rebounds partially across Figure 111 in emerging markets

Source: Refinitiv Datastream, NSE

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Figure 112: Indian equity markets recovered partially Figure 113 by a sharp fall in across all market sizes volatility

Source: Refinitiv Datastream, NSE

Figure 114: Advanced economies recorded a sharp fall Figure 115 Similar trend can be seen in India as well in G-sec yields due to expansionary monetary policies... post policy rate cuts and huge liquidty surplus by RBI

Source: Refinitiv Datastream, NSE

Figure 116: US 10-year corporate bond spreads remain quite high amid impending economic recession and rise in the probability of default

Source: Refinitiv Datastream, NSE

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Market Performance Market Round-up Ample global liquidity leading to a risk-on rally in EMs

Global equity markets rallied for yet another month in June, marking the third consecutive month of positive returns, as investor sentiments remained buoyant amid gradual revival in economic activities. Positive cues around development of a COVID-19 vaccine also supported market sentiments. Meanwhile, policymakers worldwide continued to provide fiscal and monetary support to tide over the near-term economic ramifications caused by the outbreak. Strengthened risk-on environment in the wake of surplus global liquidity led to strong foreign capital inflows into emerging markets. Consequently, the broader EM pack, including India, outperformed developed markets after underperforming in the previous month. While the MSCI World Index ended the month with a 2.5% return after posting strong returns over the previous two months, MSCI Emerging Market Index outperformed with a robust 7% return. Back home, the Nifty 50 and Nifty 500 Index rose by 7.5% and 8.3% respectively in the month of June, supported by emerging signs of a pick-up in economic activity.

Gilt curves across global markets have steepened meaningfully over the last couple of months, reflecting growth concerns and increasing government borrowing requirements. India has been no different, with the decline in yields at the short-end being much higher than at the long-end. A steep 155bps cut in reverse repo rate, coupled with a slew of liquidity easing measures taken by the RBI, has brought the shorter end of the yield curve lower. A similar trend has been observed in corporate yield curves. While the demand for shorter duration corporate bonds has risen following the introduction of LTROs and TLTROs (Targeted Long-term Repo Operations) as well as a huge surplus systemic liquidity, demand for longer duration papers has remained muted amid growth concerns. While the 10-year G-sec yield has fallen by 34bps since March 26th to close the month of June at 5.9%, the 3-month G-sec yield has fallen by ~190bps during the same period and has been hovering closer to or below the reverse repo rate since April-end.

 Domestic equity markets rallied sharply in June following a weak May: Indian The Nifty 50 and Nifty 500 equity markets moved in line with the broader emerging market pack in June, Index rallied by 7.5% and significantly outperforming the developed markets, supported by strengthened 8.3% respectively in June, risk-on sentiments on the back of gradual improvement in economic activities and led by strong FII buying and positive cues around development of COVID-19 vaccine, leading to sustained emerging signs of a pick-up buying by foreign institutional investors (FIIs). On the negative side, cases continue in economic activity. to rise in India, with total number of positive cases at 1.24mn as of July 22nd being Market volatility came off for the third highest in the world. However, case fatality rate has been gradually falling. the third month in a row in Moreover, despite rising number of cases, India continues to fare much better in June. terms of total cases and fatalities per mn population. The Nifty 50 and Nifty 500 Index ended the month of June 7.5% and 8.4% higher respectively. This strong rally has continued in July as well, with Nifty 50 rising by another 8.1% through July 27th (YTD: -8.6%). The Mid (Nifty Mid-cap 100) and Small-cap (Nifty Small-cap 100) indices also posted strong returns of 10.8% and 15.3% respectively in June. Market volatility index, India VIX, fell by 3.7% in June following a 11.1% decline in the previous month, even as it remains significantly higher than last year (150% YTD).

In cash markets, average daily turnover increased by a strong 16.6% MoM to Rs614bn nearly 45% higher than the average daily turnover during FY2019-20 and 11.2% higher than the FY21 YTD (Apr-June 2020) average. Average daily derivative turnover also improved further in June, rising by 14.9% MoM, following a 7.5% MoM increase in the previous month. This is ~25% higher than the average daily turnover during FY2019-20 and 11.9% higher than the FY21 YTD (Apr-June 2020) average.

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All sectors ended in green in June, with the rally primarily led by Banks and Autos, which reported gains of 10.7% and 8.1% respectively. Media and Real Estate also reported huge gains of 14.1% and 12.5% respectively. Gains in other sectors, including FMCG and Pharma, has been relatively muted, even as they continue to outperform the broader market in terms of YTD returns. Pharma has been the best performing sector this year, generating an YTD return of 24%.

 Fixed income market rallied on expectations of continued monetary easing: Indian fixed income markets Fixed income markets remained strong for yet another month amid continued rallied in June amid liquidity injection by global central banks. While long-end remained largely steady, expectations of continued short-end of the curve came off further, resulting in further steepening of the yield monetary easing by the RBI. curve. Corporate debt, particularly in the US, outperformed safe haven assets, The 10-year yield ended the thanks to strengthened risk-on environment amid aggressive policy interventions. month 13bps lower at 5.9%. Yields in India came off but at a much sharper pace in the short-end than in the

long-end resulting in further steepening of the yield curve. A similar trend has been observed in the corporate bond yield curve. While the demand for shorter duration G-sec and corporate bonds has risen following the introduction of LTROs and TLTROs (Targeted Long-term Repo Operations) as well as a huge surplus systemic liquidity, demand for longer duration papers has remained muted amid growth concerns. While the 10-year G-sec yield has fallen by 34bps since March 26th to close the month of June at 5.9%, the 3-month G-sec yield has fallen by ~190bps during the same period and has been hovering closer to or below the reverse repo rate since April-end.

On the global front, while China 10-year bond yield inched up by 19bps (-28bps YTD) , Germany, Japan and US 10-year bond yields remained broadly steady, ending the month at -0.46% (-27bps YTD), 0.027% (+5bps YTD) and 0.65% (- 126bps YTD) respectively.

 FIIs were strong buyers of Indian equities for the second month in a row but Equity markets saw a strong remained sellers of Indian debt: FIIs turned strong buyers of Indian equities in buying from FIIs in June even May after remaining sellers over the previous two months and remained so in June as net buying by DIIs was as well, and incrementally more so, as a part of the ample liquidity injection by relatively modest. global central banks continued to feed into into riskier asset classes such as EM equities. Net FII inflows in June stood at US$2.9bn (Source: Refinitiv Datastream), translating into net inflows of US$3bn in Q1 FY21. FII buying, however, has tapered

sharply in July. While FII selling in debt has continued for the eighth month in a row in June, the extent has come off meaningfully, with net outflows at US$204mn in June vs. net outflows of US$6.5bn during Apr-May 2020. Domestic institutional investors (DIIs) were modest buyers of Indian equities for the second month in a row, with net inflows at Rs 24bn, but turned sellers in July.

 EMs drove the global market rally in June: Rally in global equity markets continued for the third consecutive month in June, largely led by emerging markets, Developed markets underperformed emerging as investor sentiments remained buoyant amid gradual recovery in economic activities. Positive cues around development of a potential COVID-19 vaccine also World gained 2.5% in June, supported market sentiments. Meanwhile, policymakers worldwide continued to MSCI EM moved up by a provide fiscal and monetary support to tide over the near-term economic strong 7%. ramifications caused by the outbreak. Strengthened risk-on environment in the wake of surplus global liquidity led to strong foreign capital inflows into emerging markets. Consequently, the broader EM pack outperformed developed markets

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after underperforming in the previous month. While the MSCI World Index ended the month with a 2.5% return after posting strong returns over the previous two months, MSCI Emerging Market Index outperformed with a robust 7% return.

US: The positive momentum in US equity markets continued for yet another month, even as the strength diminished marginally. After registering strong returns over the previous two months, the S&P 500 Index and Dow Jones Index rose by a modest 1.8% and 1.7% respectively in June as investor sentiments remained strong owing to continued revival of economic activities and positive cues around the development of a COVID-19 vaccine, partly offset by sustained US-China geopolitical tensions and continued surge in cases, the latter promoting some states to reverse the easing of lockdown measures.

On the macro front, activity is gradually picking up. The unemployment rate moderated from more than 80-year high of 14.7% in April to 13.3%/11.1% in May/June. Weekly jobless claims have come off significantly. Consumer demand has picked up meaningfully following a sharp decline in the first quarter. Retail sales surged 7.5% MoM in June, higher than market expectations, following an upwardly revised record 18.2% MoM jump in May, reflecting a recovery in business activity and trade. The Manufacturing and Services PMI also improved meaningfully to 49.8 and 47.9 in June vs. 39.8 and 37.5 respectively in the previous month as non-essential businesses reopened following the easing of COVID19-induced lockdown restrictions.

Europe: European markets also ended the month of June in green, as the daily COVID-19 infection rate came of meaningfully and economic activity resumed post lifting of restrictions. The announcement of a EUR750bn recovery fund or 5.4% of EU GDP as part of the recovery plan submitted by the European Commission, over an above the EUR540bn relief package announced in April, also provided a boost to investor sentiments. On the policy front, while the ECB in the recent policy review meeting nearly doubled the size of its COVID-19 related bond purchases, extending the purchase program to at least end of Jun 2021, even as interest rates were left unchanged, the Bank of England added another £100bn to its bond buying program to take the total stock of asset purchases to £750bn. While the FTSE 100 rose by 1.5% in May, DAX and CAC 40 increased by 6.3% and 5.1% respectively.

On the macro front, consumer and business confidence have strengthened further, supported by easing of lockdown restrictions. Manufacturing/Services PMI have improved from 13.6/12.0 in April and 31.9/30.5 in May to 47.5/48.3 in June. Retail sales grew by a record 17.8% MoM in May 2020, even as it is still down 5.1% on an YoY basis. In the UK, Q1 GDP fell by 2.2% QoQ the worst since 2008, and slightly lower than then preliminary estimate of -2.0%. Manufacturing PMI moved back into the expansion zone to 50.1 in June, pointing to a stabilised business environment following a steep contraction over the previous three months.

Asia: Emerging Asian markets generated strong returns in June, outperforming the developed markets. While the Hong Kong market (Hang Seng Index), Indian (Nifty 50 Index) and Chinese market (SSE Composite Index) went up by 6.4%, 7.5% and 4.6% respectively in June, the Japanese market (Nikkei 225 Index) ended the month with a modest 1.9% return.

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Incoming macro data remained weak for India, with industrial production contracting by 34.7% YoY in May 2020 marking the third consecutive month of contraction. While manufacturing PMI has recovered meaningfully from 30.8 in May to 47.2 in June, Services PMI still remains in deep contraction at 33.7. While the lockdown restrictions were incrementally relaxed in June, rising number of cases in some parts of the country are prompting state government to tighten restrictions selectively. Meanwhile, economic activity in China has recovered further in China, with manufacturing PMI rising to 51.2 in June, and industrial production grew by 4.8% YoY in June 2020 the largest increase in six months.  Crude prices surged further in June amid reviving economic activity and Oil prices recovered have production curbs: After falling sharply during April 2020, crude oil prices rallied meaningfully from their sharply over the next two months, with the Brent crude ending the month of June March lows due to 16% higher at US$41/bbl, translating into a rise of 83% in Q1 FY21. This was coordinated production cuts largely on the back of easing supply amid production curbs by the OPEC+ and by oil producing economies. improving demand as economies worldwide gradually removed lockdown restrictions.

Safe-haven commodities such as gold and silver gained 3% and 1.7% in June. Other hard commodities, including aluminium, copper, lead, zinc, tin and nickel all moved up further in June as economic activity and demand picked up.  INR remained steady amid strong FII inflows and trade surplus: INR remained INR remained broadly steady broadly steady in the month of June, ending the month at 75.5 to US dollar and in June led by strong FII outperforming other emerging market currencies, despite strengthened growth inflows and trade surplus. concerns and downgrade in the sovereign rating outlook by global rating agencies. This was primarily on the back of strong foreign capital inflows into equity markets and trade surplus. As of July 23rd, the INR has depreciated by 4.5% against the

US dollar since the beginning of the year.

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Market performance across asset classes Figure 117: Performance across equity indices, fixed income, currency and commodities Indicator Name Jun-20 1M ago 3M ago 12M ago 1M (%) 3M (%) 6M (%) 12M (%) YTD (%) Equity Indices NIFTY 50 10,302 9,580 8,598 11,789 7.5 19.8 -15.3 -12.6 -15.3 NIFTY 500 8,475 7,822 6,997 9,658 8.3 21.1 -14.2 -12.3 -14.2 MSCI INDIA 1,196 1,122 995 1,336 6.6 20.2 -12.7 -10.5 -12.7 India Volatility Index (%) 29 30 64 15 -3.7 -54.8 149.6 94.7 149.6 MSCI WORLD 2,202 2,148 1,853 2,178 2.5 18.8 -6.6 1.1 -6.6 S&P 500 COMPOSITE 3,100 3,044 2,585 2,942 1.8 20.0 -4.0 5.4 -4.0 DOW JONES INDUSTRIALS 25,813 25,383 21,917 26,600 1.7 17.8 -9.6 -3.0 -9.6 HANG SENG 24,427 22,961 23,603 28,543 6.4 3.5 -13.4 -14.4 -13.4 FTSE 100 6,170 6,077 5,672 7,426 1.5 8.8 -18.2 -16.9 -18.2 NIKKEI 225 22,288 21,878 18,917 21,276 1.9 17.8 -5.8 4.8 -5.8 Fixed Income India 10YR Govt Yield (%) 5.89 6.01 6.14 6.88 -13bps -25bps -67bps -99bps -67bps India 5YR Govt Yield (%) 5.28 5.43 5.68 6.57 -15bps -40bps -120bps -129bps -108bps India 1YR Govt Yield (%) 3.73 3.62 4.80 6.19 11bps -106bps -183bps -246bps -183bps India 3Month T-Bill Yield (%) 3.19 3.31 4.32 6.15 -12bps -113bps -196bps -296bps -196bps US 10YR Govt Yield (%) 0.65 0.64 0.70 2.00 1bps -5bps -126bps -135bps -126bps Germany 10YR Govt Yield (%) -0.46 -0.45 -0.46 -0.33 -1bps 0bps -27bps -13bps -27bps China 10YR Govt Yield (%) 2.90 2.71 2.66 3.28 19bps 23bps -28bps -38bps -28bps Japan 10YR Govt Yield (%) 0.03 0.01 0.02 -0.16 2bps 1bps 5bps 19bps 5bps Currency USD/INR 75.5 75.6 75.7 69.0 -0.1 -0.2 5.8 9.4 5.8 EUR/USD 1.1 1.1 1.1 1.1 1.0 2.4 0.1 -1.4 0.1 GBP/USD 1.2 1.2 1.2 1.3 -0.1 -0.4 -6.7 -2.9 -6.7 USD/YEN 107.9 107.7 108.0 107.7 0.1 -0.1 -0.7 0.1 -0.7 USD/CHF 1.1 1.0 1.0 1.0 1.4 2.1 2.2 2.9 2.2 USD/CNY 7.1 7.1 7.1 6.9 -1.0 -0.3 1.6 3.0 1.6 Commodities Brent Crude Oil (US$/bbl) 41.3 35.4 22.6 66.9 16.4 82.5 -37.8 -38.3 -37.8 LME Aluminium (US$/MT) 1,602 1,526 1,493 1,780 5.0 7.3 -10.1 -10.0 -10.1 LME Copper (US$/MT) 6,005 5,352 4,939 5,982 12.2 21.6 -2.4 0.4 -2.4 LME Lead (US$/MT) 1,763 1,655 1,734 1,917 6.5 1.7 -7.9 -8.0 -7.9 LME Nickel (US$/MT) 12,758 12,260 11,435 12,617 4.1 11.6 -8.6 1.1 -8.6 LME Tin (US$/MT) 16,819 15,503 14,667 18,833 8.5 14.7 -2.1 -10.7 -2.1 LME Zinc (US$/MT) 2,037 1,993 1,895 2,565 2.2 7.5 -10.7 -20.6 -10.7 SHC Iron Ore Spot (US$/MT) 102 102 84 117 0.0 20.8 10.3 -12.9 10.3 Gold Spot Price (US$/troy ounce) 1,784 1,732 1,612 1,412 3.0 10.6 17.3 26.3 17.3 Silver Spot Price (US$/troy ounce) 18 18 14 15 1.7 29.8 1.7 18.6 1.7 Platinum Spot Price (US$/ounce) 814 825 727 818 -1.3 12.0 -16.2 -0.5 -16.2 Palladium Spot Price (US$/ounce) 1,905 1,920 2,307 1,524 -0.8 -17.4 -0.8 25.0 -0.8 Source: Refinitiv Datastream, NSE.

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Figure 118: Performance across NSE sector indices Indicator Name Jun-20 1M ago 3M ago 12M ago 1M (%) 3M (%) 6M (%) 12M (%) YTD (%) Auto 6,719 6,219 4,731 7,928 8.1 42.0 -18.5 -15.3 -18.5 Bank 21,370 19,297 19,144 31,105 10.7 11.6 -33.6 -31.3 -33.6 FMCG 30,063 29,297 27,319 29,546 2.6 10.0 -0.2 1.8 -0.2 IT 14,754 14,011 12,764 15,936 5.3 15.6 -5.7 -7.4 -5.7 Media 1,343 1,178 1,040 2,040 14.1 29.2 -25.5 -34.1 -25.5 Metals 1,991 1,880 1,586 2,980 5.9 25.6 -28.9 -33.2 -28.9 Pharma 9,985 9,769 7,177 8,065 2.2 39.1 24.2 23.8 24.2 Real Estate 203 180 176 285 12.5 15.5 -32.1 -28.8 -32.1 Source: Refinitiv Datastream, NSE.

Figure 119: NIFTY sector performance over the last month (rebased to 0)

Source: Refinitiv Datastream, NSE.

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Figure 120: India 10Y G-sec yield long-term trend Figure 121: India 10Y G-sec yield last one-year trend % % India 10-year benchmark g-sec yield-long-term trend India 10-year benchmark g-sec yield movement over 10 6.9 last 12 months

9 6.7

6.5 8 6.3 7 6.1 6 5.9

5 5.7

4 5.5 Jul-02 Jul-05 Jul-08 Jul-11 Jul-14 Jul-17 Jul-20 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Jul-20 Source: Refinitiv Datastream, NSE.

Figure 122: India sovereign yield curve The India sovereign yield curve has steepened -19 outbreak. The short end of the curve has fallen by as much as 200bps since March 26th. This has been primarily on the back of a steep 155bps cut in reverse repo rate which has effectively become the policy rate in surplus liquidity conditions and a slew of liquidity easing measures taken by the RBI, including the LTROs and TLTROs (Targeted Long- term Repo Operations). The longer-end of the curve (10-year and above), however, has come down by just 40-50bps, reflecting strengthened growth concerns, FPI outflows and a huge demand-supply mismatch amid heavy supply of government paper.

% India sovereign yield curve 31-Dec-19 26-Mar-20 30-Jun-20 8.0

7.2 7.1 6.8 6.4 6.5

5.6

5.0 4.8

4.0

3.2 3.2

2.4 3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 14Y 15Y 19Y 24Y 30Y

Source: Refinitiv Datastream, NSE.

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Figure 123: Sovereign yield curve across G20 countries as of June 30th, 2020 Dec 2019 3m 6m 1y 2y 3y 4y 5y 6y 7y 8y 9y 10y 30y US 0.15 0.17 0.16 0.15 0.18 0.29 0.49 0.65 1.41 Japan (0.09) (0.23) (0.16) (0.14) (0.13) (0.12) (0.10) (0.10) (0.08) (0.05) 0.01 0.03 0.60 Germany (0.56) (0.63) (0.55) (0.69) (0.72) (0.72) (0.70) (0.68) (0.61) (0.59) (0.53) (0.46) (0.00) France (0.52) (0.52) (0.52) (0.60) (0.60) (0.58) (0.53) (0.47) (0.37) (0.31) (0.19) (0.12) 0.62 UK 0.04 0.05 0.03 (0.08) (0.06) (0.07) (0.05) (0.05) 0.01 0.05 0.13 0.17 0.64 Italy (0.29) (0.24) (0.18) 0.09 0.25 0.52 0.72 0.86 0.91 1.11 1.17 1.33 2.24 Canada 0.21 0.24 0.28 0.29 0.30 0.30 0.37 0.37 0.53 0.99 EU (0.56) (0.63) (0.55) (0.69) (0.72) (0.72) (0.70) (0.68) (0.61) (0.59) (0.53) (0.46) (0.00) Argentina 43.62 42.89 Australia 0.26 0.27 0.26 0.32 0.40 0.50 0.60 0.73 0.81 0.88 1.74 Brazil 2.03 2.14 2.39 3.31 4.64 5.51 6.33 6.70 China 2.16 2.26 2.37 2.57 2.87 2.90 3.61 India 3.15 3.40 3.73 4.17 4.40 4.80 5.28 5.48 5.80 5.97 5.99 5.89 6.55 Indonesia 3.58 3.75 4.89 6.19 6.57 7.22 7.73 South Korea 0.59 0.79 0.84 1.00 1.11 1.37 1.60 Mexico 4.91 4.82 4.77 4.75 4.83 5.48 5.83 7.00 Russia 4.26 4.19 4.22 4.62 4.63 5.32 5.57 5.95 South Africa 4.50 5.04 7.71 9.27 11.29 Turkey 8.05 8.42 9.29 10.00 10.46 11.50 Source: Refinitiv Datastream, NSE

Figure 124: Sovereign yield curve across G20 countries as of June 30th, 2018 Dec 2017 3m 6m 1y 2y 3y 4y 5y 6y 7y 8y 9y 10y 30y US 1.92 2.11 2.32 2.53 2.62 2.73 2.82 2.85 2.99 Japan (0.12) (0.11) (0.12) (0.12) (0.12) (0.11) (0.11) (0.08) (0.06) (0.03) 0.01 0.03 0.71 Germany (0.59) (0.56) (0.65) (0.68) (0.59) (0.47) (0.30) (0.20) (0.06) 0.06 0.19 0.31 1.03 France (0.64) (0.60) (0.57) (0.58) (0.46) (0.31) 0.02 (0.01) 0.17 0.32 0.48 0.67 1.55 UK 0.58 0.63 0.67 0.72 0.73 0.90 1.03 1.09 1.13 1.22 1.33 1.28 1.74 Italy (0.22) (0.13) 0.25 0.73 1.04 1.47 1.75 2.09 2.30 2.39 2.60 2.69 3.46 Canada 1.26 1.46 1.70 1.91 1.99 2.03 2.07 2.13 2.17 2.20 EU (0.59) (0.56) (0.65) (0.68) (0.59) (0.47) (0.30) (0.20) (0.06) 0.06 0.19 0.31 1.03 Argentina 39.94 21.96 Australia 1.94 2.02 2.08 2.20 2.29 2.41 2.50 2.56 2.61 2.66 3.11 Brazil 6.45 6.54 6.97 7.94 9.30 10.23 10.91 11.22 China 3.21 3.33 3.36 3.41 3.57 3.54 4.07 India 6.49 6.87 7.02 7.51 7.75 7.92 7.95 8.11 8.13 8.14 8.02 7.90 8.10 Indonesia 5.13 5.63 7.04 7.30 7.60 7.80 8.41 South Korea 1.85 2.03 2.12 2.33 2.35 2.56 2.55 Mexico 7.91 8.00 8.07 7.76 7.68 7.59 7.60 7.72 Russia 7.07 7.11 6.75 7.09 7.36 7.46 7.56 7.70 South Africa 6.95 7.39 7.94 8.54 9.42 Turkey 16.83 17.39 18.80 18.54 17.89 16.80 16.30 Source: Refinitiv Datastream, NSE.

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Corporate bond market performance

Corporate bond spreads have come off meaningfully over the last couple of months across issuer categories and particularly more so at the shorter end, following a sharp spike in the previous two months. This was largely led by a significant easing of liquidity conditions in the economy, thanks to a slew of measures taken by the Central Bank. The LTROs and TLTROs led to a surge in demand for better-rated corporate bonds by banks thereby reducing credit spreads, even as the yield curve has steepened, in-line with the sovereign yield curve. In fact, the very short-end (3-6-month AAA-rated corporate papers) fell below the repo rate in July. A sharp drop in yields has resulted in corporates prepaying their bank loans by borrowing through bond markets in the wake of an incommensurate transmission of rate cuts in the bank lending rates.

Figure 125: Spreads for 3-month corporate bonds across segments Spreads for 3-month corporate bond have fallen sharply across issuer categories over the last two months. The drop has been the steepest in NBFC papers, with the credit spread for AAA-rated NBFCs papers falling from the peak of 300+ bps in May-end to sub-50 bps in July 2020. Spreads for 3-month AAA-rated corporate and PSU papers have fallen by nearly 200 and 150bps since May-end. bps Spreads for 3-month corporate bonds across segments 3M Corp (-) 3M G-sec 3M NBFC (-) 3M G-sec 3M PSU (-) 3M G-sec 340 300 260 220 180 140 100 60 20

-20

Jul-18 Jul-19 Jul-20

Oct-18 Oct-19

Apr-18 Apr-19 Apr-20

Jan-19 Jan-20

Jun-18 Jun-19 Jun-20

Feb-18 Feb-19 Feb-20

Sep-18 Sep-19

Mar-18 Mar-19 Mar-20

Dec-18 Dec-19

Aug-18 Aug-19

Nov-18 Nov-19

May-19 May-20 May-18 Source: Refinitiv Datastream, Bloomberg, NSE.

Figure 126: Spreads for 3-year corporate bonds across segments Spreads for the 3-year paper have also fallen sharply, albeit not as steep as the 3-month corporate bonds and are now hovering at levels below the last five-year averages for all issuer categories. bps Spreads for 3-year corporate bonds across segments 3Y Corp (-) 3Y G-sec 3Y NBFC (-) 3Y G-sec 3Y PSU (-) 3Y G-sec 320

280

240

200

160

120

80

40

0

Jul-18 Jul-19 Jul-20

Oct-18 Oct-19

Apr-18 Apr-19 Apr-20

Jan-19 Jan-20

Jun-18 Jun-19 Jun-20

Feb-18 Feb-19 Feb-20

Sep-18 Sep-19

Mar-20 Mar-18 Mar-19

Dec-18 Dec-19

Aug-18 Aug-19

Nov-18 Nov-19

May-19 May-20 May-18 Source: Refinitiv Datastream, Bloomberg, NSE.

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Figure 127: Spreads for 5-year corporate bonds across segments The trend has been similar for 5-year corporate bond spreads as well, even as the spreads have marginally increase in July thus far. bps Spreads for 5-year corporate bonds across segments 5Y Corp (-) 5Y G-sec 5Y NBFC (-) 5Y G-sec 5Y PSU (-) 5Y G-sec 220 200 180 160 140 120 100 80 60 40

20

Jul-18 Jul-19 Jul-20

Oct-18 Oct-19

Apr-18 Apr-19 Apr-20

Jan-19 Jan-20

Jun-18 Jun-19 Jun-20

Feb-18 Feb-19 Feb-20

Sep-18 Sep-19

Mar-20 Mar-18 Mar-19

Dec-18 Dec-19

Aug-18 Aug-19

Nov-18 Nov-19

May-19 May-20 May-18 Source: Refinitiv Datastream, Bloomberg, NSE.

Figure 128: Spreads for 10-year corporate bonds across segments Corporate yields at the long-end remained broadly steady in June and have fallen slightly in July, resulting in a significant steepening of the yield curve, in-line with the sovereign yield curve. This has been largely due to weak demand amid worsening huge supply of Government paper in the long end. bps Spreads for 10-year corporate bonds across segments 10Y Corp (-) 10Y G-sec 10Y NBFC (-) 10Y G-sec 10Y PSU (-) 10Y G-sec 180

160

140

120

100

80

60

40

20

Jul-18 Jul-19 Jul-20

Oct-18 Oct-19

Apr-18 Apr-19 Apr-20

Jan-19 Jan-20

Jun-18 Jun-19 Jun-20

Feb-18 Feb-19 Feb-20

Mar-20 Mar-18 Sep-18 Mar-19 Sep-19

Dec-18 Dec-19

Aug-18 Aug-19

Nov-18 Nov-19

May-19 May-20 May-18 Source: Refinitiv Datastream, Bloomberg, NSE.

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Figure 129: AAA-rated corporate bond yield curve Figure 130: AA-rated corporate bond yield curve % % AAA-rated corporate bond yield curve AA-rated corporate bond yield curve 9.0 31-Dec-19 26-Mar-20 21-Jul-20 9.0 31-Dec-19 26-Mar-20

8.0 8.0

7.0 7.0 6.0 6.0 5.0

4.0 5.0

3.0 4.0 3M 6M 1Y 2Y 3Y 5Y 6Y 7Y 8Y 9Y 10Y 15Y 3M 6M 1Y 2Y 3Y 5Y 6Y 7Y 8Y 9Y 10Y 15Y Source: Bloomberg, NSE.

Figure 131 Surplus liquidity in the banking system has come off over the last two months amid a decline in outstanding money parked with the RBI under reverse repo operations. This is largely owing to incrementally higher investments by banks in corporate securities under LTROs/TLTROs as well as SLR securities (government securities) over the last couple of months, even as credit offtake has remained weak. Rs bn Net lending under RBI's Liquidity adjustment facility Outstanding amount under repo operations Outstanding amount under reverse repo operations 3000 Figure greater than zero Net lending under LAF indicates deficit liquidity in the system 1000

-1000

-3000 Figure less than zero indicates surplus liquidity in the system -5000

-7000 Surplus liquidity in the banking system has come off over the last two months

-9000

Jul-18 Jul-20

Oct-18

Apr-18 Apr-20

Jan-18 Jan-19 Jan-20

Jun-19 Jun-20

Feb-18 Feb-20

Sep-18 Sep-19

Mar-19

Dec-18

Aug-19

Nov-19 May-19 May-18 Source: CMIE Economic Outlook, NSE

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Institutional flows across market segments in India

After recording huge outflows during Feb-April 2020, thanks to a heightened risk-off environment in the wake of an imminent COVID-19- induced global recession, Indian equity markets saw renewed FII interest, supported by an ample global liquidity. Net FII inflows in June stood at US$2.9bn (Source: Refinitiv Datastream), translating into net inflows of US$3bn in Q1 FY21. FII buying in Indian equities, however, has tapered sharply in July. The situation, however, remains quite gloomy in the debt segment. FII selling in debt has continued for the eighth month in a row in June even as the extent has come off meaningfully, with net outflows at US$204mn in June vs. net outflows of US$6.5bn during Apr-May 2020. This probably reflects balances.

Figure 132: Overall net inflows of FIIs in India

Source: Refinitiv Datastream, NSE

mid-May: s in FY20, particularly since end- purchases in equities rose exponentially while FIIs started selling at a faster pace particularly due to an exponential rise in coronavirus cases. During FY21, DIIs net investment remained muted till the first half of May, followed by a sudden change in trajectory with a spike in net investment in equity till the end of May. Then DIIs net investment has seen several ups and downs and ended in the positive territory over the month of June, as can be seen in the following chart.

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Figure 133: Overall net inflows by DIIs in Indian equity markets

Source: Refinitiv Datastream, NSE

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Fund mobilisation through NSE Market Statistics: Primary market

PO to raise additional capital: Amid market uncertainty, I not contain the overall spread of the coronavirus in major industrial regions even after a nationwide lockdown of more than 60 days. This has deteriorated the growth prospects of the country and overall uncertainty of the financial market increased substantially. As a result, not a single firm got listed over the last two months.

Unlike previous months, rights issue became the most preferred instrument in the Primary market : through rights issues which accounts for about 40% of total capital raised in the market. This has resulted a significant rise in fund mobilisation through equity segment from raise Rs40.0bn and 2 firms issued QIPs to raise Rs82bn over the month.

her than equity: Debt remains to be the preferred instrument as compared to equities to mobilise additional funds from the capital market. Out of Rs1,343bn funds raised through primary market, firms utilised debt instruments to raise Rs690bn through debt, marginally higher than the equity segment. However, total fund through debt declined by 16% over the month, mainly due to a fall in private placement.

Private placement remains to be one of the major instruments: Over the month, 52 firms rose Rs420bn through private placement which is about 40% lower than Rs696.6bn in the previous month, and continues to be the most preferred channel in the debt segment with almost 31% share in the primary market. Besides, government issued G- sec to raise Rs270bn in June, vs. Rs120bn over the previous month.

Figure 134: Funds mobilised through NSE platform Particulars Jun-20 May-20 Amount Amount Amount Amount No. of No. of Raised Raised Raised Raised Issues Issues (Rsm) (US$ m) (Rsm) (US$ m)

Equity

Rights Issue 1 531,242 7,013 - - -

Preferential Allotment 8 39,677 524 7 2,959 39

QIPs 2 82,125 1,084 - - -

Debt

Public issue of Gsec 2 270,000 3,564 1 120,000 1,586

Private Placement 52 419,921 5,544 59 696,623 9,206

Total 1,342,965 17,729 819,582 10,831 Note: In case of debt issuances, the above table reports no. of ISINs instead of issues. Shares issued by Reliance Industries Limited pursuant to Rights issue are partly paid up but the information is provided considering the same as fully paid up. Source: NSE.

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New listings in the month

New listing remains nil over the month of June: Merely two firms migrated from SME segment to the mainboard, while not a single adopted IPO route to raise capital in June amid the impending recession globally as well as in the Indian economy.

Figure 135 0 Listing Market Gross Turnover Listing Date Security Name Listing Gain % Cap (Rsm) (Rsm) 22-Jun-20 Univastu India Limited 5.1 377 0.22 Migrated from SME to NSE Main Board

24-Jun-20 Aarvi Encon Limited 4.9 365 0.00 Migrated from SME to NSE Main Board Source: NSE.

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Long term trends and impact of macro indicators and 2019, after recording a magnificent growth over the previous year. The situation has improved in 2020, particularly in the Cash market even as the growth prospect has deteriorated globally as well as in India due to the unprecedented coronavirus outbreak. This has also increased the downside risk in the securities market and market volatility rose significantly, which has resulted a roller coaster ride in institutional flows. This is reflected in the Equity derivative segment as well with multiple ups and downs over the last several months.

The overall trend of currency derivatives is quite different, where monthly turnover was quite high in 2013 due to increase in macroeconomic uncertainty during the Taper Tantrum. It declined significantly in the following year as government had put stricter norms on FII limits to minimise currency rate fluctuation. Thereafter, it remained stable till 2017 and was hovering around Rs2trn on average. It has again started increasing in 2018 as the Indian government increased the threshold limit of foreign investment in currency segment, and then, its total turnover remained elevated in 2019 as well at an average monthly turnover of Rs3.6trn. This has further increased in 2020 partly due to a significant depreciation of INR.

Figure 136 y turnover across segments

Source: NSE. Note: Total turnover for derivatives includes gross traded value of futures and total premium turnover of options.

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et registered a record growth of 127% in June, thanks to a low base effect and rise in uncertainty in the market amid a continuous rise in Covid-19 infections and increased in Equity and Currency derivatives segment as well, given investors are trying to hedge their funds against any adverse market movement in the following months.

Figure 137: Impact of global slowdown on overall turnover growth across segments

Source: Refinitiv Datastream, NSE.

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Trading volume and economy have taken diverse routes in June: Trading activities have increased significantly across all market segments due to rise in uncertainty in the market over the deteriorating growth prospects in India as the overall spread of Covid-19 cases continues to rise even after imposing a strict lockdown for more than 60 days.

Figure 138: Growth rates of Cash turnover and economic slowdown in India (IIP and GVA growth)

Source: Refinitiv Datastream, NSE

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Net institutional flows remains positive over the month of June: Net FII inflows rose significantly for three consecutive months while net investments by DIIs remained stable which has contributed significantly to a rise in turnover growth over the month.

Figure 139:

Source: Refinitiv Datastream, NSE.

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Institutional investments through NSE platform

Net investment turned negative in Cash market for both FIIs and DIIs: FIIs net investment through NSE turned negative in Cash market with a net outflow of Rs23bn over June, vs. a net purchase of Rs89bn in . Similar trend was observed for DIIs as well where net investment declined from Rs81bn net purchase in May to Rs8bn net sales over the month of June.

Among major segments, institutional investors remain net sellers in Equity derivatives with Rs45bn net sales by DIIs and than the previous month.

Institutional investments remain muted in Currency and Interest rate derivatives segments: Institutional investment muted over the last two months in both Currency and Interest rate segments which has resulted a significant decline in overall investment in FY21 till June. In Currency segment, DIIs net investment declined from Rs22bn net purchase in FY21 till June to net sales of Rs1bn over the same period in previous FY, while FIIs dropped at a faster pace from Rs14bn net inflows to Rs33bn net outflows over the same time period. Interest rate segment has also seen similar trend over the period and finished in negative territory in FY21 till now.

Figure 140: Foreign and domestic institutional flows (Rsbn) Jun-20 May-20 FY21TD FY20TD Category Buy Sell Net Buy Sell Net Buy Sell Net Buy Sell Net Cash Market DII 938 945 (8) 841 760 81 2,504 2,443 61 1,955 1,959 (4) FII 1,247 1,270 (23) 1389 1,300 89 3,830 3,812 18 3,216 3,139 76 Futures & Options DII 759 804 (45) 699 746 (47) 2,041 2,148 (108) 2,200 2,321 (121) FII 6,449 6,461 (11) 5,010 5,066 (56) 15,996 16,005 (9) 12,942 12,948 (6) Currency Derivatives DII 0 0 0 57 54 3 135 136 (1) 322 300 22 FII 0 0 0 631 635 (4) 1,288 1,322 (33) 1,660 1,646 14 Interest Rate Derivatives DII 0 0 0 4 4 (0) 7 7 (0) 47 44 3 FII 0 0 0 0 0 0 0 2 (2) 12 9 3 Source: NSE. *DII Domestic Institutional Investors, FII Foreign Institutional Investors

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Figure 141: Foreign and domestic institutional flows (Rsbn) during FY20 and CY20TD FY20 CY20TD Category Buy Sell Net Buy Sell Net Cash Market DII 9,777 8,653 1124 5,721 4,961 760 FII 13,166 14,155 (989) 7,363 8,224 (861) Futures & Options DII 9,908 10,155 (248) 4,679 4,696 (17) FII 56,304 56,153 151 32,278 32,220 57 Currency Derivatives DII 1,007 999 8 396 410 (15) FII 7,550 7,412 138 3,736 3,599 137 Interest Rate Derivatives DII 174 178 (4) 44 43 1 FII 47 40 6 11 9 1

Source: NSE*DII Domestic Institutional Investors, FII Foreign Institutional Investors

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Total turnover in CM and derivatives market

Total turnover rose sharply across all segments at NSE: increased significantly over the month of June, thanks to more trading days in the month, sudden spike in market uncertainty and rise in gross investments by institutional investors. In the Cash market, total turnover rose by 35% to reach Rs13.5trn in June vs. Rs10trn over the previous month.

Similar trends were observed in other segments as well. After a significant fall in April in Equity derivatives, total turnover rose over the last two months to reach Rs23trn in equity

39% in Interest rate derivatives to have Rs166bn turnover vs. Rs119bn in the previous month.

Figure 142

Segment Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20

Cash Market 8,054 7,969 10,065 9,059 10,006 13,509 Equity futures 19,471 18,487 20,974 15,497 17,586 23,151 Index futures 5,433 5,393 9,214 5,947 6,406 8,597 Stock futures 14,038 13,094 11,760 9,550 11,180 14,554 Equity options 1,200 1,156 2,268 1,419 1,616 2,388 Index options 991 941 1,985 1,209 1,368 1,985 Stock options 209 214 283 210 248 403 Currency derivatives 3,882 3,982 7,243 3,733 3,687 4,573 Currency futures 3,871 3,973 7,220 3,722 3,678 4,562 Currency options 11 9 23 11 9 11 Interest rate derivatives 254 279 298 94 119 166 Interest rate futures 254 279 298 94 119 166 Interest rate options 0.03 0.10 0.17 0.02 0.02 0.01 Commodity futures 1.1 1.6 0.9 0.6 0.8 2.1 Source: NSE. *NA refers to not applicable as Interest rate Average daily turnover in CM and derivatives market Daily turnover continues to rise in the Cash market: On average, daily turnover rose by 16.6% in the Cash mark month partly due to a partial recovery in the securities market and rise in volatility in the market after the unprecedented outbreak of COVID-19 globally, and substantial rise in gross investment by institutional investors.

Unlike previous months, daily turnover increased in the SME segment as well with a ~60% rise from Rs14m in May to Rs22m over the month. Among other categories, total turnover declined for ETF and InvITs while Sovereign Gold bonds and Mutual funds (Close ended) registered a significant rise over the month.

Among all major stocks in the cash market, IndusInd Bank, Idea, Bajaj Finance recorded a sharp increase in their total turnover over the month that has mainly contributed to the increase in average daily turnover in the segment.

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Figure 143: Average daily turnover in Cash market (Rsm)

Product Jun-20 May-20 % Change FY21TD FY20TD % Change FY20 CY20TD

Cash Market 614,052 526,622 16.6 552,101 337,465 63.6 364,399 476,926 Exchange Traded Funds 2,463 2,629 (6.3) 2,688 2,005 34.0 2,069 2,449 SME Emerge 22 14 59.7 18 78 (77.3) 53 32 Sovereign Gold Bonds 15 15 4.8 19 5 268.5 10 17 InvITs 38 40 (3.0) 39 40 -4.4 51 55 Mutual Funds (Close Ended) 3 1 305.2 1 1 0.2 1 1 Source: NSE.

Daily turnover of Stock derivatives continues to rise in June: In case of Stock derivatives, daily turnover increased by 12.4% for stock futures turnover and 40.2% for stock options premium turnover over the month, amid a significant spike in market uncertainty over the Covid-19 pandemic.

Among most traded stock derivatives, Bajaj Finance, SBI and Axis Bank recorded a significant jump in total turnover in futures segment, while IndusInd Bank, SBI, Tata Motors recorded a spike in their total trade activities in options segment.

Liquidity jumped up across all major index derivatives in June: significantly for both Bank Nifty and Nifty across futures and options segment. In the index futures, average daily turnover rose by 25% and 8% for Bank Nifty and Nifty in futures segment to reach Rs189bn and Rs200bn respectively over the month. Similar trend was visible in Index options as well, where N and Bank Nifty increased by 19% to reach at Rs46bn over the month.

Figure 144: Average daily turnover in Equity derivatives (Rsm) Product Jun-20 May-20 % Change FY21TD FY20TD % Change FY20 CY20TD

Single stock derivatives Stock futures 661,530 588,433 12.4 598,027 600,726 (0.4) 602,216 603,050 Stock options premium 18,327 13,076 40.2 14,608 7,686 90.1 9,245 12,748 Index futures Bank Nifty 189,964 151,592 25.3 160,727 98,150 63.8 113,155 141,447 Nifty 200,808 185,553 8.2 194,346 142,952 36.0 157,060 191,771 Nifty IT 19 26 (26.1) 26 229 (88.7) 121 45 Index options Bank Nifty 46,089 38,697 19.1 39,276 17,228 128.0 22,493 33,723 Nifty 44,126 33,280 32.6 38,033 15,357 147.7 21,090 35,210 Nifty IT 0 0 NA 0 0 (28.2) 0 0 Source: NSE. *premium turnover for options.

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USDINR continues to dominate in the currency derivatives segment: EURINR remains the top traded currency pair at NSE, with 79% market share in futures and 99% market share in options, even as its daily turnover declined by 2.3% and 3% in futures and options respectively over the month.

Among others, GBPINR and EURINR contributed 12% and 6% of total turnover in futures segment. Further, they gained momentum with 23% and 16% growth to reach Rs25bn and Rs13bn respectively over the month.

Figure 145: Average daily turnover in Currency derivatives (Rsm) Product Jun-20 May-20 % Change FY21TD FY20TD % Change FY20 CY20TD

Currency futures

EURINR 13,002 11,184 16.3 10,646 5,557 91.6 7,000 9,704

EURUSD 248 128 93.7 159 496 (67.9) 472 263

GBPINR 25,425 20,611 23.4 20,472 10,933 87.3 15,368 20,953

GBPUSD 359 204 75.9 242 471 (48.6) 514 423

JPYINR 4,265 4,275 (0.2) 3,920 2,663 47.2 3,109 3,982

USDINR 164,072 167,933 (2.3) 174,424 152,718 14.2 171,331 193,709

USDJPY 3 3 15.7 3 11 (75.3) 9 5

Currency options

EURINR 0.02 0.04 (37.5) 0.02 0.03 (30.4) 0.06 0.11

EURUSD 0.00 0.00 NA 0.00 0.00 NA 0.00 0.00

GBPINR 0.07 0.01 757.7 0.03 0.10 (69.7) 0.25 0.34

GBPUSD 0.01 0.00 NA 0.00 0.00 NA 0.01 0.02

JPYINR 0.00 0.00 NA 0.00 0.04 (99.5) 0.02 0.00

USDINR 501.98 517.72 (3.0) 543.50 452.91 20.0 548.49 623.61

USDJPY 0.00 0.00 NA 0.00 0.00 NA 0.00 0.00 Source: NSE. *premium turnover for options

Liquidity of Interest rate derivatives remains concentrated to merely one derivative: In the Interest rate derivatives segment, 645GS2029 is the most traded instrument in both futures and options segments with Rs7.3bn and Rs0.3m average daily turnover respectively over the month.

Among others, 757GS2033, 579GS2030 and 795GS2032 gained momentum marginally over the month in the futures segment, while there is no other product gained interest over the month.

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Figure 146: Average daily turnover in Interest rate futures (Rsm) Product May-20 Apr-20 % Change FY21TD FY20TD % Change FY20 CY20TD

Interest rate futures (Rsm)

579GS2030 52 0 14,158 20 0 NA 8,617 10

645GS2029 7,290 6,572 11 6,508 0 NA 8,617 9,376

726GS2029 24 31 (22) 36 2,855 (99) 7,903 778

795GS2032 51 0 NA 20 363 (95) 229 37

757GS2033 112 0 NA 61 0 NA 44 55

Interest rate options (Rsm)

645GS2029 0.3 0.9 (70) 0.7 NA NA 1.2 2.8

726GS2029 0.0 0.0 NA 0.0 NA NA 0.1 0.1 Source: NSE. *Data for only those contracts which were traded in the month of June have been reported in the above table.

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Turnover of top traded symbols over the month

Figure 147: Top 10 symbols based on total turnover of Cash market (Rs m) Symbol Jun-20 May-20 %Change BAJFINANCE 824,069 414,161 99.0 RELIANCE 655,602 682,382 (3.9) HDFCBANK 474,109 343,595 38.0 AXISBANK 406,332 315,064 29.0 INDUSINDBK 396,987 190,811 108.1 ICICIBANK 354,966 335,903 5.7 SBIN 332,417 203,234 63.6 BHARTIARTL 271,142 299,800 (9.6) HDFC 263,990 245,822 7.4 IDEA 225,958 53,434 322.9 Source: NSE Figure 148: Top 10 symbols based on total turnover of Stock futures (Rs m) Symbol Jun-20 May-20 %Change RELIANCE 965,729 886,447 8.9 BAJFINANCE 748,609 418,522 78.9 BHARTIARTL 560,414 583,696 (4.0) ICICIBANK 521,370 422,716 23.3 SBIN 508,765 327,244 55.5 HDFCBANK 506,116 392,569 28.9 AXISBANK 459,645 332,097 38.4 HDFC 341,911 274,437 24.6 KOTAKBANK 310,333 236,514 31.2 INFY 289,444 222,490 30.1 Source: NSE

Figure 149: Top 10 symbols based on total turnover of Stock options (Rs m) Symbol Jun-20 May-20 %Change RELIANCE 42,952 33,919 26.6 BAJFINANCE 25,318 14,382 76.0 SBIN 24,625 12,224 101.4 BHARTIARTL 15,619 13,525 15.5 ICICIBANK 15,515 12,708 22.1 AXISBANK 13,866 9,748 42.2 INDUSINDBK 11,714 4,616 153.8 HDFCBANK 10,389 6,756 53.8 TATAMOTORS 9,767 3,133 211.8 MARUTI 8,372 7,271 15.1 Source: NSE

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Client category-wise participation in total turnover

FIIs and corporates lost their share in the Cash market: Over the last six (fiscal) years,

merely 12% in FY21 till June end. Similar trend was seen for corporates who lost their share from 10% to 5% over the same time period. These were offset by Others including individual investors, HUFs, trusts, NRIs, etc. with a share of 53% in FY21 as compared to only 37% in FY16, while the share of DIIs and proprietary traders remain stable over the period. In FY21, proprietary traders contribute 23% to total turnover in the cash market, and DIIs contributed 8% over the current fiscal till June end.

FIIs gained momentum in the Equity derivatives segment: There is a significant change in composition of total turnover in equity derivatives across client categories. FIIs share of total turnover in the segment jumped up from 16% in FY16 to 26% in FY21 till June end, while prop same time period. Corporates have also lost their share from 15% to merely 8% over the period, which was primarily offset by Others with a rise in market share from 31% to 37%. However,

Trend is somewhat similar for Index futures, gradually declined in terms of total turnover from 31% in Fy16 to 26% in FY21 till June end, followed by corporates whose share declined from 14% to 8% over the same period. This overall fall in their shares has been offset by an increase in total trade by FIIs and in FY16) whereas FIIs share rose from 14% to 18% over the same period. However, the share of DIIs remains marginal during this period, which can be attributed to the regulatory restrictions on their trading activities in the derivatives segment.

DIIs contribution is marginally higher in the Stock futures, with 6% market share in FY21 till June which is comparatively higher than Fy16 (3%). Among other categories, Proprietary traders, Corporates and Others lost their share in the market, which were mainly compensated by FIIs and DIIs. In FY21, Others traded 31% of total contracts in stock futures while proprietary traders and FIIs contributed 23% and 32% of total turnover. Remaining 9% traded by corporates in the segment.

DIIs investment remains negligible in Options throughout the period due to regulatory restrictions on derivative activity. Among others, share of proprietary traders declined in Index options from 53% in FY16 to merely 34% in FY21 which was partially offset by Others whose share rose from 25% to 39% over the period. Among other clients, share of

in FY21 which was offset by proprietary traders and Others. Out of total contracts traded in Index options, around 46% were traded by proprietary traders and 43% by Others in FY21 till June end.

DIIs¬ excluding banks do not have much presence in the currency segment as well. Among other categories, the share of proprietary traders excluding banks in the segment has declined over the period. Still they capture highest share in both futures and options. While Others have been able to increase their share in these segments over this period, and FIIs capture a significant share in Currency futures since FY19.

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Distributional pattern of Interest rate futures changed radically in FY21 till June end as compared to the previous fiscal years. The share of proprietary traders excluding banks declined from 52% in FY19 to 32% in FY21, which was mainly offset by banks, Corporates and Others.

Figure 150: Share of client participation in Cash Figure 151: Share of client participation in Equity market at NSE (%) derivatives at NSE (%)

Corporates DII FII PRO Others Corporates DII FII PRO Others 100% 100%

27 26 26 31 35 80% 37 41 80% 37 45 46 47 53

60% 60% 35 38 38 21 17 35 25 25 18 22 40% 23 40% 23 21 23 16 17 22 25 15 15 16 19 26 20% 20% 10 12 9 10 2 2 4 4 10 4 10 8 3 12 11 15 13 14 13 11 10 6 5 8 0% 5 0% FY16 FY17 FY18 FY19 FY20 FY21 FY16 FY17 FY18 FY19 FY20 FY21

Figure 152: Share of client participation in Index Figure 153: Share of client participation in Index futures at NSE (%) options* at NSE (%)

Corporates DII FII Others PRO Corporates DII FII Others PRO 100% 100%

26 27 26 31 29 30 33 34 80% 80% 38 44 44 53

60% 60% 41 41 40 47 39 41 37 39 36 40% 40% 32 33 25

16 17 18 20% 14 14 18 20% 15 21 1 1 1 2 2 11 15 14 20 1 14 14 14 13 13 8 11 10 9 11 9 7 0% 0% FY16 FY17 FY18 FY19 FY20 FY21 FY16 FY17 FY18 FY19 FY20 FY21

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Figure 154: Share of client participation in Stock Figure 155: Share of client participation in Stock futures at NSE (%) options* at NSE (%) Corporates DII FII Others PRO Corporates DII FII Others PRO 100% 100%

25 25 23 23 30 26 80% 80% 40 40 42 43 44 46

31 60% 33 32 60% 37 38 34

36 40% 40% 37 37 35 40 43 24 28 32 17 21 18 20% 20% 3 13 3 4 5 11 13 12 6 6 8 16 15 5 13 13 10 9 12 10 10 10 9 6 0% 0% FY16 FY17 FY18 FY19 FY20 FY21 FY16 FY17 FY18 FY19 FY20 FY21

Figure 156: Share of client participation in Currency Figure 157: Share of client participation in Currency futures at NSE (%) options* at NSE (%) Corporates FII Banks Corporates FII Banks DII ex-banks PRO ex-banks Others DII ex-banks PRO ex-banks Others 100% 100% 10 15 15 15 12 13 16 20 18 27 23 25 80% 80%

49 49 47 60% 52 43 60% 40 80 76 75 64 62 63 40% 40% 10 16 14 12 8 17 20% 1 4 15 16 17 20% 3 2 2 19 18 1 2 2 3 3 12 10 10 8 1 2 13 2 0% 8 9 8 10 7 0% FY16 FY17 FY18 FY19 FY20 FY21 FY16 FY17 FY18 FY19 FY20 FY21

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Figure 158: Share of client participation in Currency Figure 159: Share of client participation in Interest derivatives at NSE (%) rate futures at NSE (%) Corporates FII Banks Corporates FII Banks DII ex-banks PRO ex-banks Others DII ex-banks PRO ex-banks Others 100% 100% 4 3 5 8 9 11 15 15 15 16 20 27 80% 80% 48 32 40 51 52 51 60% 49 49 47 60% 52 43 40 5 3 3 2 4 40% 40% 1 18 26 20 19 12 10 16 16 14 8 2 20 17 2 1 0 3 20% 1 4 20% 14 16 17 1 3 27 23 24 25 19 18 20 18 12 10 10 8 0% 0% FY16 FY17 FY18 FY19 FY20 FY21 FY16 FY17 FY18 FY19 FY20 FY21

Source: NSE. Note: DII: Domestic Institutional Investors, FII: Foreign Institutional Investors, PRO: Proprietary Traders, Others: includes individual investors, HUFs, trusts, NRIs, etc. *We have considered premium turnover for options contracts.

Figure 160: Share of client participation in Cash market of NSE (%)** Client Jun-20 May-20 Change FY21TD FY20TD Change FY20 CY20TD category Cash market Corporates 5.8 4.6 1.2 5.1 5.1 (0.0) 5.3 5.4 DII 7.0 8.0 (1.0) 7.6 9.7 (2.1) 10.2 9.1 FII 9.3 13.4 (4.1) 11.7 15.7 (4.0) 15.2 13.3 PRO 23.2 21.6 1.6 22.6 22.8 (0.2) 22.7 22.6 Others 54.7 52.3 2.4 53.0 46.7 6.3 46.5 49.6 Source: NSE. **DII Domestic Institutional Investors, FII Foreign Institutional Investors, PRO Proprietary Traders, Others includes individual investors, HUFs, trusts, NRIs, etc.

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Figure 161: Share of client participation in Equity derivatives of NSE (%)** Client Jun-20 May-20 Change FY21TD FY20TD Change FY20 CY20TD category Index Futures Corporates 7.9 7.8 0.1 8.2 14.0 (5.8) 12.5 10.0 DII 0.7 0.8 (0.1) 0.7 2.4 (1.6) 1.8 1.0 FII 17.0 18.9 (1.9) 18.3 18.4 (0.1) 18.2 18.7 PRO 26.2 25.6 0.6 25.7 25.4 0.3 26.6 26.1 Others 48.3 47.0 1.3 47.1 39.8 7.2 40.9 44.2 Stock Futures Corporates 8.5 9.0 (0.5) 8.8 12.0 (3.2) 10.5 9.0 DII 5.0 6.0 (1.1) 5.5 5.3 0.2 5.9 5.8 FII 31.4 31.8 (0.5) 31.8 27.2 4.6 28.0 30.7 PRO 24.1 22.2 1.9 22.8 23.9 (1.1) 23.2 22.5 Others 31.1 31.0 0.1 31.1 31.6 (0.5) 32.3 32.0 Index Options Corporates 6.5 7.4 (0.9) 7.2 9.7 (2.5) 8.7 7.7 DII 0.0 0.0 (0.0) 0.0 0.0 (0.0) 0.1 0.1 FII 20.9 19.0 1.9 19.5 21.1 (1.6) 21.1 19.9 PRO 34.0 34.7 (0.8) 33.9 32.9 1.0 32.7 33.1 Others 38.7 38.9 (0.2) 39.3 36.3 3.1 37.5 39.2 Stock Options Corporates 6.4 5.7 0.7 6.2 10.8 (4.6) 8.7 6.9 DII 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 FII 4.9 5.5 (0.5) 5.0 10.0 (5.0) 7.7 5.6 PRO 47.8 45.3 2.5 46.0 40.9 5.1 43.8 45.7 Others 40.8 43.5 (2.7) 42.7 38.2 4.5 39.8 41.9 Equity Derivatives Corporates 8.1 8.4 (0.3) 8.4 12.4 (4.0) 11.0 9.2 DII 3.1 3.8 (0.7) 3.4 4.3 (0.9) 4.4 3.7 FII 25.3 26.2 (1.0) 26.0 24.5 1.5 24.6 25.8 PRO 25.9 24.5 1.4 24.9 24.8 0.1 24.9 24.7 Others 37.6 37.0 0.6 37.3 34.1 3.2 35.2 36.6 Source: NSE. **DII Domestic Institutional Investors, FII Foreign Institutional Investors, PRO Proprietary Traders, Others includes individual investors, HUFs, trusts, NRIs, etc. We have considered premium turnover for option contracts.

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Figure 162: Share of client participation in Currency derivatives of NSE (%)** Client Jun-20 May-20 Change FY21TD FY20TD Change FY20 CY20TD category Currency Futures Corporates 7.7 8.2 (0.5) 8.4 8.7 (0.3) 10.1 9.8 FII 15.7 17.2 (1.5) 16.9 16.2 0.7 15.6 16.2 Banks 7.9 6.8 1.1 7.6 11.8 (4.2) 10.4 8.6 DII ex-banks 0.2 0.2 (0.0) 0.2 0.2 (0.0) 0.2 0.1 PRO ex-banks 43.0 38.9 4.1 39.8 43.1 (3.3) 43.3 41.3 Others 25.6 28.7 (3.1) 27.1 20.0 7.2 20.4 24.0 Currency Options Corporates 6.5 7.3 (0.8) 6.9 12.5 (5.6) 10.1 7.1 FII 2.2 1.9 0.3 2.2 2.2 0.1 2.9 3.2 Banks 2.1 2.5 (0.4) 2.7 2.0 0.7 2.2 2.6 DII ex-banks 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 PRO ex-banks 62.4 62.9 (0.5) 63.0 62.5 0.6 61.7 63.2 Others 26.8 25.4 1.4 25.2 20.9 4.3 23.1 24.0 Currency Derivates Corporates 7.7 8.2 (0.5) 8.4 8.7 (0.4) 10.1 9.8 FII 15.6 17.2 (1.5) 16.8 16.2 0.7 15.5 16.2 Banks 7.9 6.8 1.1 7.6 11.8 (4.2) 10.4 8.6 DII ex-banks 0.2 0.2 (0.0) 0.2 0.2 (0.0) 0.2 0.1 PRO ex-banks 43.1 39.0 4.1 39.9 43.1 (3.3) 43.4 41.3 Others 25.6 28.7 (3.1) 27.1 20.0 7.2 20.4 24.0 Source: NSE. **DII Domestic Institutional Investors, FII Foreign Institutional Investors, PRO Proprietary Taders, Others includes individual investors, HUFs, trusts, NRIs, etc. We have considered premium turnover for option contracts.

Figure 163: Share of client participation in Interest rate futures of NSE (%)** Client May-20 Apr-20 Change FY21TD FY20TD Change FY20 CY20TD category Interest rate futures Corporates 20.2 30.2 (10.0) 25.1 19.5 5.6 18.1 20.9 FII 0.8 0.3 0.5 0.7 1.3 (0.6) 1.2 0.9 Banks 30.3 21.9 8.4 25.7 19.8 5.9 19.7 21.0 DII ex-banks 6.3 3.0 3.3 4.6 5.1 (0.5) 4.3 3.2 PRO ex-banks 31.2 32.4 (1.2) 32.5 49.2 (16.7) 51.6 46.1 Others 11.3 12.3 (1.0) 11.5 5.1 6.4 5.1 7.8 Interest rate options Corporates 67.0 34.9 32.1 41.8 NA NA 22.4 24.4 FII 0.0 0.0 0.0 0.0 NA NA 0.0 0.0 Banks 0.0 18.8 (18.8) 19.1 NA NA 3.4 4.1 DII ex-banks 0.0 0.0 0.0 0.0 NA NA 0.0 0.0 PRO ex-banks 26.3 39.8 (13.6) 32.9 NA NA 58.9 56.7 Others 6.8 6.5 0.3 6.3 NA NA 15.3 14.8 Interest rate derivatives Corporates 20.2 30.2 (10.0) 25.1 19.5 5.6 18.1 20.9 FII 0.8 0.3 0.5 0.7 1.3 (0.6) 1.2 0.9 Banks 30.3 21.9 8.4 25.7 19.8 5.9 19.7 21.0 DII ex-banks 6.3 3.0 3.3 4.6 5.1 (0.5) 4.3 3.2 PRO ex-banks 31.2 32.4 (1.2) 32.5 49.2 (16.7) 51.6 46.1 Others 11.3 12.3 (1.0) 11.5 5.1 6.4 5.1 7.8 Source: NSE. **DII Domestic Institutional Investors, FII Foreign Institutional Investors, PRO Proprietary Traders, Others includes individual investors, HUFs, trusts, NRIs, etc. We have considered premium turnover for option contracts.

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Asset category-wise open interest (average daily volume)

Figure 164: Average daily volume of open interest in Equity derivatives (million contracts) Product Jun-20 May-20 % Change FY21TD FY20TD % Change FY20 CY20TD Equity Derivatives Stock Futures 3,114 3,111 0.1 3,031 4,664 (35.0) 4,294 3,641 Stock Options 1,720 1,179 45.9 1,301 1,389 (6.3) 1,490 1,462 Equity Derivatives - Index Futures Bank Nifty 1.7 1.5 10.8 1.5 2.0 (23.3) 1.7 1.4 Nifty 12.0 9.6 25.7 11.1 20.0 (44.6) 17.9 13.4 Nifty IT 0.0 0.0 (40.6) 0.0 0.0 (91.6) 0.0 0.0 Equity Derivatives - Index Options Bank Nifty 16.1 12.6 27.7 12.9 14.5 (11.1) 14.7 13.9 Nifty 121.3 93.5 29.8 102.5 100.4 2.1 104.2 106.2 Nifty IT 0.0 - NA 0.0 0.0 (95.8) 0.0 0.0 Source: NSE

Figure 165: Average daily volume of open interest in Currency derivatives (no of contracts) Category May-20 Apr-20 % Change FY21TD FY20TD % Change FY20 CY20TD Futures EURINR 187,827 90,610 107.3 125,741 64,213 95.8 74,622 111,188 EURUSD 5,665 1,740 225.6 3,081 48,168 (93.6) 34,538 4,575 GBPINR 77,892 40,977 90.1 57,256 50,241 14.0 74,553 73,397 GBPUSD 4,623 1,718 169.1 2,643 4,946 (46.6) 4,877 3,128 JPYINR 34,328 36,991 (7.2) 36,059 43,005 (16.2) 49,206 40,839 USDINR 2,453,324 2,839,572 (13.6) 3,231,829 2,510,641 28.7 3,123,879 3,677,344 USDJPY 91 51 79.9 68 354 (80.8) 297 161 Options EURINR 235 206 14.4 158 816 (80.7) 807 962 EURUSD 0 0 NA 0 0 NA 0 0 GBPINR 476 42 1038.9 197 989 (80.1) 1,770 2,629 GBPUSD 2 0 NA 1 0 NA 3 5 JPYINR 4 2 175.8 3 139 (98.2) 170 69 USDINR 2,735,961 2,406,997 13.7 2,495,711 2,459,706 1.5 2,932,818 2,949,668 Source: NSE

Figure 166: Average daily volume of open interest in Interest rate derivatives II (no of contracts) Category May-20 Apr-20 % Change FY21TD FY20TD % Change FY20 CY20TD Interest rate futures 579GS2030 189 6 3072.6 75 0 NA NA 36 645GS2029 51,816 64,610 (19.8) 58,031 0 NA 67,979 82,806 726GS2029 2,626 3,738 (29.7) 3,166 41,046 (92.3) 89,711 19,274 795GS2032 8,500 8,500 0.0 8,500 27,094 (68.6) 24,646 10,763 757GS2033 8,500 8,500 0.0 8,500 - NA 4,525 6,602 Interest rate options 645GS2029 8,414 5,344 57.4 6,923 NA NA 6,093 17830 726GS2029 0 0 NA 0 NA NA 975 1476 Source: NSE

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Internet-based trading

Internet based trading jumped up significantly in Cash and Equity derivatives: Internet based trading gained momentum in recent months, particularly since the nationwide lockdown as investors and traders started utilising this platform to trade from their home. Notably, daily turnover through internet-based trading rose by 25% in Cash while average turnover of Equity derivatives rose by 16% over the month to Rs 309.5bn daily.

The situation is quite different for Currency and Interest rate derivatives: After a significant rise in May, Currency and interest rate derivatives segments has, however, recorded a sharp fall in internet-based trading by 19% and 9% respectively over the

Figure 167: Average daily turnover of internet-based trading (Rs m) Segment Jun-20 May-20 % Change FY21TD FY20TD % Change FY20 CY20TD

Cash Market 161,172 128,994 24.9 139,969 103,905 34.7 90,639 107,852

Equity Derivatives* 309,522 266,812 16.0 277,110 232,080 19.4 217,432 240,252

Index Futures 149,871 126,723 18.3 134,710 79,425 69.6 82,859 109,256

Stock Futures 133,264 118,625 12.3 119,607 140,829 (15.1) 121,620 112,378

Index Options 22,446 18,504 21.3 19,546 9,659 102.4 10,875 15,997

Stock Options 3,941 2,960 33.1 3,247 2,168 49.8 2,078 2,621

Currency Derivatives* 36,296 44,726 (18.8) 40,737 34,311 18.7 31,717 37,545

Currency Futures 36,186 44,620 (18.9) 40,628 34,214 18.7 31,610 37,428

Currency Options 111 105 5.3 109 97 13.1 108 117

Interest Rate Derivatives* 1,663 1,821 (8.7) 1,534 1,948 (21.2) 1,495 1,270

Interest Rate Futures 1,663 1,821 (8.7) 1,534 1,948 (21.3) 1,494 1,269

Interest Rate Options 0.1 0.3 (74.9) 0.3 0.0 NA 0.2 0.5 Source: NSE. Note: Average trading volume is calculated as the average of gross traded value i.e., buy side turnover + sell side turnover. *Premium turnover is considered in case of options contracts.

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Record statistics NSE hits a record turnover in Stock options segment on June 5th: premium turnover reached at its all-time high of Rs25bn on June 5th, 2020, while NSE hits a record turnover in the cash market on May 29th, 2020 to reach Rs835bn per day partly due to a rise in uncertainty over the outbreak of Covid-19 and its plausible implications on the economy. The rise in market uncertainty also resulted an overall spike in market volatility since March, which may have partially caused a sharp rise in total trading across other major segments at NSE, particularly in Index derivatives segment. Index options recorded its highest ever premium turnover on March 19th, 2020 to reach at Rs146bn per day.

Though other major segments have recorded a significant growth in their average turnover, they did not cross their previous record levels. Notably, Index futures recorded their highest turnover of Rs860bn on September 20th, 2019 after the Finance Minister slashed the corporate tax rate from 30% to 22%.

Figure 168: Segment-wise record turnover till June 30th, 2020 Segment Turnover (Rsbn) Trading Date

Cash market 835 29-May-20

Index futures 860 20-Sep-19

Stock futures 1,954 25-Jan-18

Index options (premium) 146 19-Mar-20

Stock options (premium) 25 05-Jun-20 Source: NSE

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Spatial distribution of trading activities Region-wise distribution of new investors registered Despite of having a slow economic recovery amid a continuous rise in total number of Covid-19 cases, total registration jumped up in June across all regions in the country. Over the month, total registration rose by 37% to 186 thousand registrations in Western part of the country compared to 136 thousand over the previous month. Among others, South India and East India recorded 36% and 35% growth over the month, while North India registered 27% growth. This, in turn, increased total registration by 33% to reach 564 thousand compared to 423 thousand over the previous month.

Share of total registration across regions remains somewhat similar over the two months. Out contributed around 31% and 33% respectively, followed by southern region with 27% registration, while only 9% of total investors registered from East India.

Figure 169: Region-wise distribution of new investors registered

Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 600 564

500 419

400 '000 300

186 200 174 154 140 146 96 100 37 50

0 East India North India South India West India Total Source: NSE. Note: East India is Mizoram, Odisha, West Bengal, Assam, Manipur, Arunachal Pradesh, Tripura, Nagaland, Meghalaya, Sikkim, Chhattisgarh; West India Is Maharashtra, Gujarat, Madhya Pradesh, Daman & Diu, Goa, Dadra & Nagar Haveli; North India Is Bihar, Jharkhand, Uttar Pradesh, Uttarakhand, Haryana, Delhi, Punjab, Jammu & Kashmir, Himachal Pradesh, Chandigarh And Rajasthan; South India Is Telengana, Kerala, Andhra Pradesh, Tamil Nadu, Karnataka, Pondicherry, Lakshadweep And Andaman & Nicobar.

Data further shows, total registration remains concentrated in few districts. Over the month of June, around 6.8% of all investors are from Delhi region, which is marginally higher than Mumbai (~6.7%). Among others, 3.4% of all registration over the month happened in Pune, followed by Bangalore and Surat with 2.7% and 1.9% of total registration respectively. Besides, a significant number of investors are registered in Ahmedabad, Hyderabad and Jaipur over the last month.

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Figure 170: Number of new investors registered in top 10 districts

Feb-20 Mar-20 Apr-20 May-20 Jun-20 50

45

40 38.5 37.6

35

'000 28.6 30 28.1

25 19.3 20 15.1 15 9.8 10.9 10.6 9.7 8.6 10 7.8 8 7.4 7.4 7.1 5.3 4.7 5.8 5 3.1

0 Delhi-NCR Mumbai Pune Bangalore Surat Ahmedabad Hyderabad Nashik K. V. Jaipur (MH/TN/RG) Rangareddy Source: NSE

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Region-wise distribution of individual investor turnover in the cash market

Region-wise distribution of total turnover by retail investors in the Cash market remains somewhat similar over the last six months, as shown in the following charts. Western region contributed largest share over the period in terms of turnover and trade volumes in the Cash market with around 36.1% of total turnover by retail investors and 39.8% of

30.0% of retail turnover and 28.9% of retail volume, followed by the Southern and Eastern India.

Figure 171: Region-wise distribution of individual Figure 172: Region-wise distribution of individual

100% 100%

90%

80% 38.9 39.6 39.3 36.0 36.2 36.1 80% 41.7 41.6 43.9 39.3 39.8 39.8 70%

60% 60% 25.5 25.6 25.9 23.6 23.7 24.0 50% 22.6 22.6 22.6 22.0 21.9 20.4 40% 40%

30% 28.9 28.1 28.4 30.2 30.3 30.0 27.1 27.2 29.3 29.1 28.9 20% 20% 27.5

10% 8.6 8.7 8.3 8.4 8.0 8.0 9.2 9.2 8.2 8.8 8.6 8.7 0% 0% Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 East India North India South India West India East India North India South India West India

Source: NSE.

Besides, the distributional pattern of total turnover and trade volume across major districts over the last five months has shown that top 10 districts contributed ~41.5% to total retail turnover and 38.9% to Amongst them, Mumbai and Delhi have contributed around 21.8% to total turnover over the month, which is somewhat similar over the last three months, while Bangalore and Ahmedabad contributed 4.3% and 3.5% respectively, followed by Pune (3.2%) over the month.

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Figure 173: Top 10 districts based on Cash turnover of individual investors

16 Feb-20 Mar-20 Apr-20 May-20 Jun-20

13.9 14

11.8 12

10.0 10 9.3

8

6 4.4 4.3 4.3 3.5 4 3.1 3.2 2.4 2.5

% of Cash turnover of individual investors individual of turnoverCash of % 2.0 1.7 2 1.6 1.6 1.6 1.5 1.5 1.5

0 Mumbai Delhi - NCR Bangalore Ahmedabad Pune Hyderabad Kolkata Chennai Jaipur Surat (MH/TN/RG)

Source: NSE. ta.

Figure 174: Top 10 districts based on individual investors traded

14.0 13.2 Feb-20 Mar-20 Apr-20 May-20 Jun-20

12.0 11.5

10.0 8.5 8.4 8.0

market 6.0 4.8 3.8 3.8 4.0 3.6 3.6 3.5

1.9 2.0 2.1 1.7 1.7 1.6

2.0 1.5 1.5 1.5 1.3 % of traded volume of individual investors in cash in investors individualof volume traded of % - Mumbai Delhi - NCR Ahmedabad Pune Bangalore Surat Hyderabad Kolkata Jaipur Chennai (MH/TN/RG) Source: NSE ta

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Investment through mutual funds in India

Average asset under management (AAUM) of mutual funds (MFs) recovered partially: After a significant fall during Mar- mutual funds started recovering over the last two months to partially offset the overall the period partly due to weak macroeconomic outlook. The overall recovery in AAUM tallied with market performance and partial recovery of global indices after prompt and substantial policy responses from monetary regulators and governments across countries.

In India, RBI and government have announced several policy actions to provide adequate and cheap liquidity in the system. These may have given a temporary breather to the market and helped it to recover at a faster pace. However, the growth scenario remains gloomy due to slow recovery of the real economy post a nationwide lockdown for more than 60 days as total number of Covid-19 cases and fatalities continue to rise exponentially across the country.

Figure 175: Monthly trend of total MF schemes and average AUM

AAUM for the month (Rstrn) - RHS No. of Schemes

2,000 30

1,950 25

1,900 20

1,850 15

1,800 10

1,750 5

1,700 0 Apr-19 Jun-19 Aug-19 Oct-19 Dec-19 Feb-20 Apr-20 Jun-20

Source: AMFI. *AAUM-Average Asset under Management.

Net investment of MFs declined amid weak Data further reveals that there were several ups and downs in net investments of mutual funds over

utlook weakened globally due to COVID-19 pandemic. Later, net investment of MFs continued to rise over the next two months to reach Rs708bn over the month of May as securities market recovered partially across major economies, before declining again in June to merely Rs73bn net investment as coronavirus cases continue to rise over the month and growth scenario deteriorate further in India.

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Figure 176: Monthly trend of total investment through mutual funds Fund mobilized during the month (Rsbn) Repurchase/Redemption during the month (Rsbn) Net Inflow (+ve)/Outflow (-ve) for the month (Rsbn) - RHS 25,000 2,000

1,500

20,000 1,000

500 15,000 0

(500) 10,000 (1,000)

5,000 (1,500) (2,000)

0 (2,500) Apr-19 Jun-19 Aug-19 Oct-19 Dec-19 Feb-20 Apr-20 Jun-20

Source: AMFI.

Fund mobilisation through new schemes remains low in June: Monthly trend of total investment remains quite volatile through new MF schemes as well. Amid an unprecedented coronavirus pandemic, rise in market uncertainty and an impending global recession, only five new schemes were launched in April and funds worth Rs2bn got mobilised through these new schemes. This has further declined in May, with only one scheme getting launched, mobilising just Rs0.2bn. In June, three new schemes were launched that mobilised merely Rs1.95bn over the month as economic scenario remains gloomy over the coming months.

Figure 177: Monthly trend of total investment through new schemes

Funds mobilized through new schemes (Rsbn) - RHS No. of new Schemes

25 250

20 200

15 150

10 100

5 50

0 0 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20

Source: AMFI.

110/123 Market Pulse July 2020 | Vol. 2, Issue 7

Policy developments India

Policy measures by the SEBI during the month June 4th, 2020 Relaxation in compliance with requirements pertaining to AIFs and VCFs. In view of the COVID-19 situation, SEBI, vide circular dated March 30th, 2020, had extended the due date for regulatory filings for AIFs and VCFs for the period ending March 31st, 2020 and April 30th, 2020 by two months, over and above the timelines according to the SEBI AIF Regulations. The above due date has been extended further. AIFs and VCFs shall now submit the regulatory filings for the periods March, April, May and June on or before August 7th, 2020. June 5th, 2020 Framework for Regulatory Sandbox SEBI vide circular dated May 20th, 2019 had stipulated a framework for an industry-wide Innovation Sandbox, whereby FinTech start-ups and entities not regulated by SEBI were permitted to use the Innovation Sandbox for offline testing of their proposed solution. SEBI has now decided to introduce a framework for Regulatory Sandbox, whereby entities regulated by SEBI shall be granted certain facilities and flexibilities to experiment with the Fintech solutions in live environment and on limited set of real customers for a limited time frame, with necessary safeguards for investor protection and risk mitigation. June 5th, 2020 Participation of mutual funds in commodity derivatives markets in India. As per the provision in SEBI circular dated May 21st, 2019, mutual funds are permitted to participate in Exchange-traded commodity derivative (ETCDs) in India, except in commodity vide SEBI circular no. SEBI/HO/CDMRD/DMP/CIR/P/2017/84 dated July 25, 2017. As per the modified provision, no mutual fund schemes shall invest in physical goods except in gold through Gold ETFs. However, mutual fund schemes participating in ETCDs may hold the underlying goods in case of physical settlement of contracts. In such case mutual funds shall dispose of such goods from the books of the scheme, at the earliest, not exceeding the prescribed timelines for various commodities in the modified provision. June 8th, 2020 Relaxation from compliance with certain provisions of the SEBI (Issue and Listing of Debt Securities) Regulations, 2008 and SEBI (Non-Convertible Redeemable Preference Shares) Regulations, 2013 and certain SEBI Circulars due to the COVID -19 virus pandemic. SEBI has decided to extend the relaxation provided in the circular for issuers who intend/propose to list their Non-Convertible Debentures (NCDs) /Non-Convertible Redeemable Preference Share (NCRPS) /Commercial Papers (CPs) for disclosure of financial results for another one month. June 9th, 2020 Relaxations from certain provisions of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 in respect of Further Public Offer. In continuation to temporary relaxation in eligibility conditions related to Fast Track Rights Issue announced on April 21st, 2020 in the wake of the COVID-19 outbreak, SEBI has decided to provide similar relaxations in the eligibility conditions related to Fast Track Further Public Offer (FPO). June 12th, 2020 Investment by the sponsor or asset management company in the scheme. As per the SEBI Mutual Funds Regulations, the sponsor or asset management company is required to invest not less than one percent of the amount which would be raised in the new fund offer or fifty lakh rupees, whichever is less in such option of the scheme, as may be specified by the Board. SEBI has decided that the aforementioned investment shall be made in growth option of the scheme. For schemes where growth option is not available the investment shall be made

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in the dividend reinvestment option of the scheme. Further schemes where growth option as well as dividend reinvestment option are not available the investment shall be made in the dividend option of the scheme. June 19th, 2020 Relaxation in timelines for compliance with regulatory requirements Due to the COVID-19 pandemic SEBI had earlier provided relaxations in timelines for compliance with various regulatory requirements by the trading members, clearing members and depository participants. SEBI has decided to further extend the timelines for compliance with the regulatory requirements with respect to client funding reporting, Artificial Intelligence and Machine Learning applications reporting, compliance certificate for margin trading in CM segment, risk- based supervision, networth certificate for all member for half-year ended March 2020 etc. till July 31st, 2020. June 22nd, 2020 Conducting meeting of unitholders of InvITs and REITs through video-conferencing (VC) through other audio-visual means (OAVM). SEBI Infrastructure Investment Trusts Regulations and SEBI Real Estate Investment Trusts Regulations provide for holding of annual meeting of all unitholders not less than once a year. Meeting of unitholders are also required for matters which require approval of the unitholders. SEBI has clarified that InvITs/REITs can conduct meeting of unitholders through VC or OVAM. For meeting other than annual meeting of unitholders, meeting through VC and OVAM shall be available up to September 30th, 2020. Detailed procedures of VC and OVAM are specified in the circular June 22nd, 2020 Transaction in Corporate Bonds/Commercial Papers through RFQ platform With a view to enhance the transparency and disclosures pertaining to debt schemes and investments by mutual funds, SEBI has issued certain guidelines based on the recommendations by the Mutual Fund Advisory Committee. Some of the key guidelines include: 1. Mutual Funds shall undertake on a monthly basis at least 10% of their average secondary market trades by value (excluding Inter Scheme Transfer trades) in the Corporate Bonds in the immediately preceding three months by placing/seeking quotes through one-to- many mode on the Request for Quote (RFQ) platform of stock exchanges. 2. All transactions in Corporate Bonds and Commercial Papers wherein Mutual Fund is on both sides of the trade shall be executed through RFQ platform of stock exchanges in one-to-one mode. 3. Any transaction entered by mutual fund in Corporate Bonds in one-to-many mode and gets executed with another mutual fund shall also be counted for the aforesaid 10% requirement. 4. In partial modification to SEBI circular dated September 13th, 2020, such disclosure shall be done on fortnightly basis within five days of every fortnight for debt schemes. June 23rd, 2020 Temporary relaxation in processing of documents pertaining to FPIs due to COVID-19. In view of the COVID-19 pandemic, SEBI vide circular dated March 30th, 2020 had prescribed temporary relaxation in processing documents pertaining to FPIs. SEBI has decided to further extend the timelines for compliance with the regulatory requirements. All other conditions in the March 30th circular shall remain unchanged. June 24th, 2020 Further extension of time for submission of financial results for the quarter/half year/financial year ending March 31st, 2020 due to the continuing impact of the CoVID-19 pandemic. SEBI vide circular dated March 19th, 2020 had extended the deadline for submission of financial results under LODR requirements for the quarter and the year ending31stMarch 2020 till June 30th, 2020 due to the COVID-19 pandemic. Taking into representations from listed companies,

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Chartered Accountant firms and industry bodies, SEBI has decided to extend the above timeline further till July 31st, 2020. June 24th, 2020 Guidelines for Order-to-trade ratio (OTR) for Algorithmic Trading. On the basis of the requests received from stock exchanges, the following modifications shall be made to the existing OTR framework under algorithmic trading mechanism: 1. Stock exchanges may be permitted to introduce additional slabs up to OTR of 2000 (from existing OTR of 500), and for OTR more than 2000. The slabs can be introduced with deterrent incremental penalty decided jointly by stock exchanges. 2. On the third instance of the OTR being 2000 or more in last 30 days (rolling basis), the concerned trading member shall not be permitted to place any orders for the first 15 minutes on the next trading day as a cooling-off action. June 25th, 2020 Further extension of timeline for submission of Annual Secretarial Compliance report by listed entities due to the continuing impact of the CoVID-19 pandemic. SEBI vide circular dated March 19th, 2020 had extended the timeline for submission of the Annual Secretarial Compliance report for listed entities for the FY2019-20 from May31st, 2020 to June 30th, 2020. Taking into considerations the representations received from the Institute of Company Secretaries of India (ICSI), industry bodies and listed entities, the above deadline has been extended till July 31st, 2020. June 26th, 2020 Relaxation of time-gap between two Board/Audit Committee meetings of listed entities owing to COVID-19 pandemic. SEBI vide circular dated March 19th, 2020 had relaxed the maximum stipulated time gap of 120 days between two meetings of the Board and Audit Committees of the listed entities held/proposed to be held between the period December 1st, 2019 and June 30th, 2020. The above relaxation is further extended till July 31st, 2020. June 29th, 2020 Guidelines for Portfolio Managers Extension of implementation timeline SEBI vide circular dated March 30th, 2020 had extended the timeline for applicability of February 13th circular Guidelines for Portfolio Managers effective from July 1st, 2020. The timeline stands extended. The circular will now come in to force from October 1st, 2020. June 30th, 2020 Relaxation in timelines for compliance with regulatory requirements for depository participants, Registrar to an issue and share transfer agents. SEBI, in its previous circulars had extended the timelines for various regulatory requirements by depository participants, Registrar to an issue and share transfer agents. The timeline is further extended till July 31st, 2020. All other conditions specified in the previous circulars shall continue to remain applicable. June 30th, 2020 Collection of stamp duty on issue, transfer and sale of units of AIFs. The Government of India vide Gazette notification dated January 8th, 2020 had notified the registered under the Securities and Exchange Board of India (Registrars to an Issue and Share Transfer Agents) Regulations,

Stamp Act, 1899 and the Rules made thereunder, only in case of instruments of transaction otherwise than through a recognised stock exchange or depository. In this regard, the above entities shall comply with the applicable provisions of the Indian Stamp Act, 1899 and the Rules made thereunder regarding collection of stamp duty on sale, transfer and issue of units of AIFs w.e.f. July 1st, 2020. AIFs, where the RTAs have not been appointed thus far, shall appoint the RTA, at the earliest but not later than July 15th, 2020 to enable collection of applicable stamp duty. Till such time the RTAs are appointed, the AIFs shall keep the applicable stamp duty in a designated bank account. The AIFs shall transfer the said amount to the RTA upon appointment

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for onward remittance to States/ Union Territories. With regard to transactions (issue, transfer and sale) of units of AIFs in demat mode through recognized Stock Exchange or Depository, the respective Stock Exchange/authorized Clearing Corporation or a Depository is empowered to collect stamp duty as per the amended Indian Stamp Act.

Global

ESMA renews its decision requiring net short position holders to report positions of 0.1% and above of the issued share capital (ESMA. June 11th, 2020)16

The European Securities and Markets Authority (ESMA) has renewed its decision to temporarily require the holders of net short positions in shares traded in a European Union (EU) regulated market to notify the relevant national competent authority (NCA) if the position exceeds 0.1% of the issued share capital. According to ESMA, this measure will maintain the ability of NCAs to deal with any threats to market integrity, orderly functioning of markets and financial stability at an early stage, allowing them and ESMA to timely address such threats in case of signs of market stress. The measure will applicable for a period of three months from June 17th, 2020.

Financial Regulators modify Volcker Rule (SEC, CFTC, FDIC, OCC, Federal Reserve Board. June 25th, 2020)17 on banking entities investing in or sponsoring hedge funds or private equity funds known as covered funds. Five federal regulatory agencies today finalized a rule modifying the private equity funds known as covered funds. The modifications are in three areas: a) Streamlining the covered funds portion of rule, b) Addressing the extraterritorial treatment of certain foreign funds, and c) Permitting banking entities to offer financial services and engage in other activities that do not raise concerns that the Volcker rule was intended to address. The rule will be applicable from October 1st, 2020.

The Climate Financial Risk Forum (CFRF) publishes its guide to help the financial industry address climate-related financial risks (FCA. June 29th, 2020)18

The CFRF was jointly established in March 2019 by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), to build capacity and share best practice risks from climate change. The objective of the guide is to help firms understand the risks that arise from climate change, and to provide support on how to integrate these risks into their strategy and decision-making processes. The key areas covered under the guide are: a) Risk Management, b) Scenario analysis, c) Disclosures, d) Innovation.

16 https://www.esma.europa.eu/sites/default/files/library/esma71-99-1342_decision_ss_reporting_renewal_statement.pdf 17 https://www.sec.gov/news/press-release/2020-143 18 https://www.fca.org.uk/news/press-releases/climate-financial-risk-forum-publishes-guide-financial-industry-address-climate-related

114/123 Market Pulse July 2020 | Vol. 2, Issue 7

Comparison of trading activities across major exchanges globally

The study has analysed the trading pattern in the securities market in different segments across exchanges globally. - 96 exchanges; where 55 from the EMEA region, 25 from Asia-Pacific and the rest from the Americas region. The analysis has h its trading activity in the cash/spot markets and different derivatives markets Equity, Index derivatives and Currency segments. Key takeaways of the analysis are:  domestic market capitalisation (DMC): NSE became the 11th largest exchange in the world based on market capitalisation albeit significantly higher than the previous month as securities market recovered globally. Among other stock exchanges in India Indian, BSE held 14th position with The NYSE remains the top exchange globally with US$21trn market capitalisation, followed by Nasdaq-US and Japan Stock Exchange. Shanghai, Euronext, Hong Kong and Euronext are others leading exchanges worldwide.

Recently, Saudi Stock Exchange (Tadawul) became one of the largest exchanges with US$2.2trn DMC as of May vs. US$537bn in the previous year) post the listing of the oil company Saudi Aramco valued at US$1.7trn as the w biggest IPO.

Many top exchanges recorded a sharp fall in DMC on an YoY basis amid ongoing global slowdown owing to the Covid-19 outbreak. The NYSE recorded a 8% YoY fall in DMC in contrast, Nasdaq US, Shanghai, Shenzhen, Hong Kong and Japan stock exchanges registered a significant growth in their market cap.  In the Cash market, NSE held second position globally in terms of number of trades: NSE retained its second position globally in terms of number of trades in the Cash market, while Shanghai Stock Exchange (SSE) slipped further to sixth position over the month. However, Shenzhen Stock Exchange (SZSE) still maintains its top position globally with 430mn trades over the month, even as it recorded 18% fall in the number of trades on MoM basis. All major exchanges recorded a sharp decline in their trading volumes. Data also reveals the volatility of total trades has increased significantly across all exchanges particularly over the last year particularly for large exchanges.

 NSE retained its top position in equity index options with ~77% of trade share in May : increase from 70% in Apr 7% in May the market over the last two years in terms of total number of contracts traded in the segment. Other exchanges contributes a minor portion in the market globally over the last two years, while Korea Stock Exchange and CBOE Global hold second and third positions with merely 6% and 5% market share respectively, followed by Deutsche Boerse AG.

 NSE became fifth largest exchange globally in the Equity index futures segment in terms of total number of contracts traded: B3 - Brasil Bolsa Balcão retains top position in the Equity index futures market over the last two years, barring few

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months in 2018, even as its marke vs. 61% market in the previous month. Among others, CME group holds second position with 21% market share, followed by Deutsche Boerse (8%) and Japan stock exchange (6 improved to 3% in May vs. 2% in April.

 NSE remains the third largest exchange in the Stock futures segment: Distibution of total trade volume is quite diverse across exchnages for Stock options vs. Stock futures. Korea Stock Exchange topped in the stock futures segment over the last two years in terms of total number of contracts traded, followed by Borsa Istanbul Exchange, NSE, B3 - Brasil Bolsa Balcão and Moscow Stock Excnange. NSE became third largest exchnage globally in terms of total number of contracts trades in stock futures where 22.6m contracts were traded over the month of May 19.5m contracts traded in Apr

 In Currency segment, NSE is the largest exchange globally in the options market: NSE ranked first in the Currency options with 63% contracts traded in May; however, the exchange has lost its top position in Futures to B3 - Brasil Bolsa Balcão over the month. Among other exchanges in India, BSE also contributed significant share in the global market. It retained second position in Currency options and fourth position in Currency futures with 26% and 9% market shares respectively over the month of May.

 NSE holds fifth position in stock options: In stock options, Nasdaq-US holds top position in May 4m contracts traded, followed by CBOE Global where 98m contracts were treaded over the month. B3 - Brasil Bolsa Balcão maintained its third position with 75m contracts traded over the month, while NSE ranked fifth with 17m contract traded over the month.

Figure 178: Domestic market cap of top ranked Figure 179: Number of trades in Cash market of top exchanges* ranked exchanges* (mn) NYSE 800 SZSE NSE KRX Nasdaq - US CBOE Global Nasdaq - US SSE JPX 700 SSE

HKEX 600 Euronext

SZSE 500 May'20 LSE Group May'19 Tadawul 400 TMX Group May'18

NSE 300 DBAG SIX Swiss 200 BSE

0 5,000 10,000 15,000 20,000 25,000 100 (US$bn) May-18 Nov-18 May-19 Nov-19 May-20

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Figure 180: Number of contracts traded in Stock Figure 181: Number of contracts traded in Stock options futures of top-ranked exchanges* of top-ranked exchanges* Nasdaq - US CBOE Global (mn) KRX BIST (mn) NSE B3 - Brasil Bolsa Balcão B3 - Brasil Bolsa Balcão MIAX 160 NSE DBAG MOEX 120 HKEX 140

120 90 100

80 60

60

40 30

20

0 0 May-18 Nov-18 May-19 Nov-19 May-20 May-18 Nov-18 May-19 Nov-19 May-20

Figure 182: Number of trades in Index futures of top Figure 183: Number of trades in Index options of top ranked exchanges* ranked exchanges*

(mn) B3 - Brasil Bolsa Balcão CME Group (mn) NSE KRX CBOE Global DBAG JPX DBAG TFE CME Group NSE SGX 450 525

400 450

350 375 300

300 250

200 225

150 150 100 75 50

0 0 May-18 Nov-18 May-19 Nov-19 May-20 May-18 Nov-18 May-19 Nov-19 May-20

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Figure 184: Number of trades in Currency futures of top Figure 185: Number of trades in Currency options of top ranked exchanges* ranked exchanges* B3 - Brasil Bolsa Balcão NSE (mn) (mn) NSE BSE MOEX MOEX BSE TASE JSE CME Group 100 80

80 60

60

40

40

20 20

0 0 May-18 Nov-18 May-19 Nov-19 May-20 May-18 Nov-18 May-19 Nov-19 May-20

Source: WFE monthly statistics. Note: *ASX - Australian Securities Exchange, BIST - Borsa Istanbul, BME - Spanish Exchanges, BSE - BSE India Limited, HKEX - Hong Kong Exchanges and Clearing, ISE - International Securities Exchange, JPX - Japan Exchange Group Inc., JSE - Johannesburg Stock Exchange, KRX - Korea Exchange, LSE London Stock Exchange, MOEX - Moscow Exchange, NSE - National Stock Exchange of India Ltd., NYSE New York Stock Exchange, SGX - Singapore Exchange, SSE - Shanghai Stock Exchange, SZSE - Shenzhen Stock Exchange, TMX TMX Group, TSE - Tehran Stock Exchange, TFE - Taiwan Futures Exchange, Tadawul - Saudi Stock Exchange (Tadawul), TASE - Tel-Aviv Stock Exchange, MIAX - Miami International Securities Exchange, DBAG - Deutsche Boerse AG. Only WFE member exchanges are included in the analysis.

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Economic calendar for major countries (August 2020)

Reuters Prior Date Country Indicator Name Period Unit Poll Period 3 Aug 2020 China (Mainland) Caixin Mfg PMI Final Jul 51.2 Index (diffusion) 3 Aug 2020 India IHS Markit Mfg PMI Jul 47.2 Index (diffusion) 3 Aug 2020 Russia Markit Mfg PMI Jul 49.4 Index (diffusion) 3 Aug 2020 Euro Zone Markit Mfg Final PMI Jul 47.4 Index (diffusion) 3 Aug 2020 United Kingdom Markit/CIPS Mfg PMI Final Jul 50.1 Index (diffusion) 3 Aug 2020 United States Markit Mfg PMI Final Jul 49.8 Index (diffusion) 3 Aug 2020 United States ISM Manufacturing PMI Jun 52.6 Index 4 Aug 2020 Japan CPI, Overall Tokyo Jul 0.3 % 4 Aug 2020 United States Factory Orders MM Jun 8.0 % 4 Aug 2020 Brazil Industrial Output YY Jun -21.9 % 5 Aug 2020 Japan Services PMI Jul 45.0 Index (diffusion) 5 Aug 2020 China (Mainland) Caixin Services PMI Jul 58.4 Index (diffusion) 5 Aug 2020 India IHS Markit Svcs PMI Jul 33.7 Index (diffusion) 5 Aug 2020 Euro Zone Markit Serv Final PMI Jul 48.3 Index (diffusion) 5 Aug 2020 United States Markit Svcs PMI Final Jul 47.9 Index (diffusion) 6 Aug 2020 Brazil Selic Interest Rate 5 Aug 2.25 % 6 Aug 2020 United Kingdom BoE Bank Rate Jul 0.1 0.1 % 7 Aug 2020 United States Non-Farm Payrolls Jul 4,800k Person 7 Aug 2020 United States Unemployment Rate Jul 11.1 % 7 Aug 2020 India Repo Rate 7 Aug 4.0 % 7 Aug 2020 India Reverse Repo Rate 7 Aug 3.35 % 11 Aug 2020 United Kingdom ILP Unemployment Rate Jun 3.9 % 11 Aug 2020 India Industrial Output Jun -18.3 % 11 Aug 2020 Russia GDP YY Quarterly Prelim Q2 1.6 % 12 Aug 2020 United Kingdom GDP Prelim YY Q2 -1.7 % 12 Aug 2020 United States CPI MM, SA Jul 0.6 % 14 Aug 2020 China (Mainland) Industrial Output YY Jul 4.8 % 14 Aug 2020 India WPI Inflation YY Jul -1.8 % 14 Aug 2020 Euro Zone GDP Flash Estimate YY Q2 -3.3 % 14 Aug 2020 United States Industrial Production MM Jul 5.4 % 17 Aug 2020 India Trade Deficit Govt.-USD Jul -0.79B USD 17 Aug 2020 India Imports Jul 21.11B USD 17 Aug 2020 India Exports Jul 21.91B USD 17 Aug 2020 Japan GDP QQ Annualised Q2 -2.2 % 17 Aug 2020 Russia Industrial Output Jul -9.4 % 19 Aug 2020 United Kingdom CPI YY Jul 0.6 % 19 Aug 2020 Euro Zone HICP Final YY Jul 0.3 % 19 Aug 2020 South Africa CPI YY Jul % 20 Aug 2020 Russia Unemployment Rate Jul 6.2 % 21 Aug 2020 Japan CPI, Overall Nationwide Jul 0.1 % 25 Aug 2020 United States Consumer Confidence Aug Index 27 Aug 2020 United States GDP 2nd Estimate Q2 % 28 Aug 2020 Euro Zone Consumer Confid. Final Aug Net balance 31 Aug 2020 India GDP Quarterly YY Q2 3.1 % 31 Aug 2020 India Infrastructure Output YY Jul % Source: Refinitiv Datastream

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Annual Macro Snapshot

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 National income

GDP (Current) (Rs trn) 76.3 87.4 99.4 112.3 124.7 137.7 153.9 171.0 189.7 203.4 GDP (Current) Growth (%) 19.9 14.4 13.8 13.0 11.0 10.5 11.8 11.1 11.0 7.2 GDP (Constant) Growth (%) 8.5 5.2 5.5 6.4 7.4 8.0 8.3 7.0 6.1 4.2 GVA (Constant) Growth (%) 8.0 5.2 5.4 6.1 7.2 8.0 8.0 6.6 6.0 3.9 Agriculture growth (%) 8.8 6.4 1.5 5.6 -0.2 0.6 6.8 5.9 2.4 4.0 Industry growth (%) 7.9 3.6 3.3 3.8 7.0 9.6 7.7 6.3 4.9 0.9 Services growth (%) 7.8 5.9 8.3 7.7 9.8 9.4 8.5 6.9 7.7 5.5 Per Capita GDP (Curr) (Rs) 64,372 71,609 80,518 89,796 98,405 1,07,341 1,18,489 1,30,124 1,42,963 1,51,677 Prices CPI Inflation (%) 10.1 9.3 5.9 4.9 4.5 3.6 3.4 4.8 CPI Rural (%) 10.7 9.6 6.1 5.5 5.0 3.6 3.0 4.2 CPI Urban (%) 9.5 9.1 5.4 4.1 4.0 3.6 3.9 5.4 WPI Inflation (%) 9.5 8.9 6.9 5.2 1.2 -3.7 1.7 3.0 4.3 1.7 Primary articles (%) 17.9 9.8 11.4 9.9 2.2 -0.4 3.5 1.3 2.8 6.8 Fuel & power (%) 12.3 13.9 7.1 7.1 -6.1 -19.7 -0.2 8.1 11.6 -1.8 Manuf. prods (%) 5.7 7.3 5.3 3.0 2.5 -1.8 1.4 2.8 3.6 0.3 Money, banking & interest rates Money supply (M3) growth (%) 16.1 13.5 13.6 13.4 10.9 10.1 10.1 9.2 10.5 8.9 Aggregate deposit growth (%) 15.9 13.5 14.2 14.1 10.7 9.3 15.3 6.2 10.0 7.9 Bank credit growth (%) 21.5 17.0 14.1 13.9 9.0 10.9 8.2 10.0 13.3 6.1 Non-food credit growth (%) 21.3 16.8 14.0 14.2 9.3 10.9 9.0 10.2 13.4 6.1 Cash Reserve Ratio (%, eop) 6.0 4.8 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 Bank Rate (%, eop) 6.00 9.50 8.50 9.00 8.50 7.75 6.75 6.25 6.50 4.65 Public Finance* GOI rev. receipts growth (%) 37.6 -4.7 17.0 15.4 8.5 8.5 15.0 4.4 8.2 19.1 Tax receipts growth (%) 27.0 12.1 16.5 9.9 9.3 16.9 17.9 11.8 8.4 4.0 GOI Expenditure growth (%) 16.9 8.9 8.1 10.6 6.7 7.6 10.3 8.4 8.1 16.6 Subsidies growth (%) 22.7 25.7 18.0 -1.0 1.4 2.3 -11.1 -4.4 -0.7 18.2 Interest expense growth (%) 9.8 16.7 14.7 19.5 7.5 9.7 8.8 10.0 10.2 7.3 External transactions Exports growth (%) 40.7 21.9 -1.8 4.9 -1.5 -15.5 5.1 10.1 8.8 -5.2 POL exports growth (%) 47.8 34.9 8.7 4.3 -10.7 -46.1 3.4 18.8 24.5 -11.8 Non-POL exports (%) 39.3 19.3 -4.2 5.1 0.8 -8.6 5.4 9.0 6.6 -4.1 Imports growth (%) 28.5 32.4 0.2 -8.4 -0.3 -15.0 1.0 21.2 10.5 -8.0 POL exports growth (%) 21.9 46.4 5.7 0.7 -16.4 -40.1 5.3 25.0 29.9 -7.5 Non-POL exports growth (%) 31.3 26.8 -2.3 -13.0 9.1 -3.8 -0.2 20.1 4.5 -8.1 Net FDI (US$bn) 11.3 21.9 19.8 21.6 31.3 36.0 35.6 30.3 30.7 43.0 Net FII (US$bn) 30.3 17.2 26.9 4.8 42.2 -4.1 7.6 22.1 -0.6 -1.4 Trade Balance RBI (US$bn) -189.7 -195.7 -147.6 -144.9 -130.1 -112.4 -160.0 -180.3 -157.5 Current Acc. Balance (US$bn) -78.2 -87.8 -32.4 -26.7 -22.1 -15.2 -48.7 -57.2 -24.6 Forex Reserves (US$bn) 304.8 294.4 292.6 303.7 341.4 355.6 370.0 424.4 411.9 475.6 Exchange rate (USDINR) 45.57 47.95 54.45 60.50 61.15 65.46 67.09 64.45 69.89 70.88 Source: CMIE Economic Outlook, NSE

120/123 Market Pulse July 2020 | Vol. 2, Issue 7

Our reports on the economy and markets in 2020 thus far

Sr. No. Date Report 1 24-Jul-20 Q4FY20 Corporate Performance Review 2 15-Jul-20 Macro Review: India monthly trade 3 13-Jul-20 Macro Review: IIP and Inflation 4 01-Jul-20 Macro Review: Q4FY20 Balance of Payments 5 26-Jun-20 Market Pulse June 2020: A monthly review of Indian economy and markets 6 16-Jun-20 Macro Review: India monthly trade

7 15-Jun-20 Macro Review: IIP and Inflation 8 04-Jun-20 Impact of COVID-19 on Agriculture: NSE webinar key takeaways 9 01-Jun-20 Macro Review: Q4FY20 GDP 10 31-May-20 Market Pulse May 2020: A monthly review of Indian economy and markets 11 29-May-20 India Ownership Tracker March 2020 12 22-May-20 Macro: Review: RBI Monetary Policy 13 17-May-20 Macro Review: India COVID-19 Stimulus Package (Fifth Tranche) 14 16-May-20 Macro Review: India COVID-19 Stimulus Package (Fourth Tranche) 15 15-May-20 Macro Review: India COVID-19 Stimulus Package (Third Tranche)

16 14-May-20 Macro Review: India COVID-19 Stimulus Package (Second Tranche) 17 13-May-20 Macro Review: India COVID-19 Stimulus Package (First Tranche) 18 13-May-20 Macro Review: IIP and Inflation 19 30-Apr-20 Market Pulse April 2020: A monthly review of Indian economy and markets 20 27-Apr-20 COVID-19: India Macro and Market Outlook

21 17-Apr-20 RBI response to COVID-19

22 16-Apr-20 Macro Review: India monthly trade

23 14-Apr-20 Macro Review: IIP and Inflation

24 14-Apr-20 Key takeaways from RBI Monetary Policy Report

25 27-Mar-20 India policy response to COVID-19

26 20-Mar-20 Market Pulse March 2020: A monthly review of Indian economy and markets

27 16-Mar-20 Macro Review: Q3FY20 Balance of Payments

28 11-Mar-20 A deep dive into Investment in India

29 09-Mar-20 India Ownership Tracker December 2019

30 02-Mar-20 Macro Review: Q3FY20 GDP

31 29-Feb-20 Quarterly Briefing: Takeover and Corporate Governance in India

32 20-Feb-20 Market Pulse February 2020: A monthly review of Indian economy and markets

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33 06-Feb-20 Macro Review: RBI Monetary Policy

34 01-Feb-20 Decoding the Union Budget FY2020-21

35 20-Jan-20 Market Pulse January 2020: A monthly review of Indian economy and markets

36 08-Jan-20 Macro Review: FY20 GDP Advance Estimates

37 01-Jan-20 Macro Review: Q2FY20 Balance of Payments

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Economic Policy & Research

Tirthankar Patnaik, PhD [email protected] +91-22-26598149

Prerna Singhvi, CFA [email protected] +91-22-26598316

Runu Bhakta, PhD [email protected] +91-22-26598163

Ashiana Salian [email protected] +91-22-26598163

Marketing

Rajesh Jaiswal [email protected] +91-22-26598380

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