#1Classification - Restricted HDFC Bank Research Presentation November 2022 1 HDFC BANK RESEARCH Confidential/Restricted Classification - Restricted HDFC BANK We understand your world#2Risk Profile based Asset - allocation Classification - Restricted Asset Allocation Asset Class Overall View Aggressive Moderate Conservative Equity Funds 75% 55% 25% Debt Funds 20% 40% 70% Gold Category wise view Note: 5% 5% 5% Optimistic Cautiously Optimistic Cautious MF Categories View MF Categories Equity Oriented Funds Largecap Funds Large Cap Index Funds Multi/Flexicap Funds Large and Mid Cap Funds Mid cap/Small cap ELSS Value / Contra / Dividend Yield Funds Focused Funds Aggressive Hybrid Funds/Dynamic Asset Allocation/Balanced Advantage Funds Equity Savings Funds Sector/Thematic Funds 1 Confidential/Restricted Debt Oriented Funds Short Duration Funds/Medium Duration Funds Target Maturity Index Funds Medium to Long / Long Duration Funds Dynamic Bond Funds Gilt Funds Ultra Short Duration/Low Duration/Money Market Funds Arbitage Funds Liquid/Overnight Funds Conservative Hybrid Funds Credit Risk Funds View HDFC BANK HDFC BANK RESEARCH We understand your world Classification - Restricted#3Classification - Restricted Equity MF Strategy & Recommended Asset Allocation ■The US Fed has continued on its path to hiking rates and tightening liquidity to control demand led inflation, yet key data points in the US suggest that this fight could take long. ■ Europe remains in a bigger mess with higher energy costs, weakening consumer confidence and tightening monetary policy which can structurally impact the growth of the EU. ■ Multilateral agencies continue to warn of a weaker global growth outlook for CY22 and CY23, led by the Russia Ukraine conflict, high inflation and tight money supply. " Due to expectation of slowdown, the commodity prices have consolidated, which is likely to have a sobering impact on global inflation. Energy costs still remain high. " OPEC believes that demand for crude oil could continue to rise for the next 20 years, despite transition into renewables. ■ Despite the slowdown fears the global equity markets rallied in October, led by value buying and expectations of a Fed pivot as growth impulses weaken. ■ Sharp appreciation of US Dollar is also putting a lot of pressure on global currencies and economies. China too has seen marked slowdown owing to Covid-19 led shutdowns and the issues in its housing market. The overall economic indicators in India continued to show positivity and urban demand showing reasonable strength. Rural demand is starting to see green shoots, while rising inflationary pressure could hurt demand dynamics. ■ Corporate and Banking sector balance sheets in India have shown strong improvement, capacity utilisation data too have shown improvement and this is setting stage for increasing private capex demand. While consumer confidence continues to remain strong, rising inflation poses risk to this as it hurts the consumer/corporate surplus, this is a key monitorable from corporate earnings perspective. The Government is clearly focussed towards driving the capex in the economy through its own spending and incentive driven private capex. To control the rising impact of inflation on growth, the RBI raised the Policy Repo Rate and also started to take steps to move towards liquidity normalisation, to cushion the inflationary impulses. Given its strong growth differential and strong retail participation in the equity markets with other peer economies, India has been an outperformer in the EM basket. Any changes in these could have implication for the Indian market valuations. Q2FY23 results have seen stable topline growth, but margins pressure in many sectors is impacting the profit growth. Earnings expectations could see too could also see marginal downgrades. Key alpha sectors seems to be Banking, Auto, Infra, while Pharma seems to be emerging out of its slumber. The market saw steady performance in the frontline indices in the month of October, while the larger indices lagged, impacting alpha generation in the funds. ■ Declining liquidity, earnings cuts and rising rate could still weigh on the market valuations. However, in the longer term improving domestic macro conditions, higher capex investments and stable consumption growth could drive the Indian corporate earnings higher and support the equity markets. We expect the return expectations over 2-3 year period to be in line with earnings growth, with marginal valuation compression. However, with slowing global growth future earnings potential would remain a key monitorable. We continue to maintain an investment deployment strategy of 50% lumpsum and rest 50% to be staggered over the next 3-4 months with a cautiously optimistic stance. Investors could focus on Large Cap, Large & Midcap, Value, Hybrid Equity funds as portfolio core, in line with their risk profile and product suitability. 2 Confidential/Restricted HDFC BANK RESEARCH HDFC BANK We understand your world Classification - Restricted#4Classification - Restricted ☐ ☐ Debt Mutual Fund Strategy Given the expected volatility and uncertainty and expectations of flattening of the yield curve, staying invested at the short and the very short end of the yield could be better from risk reward perspective currently. Thus, investors should look at funds oriented towards the shorter end of the yield curve for relative stability in the near term and to benefit from the reset in interest rates on the higher side. For this one can look at Short Duration Funds, Money Market Funds, Ultra Short Duration and Low Duration Funds for a horizon of 12 months and above. For investors looking for accrual strategies, they can consider Target Maturity Index Funds that invest in a mix of better quality bonds with investment horizons matching the maturity of the funds. Investors who are comfortable with volatility and have a longer investment horizon could look at Dynamic Bonds for a horizon of 24 months and above. For a horizon of 3 months and above Arbitrage and Money Market Funds can be considered. Whereas, for a horizon of up to 3 months investors can consider Overnight Funds and Liquid Funds. Investors should invest in line with their risk profile and product suitability. 3 Confidential/Restricted HDFC BANK HDFC BANK RESEARCH We understand your world Classification - Restricted#5Research Presentation - Contents Classification - Restricted ■ US Interest rates continue to rise as Inflation and other key macro data remains strong, while steady fundamentals, expectations of Fed Pivot and bottom fishing led to strong rally in the US markets ■ Europe continues to struggle with stagflation and high energy costs, on the back of ongoing Russia-Ukraine Conflict ■ Chinese market correct as Xi Jinping reappointed for third term... while the economy continues to falter ■ Industrial commodity consolidating but Energy prices remained elevated...While Agri commodities saw mixed trends ■ Multilateral agencies expect weak global growth going forward, driven by tightening monetary conditions...While India would still be one of the fastest growing economies in the world ■ While most EMS currencies weakened.... Equity markets rose tracking similar movement in the developed markets ■ Indian markets remained positive in October on the back of strong DII flows, stable macros and revival in FPI flows... ■ Sectoral equity indices - Performance and FPI flows for October 2022 ■ Domestic macro conditions remains strong .... ...led by strong Urban demand ■Rural India is seeing signs of improvement with high crop prices, rising MSP and lower MGNREGA demand.... Low acreage in some crops could lead to better realisation going forward. ■ Strong corporate and Banks Balance Sheets and rising capacity utilisation creating condition for revival in private capex... ■ Q2FY23 earnings season started on mixed note... Topline growth remained steady but margin impact has led to weak profitability ■ While India's GDP growth / Earnings estimates have been downgraded, any uptick in growth trajectory could support equity market performance... ■Market Round up - October 2022 ■ Key concerns to watch out .... ■ Sectoral rotation has been the trend in last one year.... Sectors like Banking, Auto and Infra seems to be generating alpha in the near term. ■ Largecap vs Midcap ■ Fixed Income Market ■ High Inflation - Low Growth: The World is starting to be divided between controlling Inflation and Driving Economic Growth... ■Monetary Policy Tightening continued with inflation rates surging to multi-decade highs... ■ Domestic bond yields remained volatile and traded with an upward bias... ■ Retail Inflation Continued to Surge in September 2022.. While WPI has started to show some deceleration led by consolidation in commodity prices ... ■RBI is also likely to remain focused on controlling inflation... ■ Declining Forex Reserves amidst strengthening US Dollar remains a key monitorable for Bond Markets... ■ Banking system liquidity remained in Deficit mode for most part of October 2022... ■Rising credit growth and G-sec supply may continue to exert upward pressure on shorter end of the yield curve... ■ Yield Curve flattened further as the short term yields continued to rise amidst negative banking liquidity... 4 Confidential/Restricted HDFC BANK HDFC BANK RESEARCH We understand your world Classification - Restricted#65 10 9 8 7 CPI Inflation (YOY) Jan-21 Feb-21 Mar-21 Confidential/Restricted Apr-21 May-21 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 US 10-Yr Bond Yield (%) Jan 31, 2020 Mar 04, 2020 Apr 05, 2020 Jun 09, 2020 Jul 14, 2020 May 07, 2020 Aug 16, 2020 Sep 17, 2020 Oct 21, 2020 Nov 23, 2020 Dec 27, 2020 Jan 29, 2021 Mar 03, 2021 2021 Apr 04, 2021 May 05, Jun 07, 2021 2021 Jul 09, 2021 Aug 12, Sep 14, 2021 Oct 17, 2021 Nov 17, 2021 Dec19, 2021 Jan 21, 2022 Feb 24, 2022 Mar 28, 2022 Apr 29, 2022 Jun 01, 2022 Jul 05, 2022 Aug 05, 2022 Sep 07, 2022 Oct 10, 2022 US 10-Yr Bond Yield (%) CPI based Inflation (YoY %) in US remained elevated Source: Bloomberg Classification - Restricted US Interest rates continue to rise as Inflation and other key macro data remains strong, while steady fundamentals, expectations of Fed Pivot and bottom fishing led to strong rally in the US markets 5.00 4.50 4.00 US Fed Interest Rate Vs US Bond Yield % 4.49 No. of unemployed persons per job opening, seasonally adjusted is at 0.5 whereas, unemployment rate stands at 3.5%. Jun-21 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 US Fed Rate (%) US's GDP on annualised basis has improved in Q3CY23 after declining in the previous quarter Quarterly GDP Growth % (Annualised) 4.05 40.0 33.4 30.0 3.25 20.0 10.0 4.3 6.4 6.7 6.9 2.3 0.0 -1.6 -0.9 -10.0 -20.0 -30.0 -40.0 -31.4 16.0 14.0 12.0 2.6 10.0 8.0 6.0 4.0 2.0 0.0 Source: US Bureau of Economic Analysis Q2CY20 20.0% 8.3 15.0% 10.0% 5.0% 0.0% % Change -5.0% -10.0% -8.6% -15.0% -20.0% -25.0% Jul-22 Aug-22 Sep-22 Source: U.S. Bureau of Labor Statistics -30.0% Q3CY20 14.0% Q4CY20 Q1CY21 Q2CY21 Q3CY21 Q4CY21 Performance of US Equity Market 3.9% 8.0% -29.1% -35.0% USA (Dow jones) USA (NASDAQ) 25 USA (S&P 500) ■1 Year Oct-22 Source: Bloomberg -15.9% HDFC BANK RESEARCH Classification - Restricted Q1CY22 Q2CY22 Q3CY22 01-03-20 20 01-05-20 20 01-07-20 20 61.1 60.7 58.4 58.3 57.7 Manufacturing PMI 45 칡gggg 40 35 30 65 60 55 50 01-09-2020 01-11-20 20 01-01-2021 01-03-2021 01-05-2021 Umemployment Rate in the US 01-07-2021 01-09-2021 Source: US Bureau of Labor Statistics Manufacturing PMI witnessing expansion on back of demand improvement 57.3 55.5 01-11-2021 01-01-2022 01-03-2022 01-05-2022 01-07-2022 01-09-2022 58.8 59.2 57.0 52.7 52.2 51.5 52.0 Aug'21 Sept'21 Oct-21 Nov-21 Dec-21 Jan-22 HDFC BANK We understand your world Feb-22 Mar-22 Apr-22 May-22 Jun-22 Jul-22 Aug-22 Source: Bloomberg Sept 3.5#76 Confidential/Restricted 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Jan-19 Energy Price Index based 120.0 100.0 Dec-2021 Energy Price Movement (%) since Jan 2022 280.0 With tightening of 260.0 240.0 220.0 200.0 supply of Natural Gas market due to Russia Ukraine conflict, Natural Gas prices moved up sharply since Jan'22 180.0 160.0 140.0 Jan-2022 Feb-2022 Mar-2022 Apr-2022 -Natural Gas May-2022 Jun-2022 Jul-2022 Unemployment Rate in the Euro Area has been Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 declining 166.6 Europe continues to struggle with stagflation and high energy costs, on the back of ongoing Russia-Ukraine Conflict Aug-2022 Sep-2022 Source: Bloomberg Oct-2022 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% Source: Cogensis Apr-22 Jul-22 Oct-22 -3.0% Ja n-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 0 CPI Inflation (% YoY) 2 864 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 29 10 Aug-21 Sep-21 -Euro Area UK Classification - Restricted Inflation Trend In Euro Area 12 Oct-21 Nov-21 Dec-21 Jan-22 Feb-22 Mar-22 Apr-22 May-22 Increase in energy prices leading to higher inflation and impacting consumer sentiments in the region. Jun-22 Jul-22 Aug-22 Sep-22 Source: Eurostat, ONS Consumer Confidence Index Sep-20 Nov-20 Jan-21 Euro Consumer Confidence Index - Europe 0 -5 -10 -15 -20 -25 High inflation and interest rates led to decline in Consumer Confidence -30 -35 Mar-21 May-21 Industrial Production in Euro Area witnessing signs of improvement | …... Europe has unveiled Euro 200 bn energy-assistance plan for its households and businesses. Despite strong inflationary headwind and cost of living issues in Europe, Subsidy for energy should help Consumer and Industries. Dec-21 Jan-22 Feb-22 Source: Bloomberg Mar-22 Apr-22 May-22 Ju n-22 Jul-22 HDFC BANK RESEARCH Classification - Restricted HDFC BANK We understand your world Aug-22 Jul-21 Sep-21 Nov-21 Jan-22 Mar-22 May-22 Source: European Commission services Jul-22 Sep-22#87 Consumer Confidence Index 130 120 112.1 110 100 90 80 70 60 50 40 30 Jun-21 Confidential/Restricted Jul-21 Aug-21 117.8 117.5 121.2 120.2 119.5 Slower growth in Chinese economy impacted Consumer Confidence Classification - Restricted Chinese market correct as Xi Jinping reappointed for third term... while the economy continues to falter Xi Jinping has tightened Shanghai Index witnessed correction in Oct 2022 3500 his grip on shutting-out power, 3400 known 3300 economy, reformers to effectively take sole charge of the investors nervous. 3200 making Index Values 3100 3000 ≤ 2900 2800 Chinese Market saw Sharp correction in Oct 2022 as Xi Jinping reappointed for the third term Source: Bloomberg 2700 2600 31-Mar-22 14-Apr-22 28-Apr-22 12-May-22 26-May-221 09-Jun-22 23-Jun-22 07-Jul-22 21-Jul-22 04-Aug-22 18-Aug-22 01-Sep-22 15-Sep-22 29-Sep-22 13-Oct-22 27-Oct-22 COVID containment policies, crisis in China's real-estate market and growing fears of a recession impacting economic activities in China GDP % China's GDP growth trend and forecast for CY22 and CY23 9.00 8.00 6.85 6.95 6.75 7.00 5.95 6.00 5.00 4.00 8.11 4.70 3.20 2.24 3.00 2.00 1.00 0.00 CY16 CY17 CY18 CY19 CY20 CY21 CY22 (E) CY23 (E) Source:- Eurostat/ OECD Sep-21 Oct-21 Nov-21 Dec-21 Jan-22 119.8 121.5 120.5 113.2 86.7 Feb-22 Mar-22 Apr-22 May-22 86.8 Source: National Bureau of Statistics of China People Bank of China (PBOC) loose Monetary Policy to spur growth 4.65% 4.75% 4.50% 8.40% 4.25% 4.00% 3.85% 3.75% 88.9 87.9 3.50% 87 87.2 3.25% 3.00% 2.95% 8.45% 8.40% 4.30% 8.35% 8.30% 3.65% 8.25% 8.20% 2.75% 8.15% 2.75% 2.50% 8.10% 8.10% 2.20% 2.25% 8.05% 2.00% 2.00% 8.00% Jun-22 Jul-22 Aug-22 Sep-22 1.75% 7.95% Jan-22 Dec-21 Feb-22 Mar-22 -1-year MLF -7-days Reverse Repo Rate Apr-22 -1-year LPR May-22 -5-year LPR Jun-22 Jul-22 Aug-22 Required Reserve Ratio (RRR) HDFC BANK RESEARCH Classification - Restricted HDFC BANK We understand your world Source: Bloomberg#98 Confidential/Restricted Price Change (%) ENERGY PRICE INDEX BASED TO 100 -10.0 -20.0 -30.0 -40.0 240.0 220.0 200.0 180.0 160.0 140.0 120.0 100.0 Мил Classification - Restricted Industrial commodity consolidating but Energy prices remained elevated... Tightening of supply of Natural Gas market due to Russia Ukraine conflict led the Natural Gas prices elevated Energy Price Movement (%) since Jan 2022 280.0 260.0 While Agri commodities saw mixed trends Trend in Crude oil Price in the last few months 145 135 125 Natural Gas Oct-2022 20.0 10.0 0.0 Industrial Commodities: Slower global growth and weakness in China could keep the Industrial commodity prices under check SOURCE: BLOOMBERG -50.0 Since Jan'2022 Oct-22 LMEX Metal -22.5 -1.5 Aluminium Steel Copper -20.9 2.8 -18.9 -5.5 -23.4 -1.5 166.6 in USD/bbl 75 55 212 65 Dec-21 Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 Jul-22 Aug-22 Sep-22 Oil Demand mb/d OPEC expects current oil demand continue to rise 115.0 109.5 109.8 -109.8 110.0 108.3 105.5 105.0 93.3 100.0 96.9 95.0 90.0 85.0 Oct-22 CY21 CY25 CY30 CY35 CY40 CY45 Source: Bloomberg Source: OPEC Agri Commodities: Agri commodities showed mixed trend amid changing weather condition and drought like situation in many parts of the world including US & Europe HDFC BANK RESEARCH Classification - Restricted BBG Agriculture 5.9 0.5 Corn Sugar Palm Oil Cotton Wheat 16.6 2.1 -4.8 1.6 -39.1 10.5 -36.1 -15.6 14.5 -4.3 HDFC BANK We understand your world Source: Bloomberg#10Classification - Restricted Multilateral agencies expect weak global growth going forward, driven by tightening monetary conditions... ...While India would still be one of the fastest growing economies in the world GDP Growth % Global GDP Growth Projections by Multilateral Agencies 4.0% 3.6% 3.5% 3.2% 3.2% 3.0% 3.0% 3.0% 2.9% 2.9% 3.0% 2.8% 2.7% 2.7% 2.7% 2.4% 2.5% 2.3% 2.2% 1.7% 2.0% 1.5% 1.0% 0.5% 0.0% OECD 6 Moody's Fitch Ratings IMF ■CY22 (Earlier) ■CY22 (Revised) ■CY23 (Earlier) ■CY23 (Revised) Confidential/Restricted Source: Media Reports GDP Growth Projections (%) India's GDP Growth Projection by Multilateral Agencies 9.0% 8.2% 8.0% 7.8% 8.0% 7.4% 7.5% 7.2% 6.8% 7.0% 7.0% 6.5% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% IMF World Banks RBI ■FY23 (E) April FY23 (E) July FY23 (E) Oct Source: Media Reports HDFC BANK HDFC BANK RESEARCH We understand your world Classification - Restricted#1110 Confidential/Restricted 5.00% 4.6% 4.00% 3.00% 2.00% 1.00% 0.00% -1.00% -2.00% -3.00% -4.00% -5.00% While most EMS currencies weakened.... Equity markets rose tracking similar movement in the developed markets Trend in currencies of Emerging markets in Oct'22 15.00% 11.87% 10.00% 5.00% 0.00% -5.00% -10.00% Mexico- MEXBOL Index Brazil-IBOV Index Brazil 5.45% Mexico 1.7% Turkey Thailand Taiwan Classification - Restricted -0.5% -0.9% -1.4% -1.7% -2.4% -2.6% -3.9% Trend in equity markets of Emerging Countries: India- NIFTY 50 5.37% Indonesia - JCI Index 0.83% India Indonesia China Source: Bloomberg, Negative return indicates depreciation agains USD -3.54% -7.78% Taiwan-TWSE Index China-SHSZ300 Index HDFC BANK RESEARCH Classification - Restricted HDFC BANK We understand your world Source: Bloomberg Vietnam#1211 Rs. in bn (400) (600) Confidential/Restricted Sep-21 400 200 83 600 62000 61000 60000 59000 58000 57000 56000 55000 54000 03-Oct-22 05-Oct-22 07-Oct-22 09-Oct-22 11-Oct-22 13-Oct-22 15-Oct-22 (57) (200) (170) (132) Oct-21 Nov-21 Dec-21 Jan-22 Trend in S&P BSE Sensex Indian markets remained positive in October on the back of strong DII flows, stable macros and revival in FPI flows... 17-Oct-22 19-Oct-22 21-Oct-22 23-Oct-22 25-Oct-22 Resumption of buying by Foreign Portfolio Investors (FPI) pushed equity IT (360) (377) Feb-22 Mar-22 markets higher (283) (291) (377) (495) Apr-22 May-22 Jun-22 Jul-22 Aug-22 Source: NSDL, Data as on 31 October 2022 Sep-22 67 540 27-Oct-22 29-Oct-22 31-Oct-22 Source: Bloombeing Classification - Restricted 30000 60747 24000 26000 28000 3-Oct-22 4-Oct-22 5-Oct-22 6-Oct-22 7-Oct-22 8-Oct-22 350 250 150 84 50 (50) (119) (130) (150) (145) (163) (250) (264) (350) (308) Oct-22 Oct-20 Dec-20 Feb-21 Apr-21 Jun-21 Trend in BSE Mid Cap and Small Cap Indices 9-Oct-22 10-Oct-22 11-Oct-22 12-Oct-22 13-Oct-22 14-Oct-22 15-Oct-22 16-Oct-22 17-Oct-22 18-Oct-22 19-Oct-22 20-Oct-22 21-Oct-22 22-Oct-22 23-Oct-22 24-Oct-22 25-Oct-22 26-Oct-22 S&P BSE Mid Cap S&P BSE SmallCap (RHS) Source:- Bloomberg DII's continues to buy the dips (Rs in Bn) 284 290 194 215 219 220 207 186 165 55 77 225 == 48 64 115 59 16 63 Aug-21 Oct-21 HDFC BANK RESEARCH Classification - Restricted HDFC BANK We understand your world Dec-21 Feb-22 Apr-22 Jun-22 9 Aug-22 Source: SEBI, Data as on 30 Oct 2022 Oct-22 69 27-Oct-22 28-Oct-22 29-Oct-22 30-Oct-22 31-Oct-22#13Classification - Restricted Sectoral equity indices - Performance and FPI flows for October 2022 S&P BSE Sectoral Indices monthly performance 8.0 7.3 7.0 6.6 5.6 6.0 5.0 5.3 5.2 5.0 4.0 3.0 2.0 1.0 0.0 4.0 3.4 2.5 2.5 0.4 -1.0 Healthcare Metal FMCG Infra IT Auto Power (Month on Month change in %) Oil & Gas BANKEX Cons Durables Realty Sectoral FPI flows - Top 5 and Bottom 5 (Rs in Bn) 40.0 17.4 20.0 10.2 8.9 7.8 0.0 -20.0 -40.0 -60.0 -80.0 -100.0 6.8 -22.1 -33.6 -49.7 -68.7 -0.3 Cap Goods Source: ACEMF -120.0 -110.9 Telecommunication Others Consumer Services Construction Capital Goods Automobile and Auto Components Metals & Mining Oil, Gas & Consumable Information Technology Financial Services Fuels Source: NSDL, Data is from Sept 16, 2022-Oct 15, 2022 12 Confidential/Restricted HDFC BANK RESEARCH Classification - Restricted HDFC BANK We understand your world#1413 Jan Feb 0 20 40 Feb 20 140 120 100 80 60 Domestic macro conditions remains strong .... High frequency indictors of economic activity continues to show momentum Jun 20] Apr 20 Oct 20] Aug 20 Dec 20 Feb 21 Apr 21 Jun 21 Aug 21 Oct 21 Dec 21 Feb 22 Apr 22 Source: RBI staff estimates. Activity Index Pre-Covid Level (Feb = 100) GST collection witnessed robust growth 2nd highest collection since implementation Jun 22] 1.8 1.44 1.6 58 1.4 57 1.2 56 bo 1.12 ноо 1 55 0.8 54 0.6 48.1 53 0.4 52 0.2 51 0 Mar Apr May Jun Jul Aug Sept Oct 2022 2021 Avg of last 12 mths Source: Ministry of Finance Oct-21 Confidential/Restricted Nov-21 Dec-21 Jan-22 Classification - Restricted Bank credit growth rose reflecting festive and quarter-end demand Consumer Confidence Indices 140 19 17.9 17-Nov-21 05-Nov-21 29-Nov-21 11-Dec-21 Credit Growth (in %) 120 113.3 113.0 100 80 77.3 80.6 550 60 Source: RBI. 40 23-Dec-21 04-Jan-22 16-Jan-22 28-Jan-22 09-Feb-22 21-Feb-22 05-Mar-22 17-Mar-22 29-Mar-22 10-Apr ZZ 22-Apr-22 04-May-22 16-May-22 28-May-22 09-Jun-22 21-Jun-2.2 03-Jul-22 15-Jul-22 27-Jul-22 08-Aug-22 20-Aug-22 01-Sep-22 25-Sep-22 13-Sep-22 07-Oct-22 19-Oct-22 May-18 Jun-18 Sep-18 Nov-18 Dec-18 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21 Jan-22 Mar-22 May-22 Jul-22 Sep-22 Source: RBI, Bloomberg India's Purchasing Managers' Index (PMI) shows signs of resilience Capacity Utilization in Manufacturing is showing signs of Rebound Feb-22 Mar-22 Apr-22 May-22 Jun-22 Jul-22 75- 70- 55.3 Per cent 65- 60- 55- 50- Source: Cogencis 45 Aug-22 Sep-22 Oct-22 --Current Situation Index HDFC BANK RESEARCH Classification - Restricted HDFC BANK We understand your world Future Expectations Index 2018-20 2020-21 Q1 Q2 Q3 Q4Q1 Q2 Q3 Q401 02 03 0401 02 03 040102030401 2017-18 2018-19 2021-22 2022-23 CU (Seasonally adjusted) CU Long-term average Source: RBI.#15Index ...led by strong Urban demand Uptrend in Domestic Air Passenger traffic continues as covid-19 related restrictions eased and economic activities increased (in Lakh) 56- 54- Job creation continues in positive manner Classification - Restricted Passenger Vehicle Sales continues to improve (YoY) on back of strong demand and easing supply woes 400 356 107 108 140 120 100 77 78 77 78 80 64 57 60 40 20 0 Jan Feb Mar Apr May Jun Jul Aug Sep Source: DGCA 2021 2022 120 350 294 105 102 104 300 271 276 281 97 67 67 50 31 21 in thousands 254 252 251 238 250 200 150 100 50 0 Jan Feb Mar Apr May Jun Jul Aug Sep 2021 2022 Source: SIAM 52- 50 48- 46- 44- 42- 29 40 PMI Manufacturing-employment Note: PMI value of above 50 indicates expansion. Source: S&P Global. 14 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 Jul-22 Aug-22 Sep-22 Confidential/Restricted PMI Services-employment -No change level Source: RBI (State of the Economy) No. of Registrations 160000 140000 120000 100000 Total Property Registrations in 10 major cities shows rising Urban demand 180000 80000 60000 40000 20000 04:2018-19 01:2019-20 Q2:2019-20 Q3:2019-20 04:2019-20 Q1:2020-21 Q2:2020-21 HDFC BANK RESEARCH Classification - Restricted 03:2020-21 04:2020-21 Q1:2021-22 Q2:2021-22 03:2021-22 04:2021-22 01:2022-23 Source: Registration authorities of State govt and RBI Staff Estimate HDFC BANK We understand your world#1615 index Based to 100 Classification - Restricted Rural India is seeing signs of improvement with high crop prices, rising MSP and lower MGNREGA demand.... Low acreage in some crops could lead to better realisation going forward. 20 Demand for work continues to remain low under MGNREGA 10 0 -10 -20 -30 -40 سلار Aug-22 Sep-22 -50 Growth (y-o-y) [RHS] Jul-22 50 45- 40 35 30 25 20- 15- 10 5 In Million Apr-22 May-22 Jun-22 Demand (Number of person) Sources: Government of India: and RBI staff estimates. Confidential/Restricted Increase in prices of Agri commodities may lead to rise in Rual income which inturn could boost MSP MSP 500¬ 450 First advance estimates of crop production 15 10 Crops RMS RMS % Change 400- 150 rural demand 2022-23 2023-24 140 130 Wheat 2015 2125 5.46% Million Tonnes 350- 300- 250 200 in 150- 127 Barley 1635 1735 6.12% 100- -10 120 110 100 50- 110 Gram 5230 5335 2.01% 0+ 108 Rice 102 101 Lentil (Masur) 5500 6000 9.09% 93 90 Jan Rapeseed & Mustard 5050 5450 7.92% Coarse cereals Pulses ⚫ -15 Oilseeds Cotton Sugarcane Jute & Mesta Feb Mar Apr May Jun Jul Aug Sep Basmati rice Wheat Oil Seeds Pulses Sugar Safflower 5441 5650 3.84% Raw Cotton Source: eaindustry.nic.in Source: Govt of India ■Production ●Growth over 1st AE of 2021-22 (RHS) •Growth over 4th AE of 2021-22 (RHS) Source: Ministry of Agriculture and Farmers' Welfare (MOAFW). Per cent February 2020-100 250¬ 200- 150- 100- 50- Jun-21 Jul-21 Aug-21 Sep-21 Oct-21 Tractor sales Three wheelers sales Key rural consumption items showing traction Nov-21 Dec-21 Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 Jul-22 HDFC BANK RESEARCH Classification - Restricted HDFC BANK We understand your world Aug-22 Sep-22 Two wheelers sales Motorcycle sales Source: SIAM,TMA & RBI STAFF ESTIMATES Per cent#17Classification - Restricted Strong corporate and Banks Balance Sheets and rising capacity utilisation creating condition for revival in private capex... Debt to Equity Ratio (%) Trend Debt to Equity (D/E) Ratio - BSE 500 Indian Corporates have been deleveraging their balance sheets over the last few years, setting the stage for Capex recovery 100% 95% 90% 8556 85% 81% 87% 81% 8096 7896 7856 7556 Capacity utilisation in the manufacturing sector is now above its long-term average, indicating the need for fresh investments for additional capacity creation 75- 80% 75% 70% 65% 60% 55% 50% FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 76% 6396 57% 70- Source: Canara Robeco Mutual Fund Per cent 65- 60- Approximate Private Sector Capex Rs. Bn 2500 55- 2000 RBI expects the Private sector to continue its recovery in FY23 50- Capex in Rs. Billion (Bn) 2000 1760 45- 1430 1500 1000 756 16 500 0 FY 19 FY20 FY21 FY22 Source:- RBI Confidential/Restricted Source: RBI. 01 02030401 02 03 0421 020304010203040102030401 2018-20 2017-18 2018-19 CU Long-term average 2020-21 2021-22 2022-23 CU (Seasonally adjusted) HDFC BANK RESEARCH Classification - Restricted HDFC BANK We understand your world#18Classification - Restricted Q2FY23 earnings season started on mixed note... Topline growth remained steady but margin impact has led to weak profitability Net sales EBITDA YoY growth in % Q2FY23 Q1FY23 Q2FY22 Q2FY23 Q1FY23 Q2FY22 Q2FY23 Rep PAT Q1FY23 Q2FY22 Cyclicals Auto & Auto Anc 38.9 37.6 11.9 100.3 65.3 (29.5) 51.7 33.7 (3.3) BFSI 17.3 12.7 6.4 44.3 41.1 (6.4) 46.8 58.6 15.3 Capital Goods 17.2 65.1 32.8 (5.9) 106.4 17.3 (4.1) 127.3 17.3 Cement & Products 12.8 21.9 10.2 (53.0) (22.6) 1.6 (71.8) (27.3) 7.0 Metal & Mining 25.8 34.9 50.9 (42.3) (16.1) 73.2 (69.9) (27.5) 186.7 Oil & Gas 46.2 73.7 55.8 (7.4) 24.9 27.7 (32.1) 2.9 29.1 Power 36.8 45.4 16.8 19.5 15.3 4.7 6.1 31.5 Realty (10.9) 65.4 16.1 (10.1) 74.1 50.2 17.4 133.5 Others (13.8) 8.0 55.6 (16.9) 8.2 71.4 (8.0) 11.3 7.4 95.7 74.6 Growth & Defensive or Non-Cyclical Chem & Fertilizers 38.6 32.9 14.8 75.7 63.5 20.3 122.7 78.8 68.6 FMCG & Retail 20.4 37.7 18.8 16.6 35.5 12.3 25.7 36.0 10.3 11.1 4.8 14.8 22.6 5.9 10.3 6.3 52.1 15.8 19.8 19.3 19.2 9.7 4.2 16.5 7.4 1.9 18.8 Telecom 12.2 2.8 79.2 (16.7) (25.8) 135.4 (29.5) (40.9) 77.4 Ecomm 31.9 23.7 11.8 (30.8) (34.3) (0.1) (16.8) (46.9) 17.8 Nifty 200 Index Grand Total 29.1 38.8 26.9 13.1 21.1 Ex BFSI 33.2 47.8 35.8 (4.5) 9.3 11.6 25.2 1.7 (16.7) 17.5 27.6 2.7 33.4 Source: Capitaline Healthcare IT ■ Q2FY23 results have seen stable topline growth, but margins pressure in many sectors has been seen impacting the profit growth. Earnings expectations could see too could also see marginal downgrades post the result season. Key alpha sectors seem to be Banking, Auto, Infra, while Pharma seems to be emerging out of its slumber. ■ So far 84 companies in Nifty 200 index have reported their quarterly earnings as of 30 October 2022, and the net sales for these companies grew by 29.1% YoY, EBITDA grew by 13.1% YoY and PAT grew by 1.7% YoY in Q2FY23. ■ On the margin front, key user industries like Cement, IT, Power and Metals & Mining witnessed moderation due to sharp rise in raw material and wage costs during the quarter. Data as of 30 October 2022 ◉ Going forward, strong corporate balance sheets, high household savings and government's focus on infrastructure development and job creation is likely to drive capex demand and thereby push incremental consumption demand as well in medium term, which would be positive for corporate earnings. 17 Confidential/Restricted HDFC BANK HDFC BANK RESEARCH We understand your world Classification - Restricted#19Classification - Restricted Consensus views of Fund Managers on Key Sectors Banking & Financial Services Positive on large private sector banks, insurance companies and select large NBFCs/HFCs. Expect strong credit growth to continue on back of economic recovery Steady margins (NIM), corporate asset quality holding up better, Banks are well capitalized, well placed on technology front. Issues around Fund raise and some smaller banks with weaker deposit franchise could get impacted negatively Reasonable valuations, but rising rates could play spoilsport Information Technology Cautious - Growth and margins both might moderate in few quarters as global growth slows meaningfully. Consumer Sector Auto Cautiously optimistic - Volume growth has shown muted performance, while gains have come due to better pricing gains. Gross margin headwinds have eased. Organized players to gain market share as unorganized get hit by elevated inflation. Valuations is some pockets are lower relative to their own historical performance. Companies having higher urban dependence is expected to perform better. Rural demand continues to remain slow but recent correction in commodities to aid gross margins expansion. FMCG better than Durables. Positive - Positive on select Passenger Vehicle OEMs which have a larger part of the demand coming from urban consumers. Demand for vehicles is currently strong and is expected to retain momentum, due to high backlogs. Improvement in supply chain situation, volume improvement in PV segment suggests strong growth. Decline in commodity prices likely to help margins. 18 Confidential/Restricted HDFC BANK RESEARCH HDFC BANK We understand your world Classification - Restricted#20....Contd Classification - Restricted Pharma Neutral to Positive - US generics market experiencing higher than expected price erosion due to inventory liquidation by large players, that seems to have been priced in by the stocks. Normalisation of production expected in next few months. Domestic oriented business momentum continues to be strong. Domestic focused companies could generate Alpha. Housing & Construction Positive - Higher household savings have increased the affordability for Housing sector. Focus on Infrastructure is clearly visible with government accelerating spending at the cost of fiscal deficit. Risk-reward is still highly favourable and medium-term outlook remains positive. Volatility in raw material cost could impact profitability. Sector is coming out of long period of consolidation Metals Cautious- Due to High cyclicality and global risks. Uncertainty over volatility in raw material cost, including thermal and coking coal and iron ore, leading to earnings volatility. Possibility of demand slowdown due to widespread global inflation is a major concern for metals sector. Commodity cycle has largely played out - Prices likely to correct further as global growth moderates 19 Confidential/Restricted HDFC BANK HDFC BANK RESEARCH We understand your world Classification - Restricted#21Classification - Restricted While India's GDP growth / Earnings estimates have been downgraded, any uptick in growth trajectory could support equity market performance... Trend in BSE Sensex TTM PE for 14-year 40 35 30 Average PE: 21.7 25 20 15 10 5 12.75 0 17.04 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 23.46 21.9 22.8 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 22.55 Oct-20 Apr-21 Oct-21 Apr-22 Oct-22 Sources Capitaline Going forward, Incremental earnings growth momentum is likely to see slowdown on back liquidity tightening EPS (Rs) S&P BSE Sensex Consensus EPS (Rs.) 4000 40.0 3456 34.4 35.0 3500 3092 30.0 3000 2675 2410 2500 1540 1793 2000 1472 1554 15.4 5.6 1500 1000 500 13.2 4.4 0 FY18 FY19 FY20 FY21 FY22 FY23E Note: EPS is based on Full Market Capitalisation 25.0 20.0 15.6 15.0 11.8 11.0 :10.0 5.0 0.0 -5.0 -10.0 FY25E FY24E Source: Bloomberg, % YoY Change in EPS Nifty 50 Index MSCI Emerging Market Index 103.93 70.86 Jan 14 Jan 31 Feb 14 Feb 28 Mar 15 Mar 31 For 15 Apr 29 May 16 May 31 Jun 15 Jun 30 Jul 15 329 Au 15 Aug 31 Sep 15 Sep 30 Oct 14 Oct 31 2002 Nifty-500: Corporate profit to GDP (%) -2.7 FY03 5.1 4.6 3.7 3.8 4.0 3.3 FY04 FY05 FY06 FY07 Sharp recovery in earnings led to improvement in Corporate Profit to GDP ratio in the recent past. With earnings growth expected to 4.6 4.6 continue, this ratio may see further improvement. 4.2 FY08 FY09 FY 10 4.3 3.9 3.8 3.47 3.3 3.2 2.9 2.8-2.8- 2.2 Average: 3.7% FY 11 FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 FY 19 FY20 FY21 FY22 FY23 Source: ICICI Prudential Mutual Fund India has outperformed the EMs substantially since last 10 months, given the strong economic growth outlook, despite the recent downgrades, as the other key EMs have seen sharper weakness. To maintain this outperformance, the Indian earnings growth trajectory needs to start shifting upwards. S&P BSE Sensex is trading at 22.7x of FY23E Bloomberg consensus EPS of Rs.2675. India's monetary policy tightening continues its focus to ensure that inflation returns to the target while supporting growth. That, along with the weak global outlook is likely to impart considerable volatility to the market in the near to medium term. Our long term view on Indian markets remain positive on the back of strong monsoon, rise in capacity utilisation and credit growth, government's capex push, strong corporate and bank balance sheets and buoyant consumer and business confidence and superior demographics. Hence, any sharp dips in markets could be used as buying opportunities by investors with a 2-3 year's investment horizon. Investors could have larger focus at Large Cap, Value and Hybrid Equity funds in line with their risk profile and product suitability. 20 Confidential/Restricted HDFC BANK RESEARCH Classification - Restricted HDFC BANK We understand your world#22Index Values Classification - Restricted Market Round up - October 2022 ■ Indian equity markets were steady and ended on a positive note during the month of October 2022, as S&P BSE Sensex index and Nifty 50 index closed up by 5.8% MoM and 5.4% MOM, respectively. ■ The S&P BSE Midcap index and S&P BSE Smallcap index closed up by 2.0% MoM and 1.3% MOM, respectively. ■ On the sectoral indices front, S&P BSE Bankex index and S&P BSE Capital Goods index, were top two outperformers with a gain of 7.3% MoM and 6.6% MOM, respectively. The S&P BSE Consumer Durable index moved up by 0.4% MoM whereas, S&P BSE FMCG index declined marginally by 0.3% MOM, were the top two underperformers. During the month of October 2022, Foreign Portfolio Investors (FPIs) were net buyers to the tune of Rs 84 bn and Domestic Institutional Investors (DIIs) were net buyers to the tune of ~Rs.63 bn (as of 30 October 2022). 500 -500 -1500 -2500 Equity Indices Performance - October 2022 70000 65,000 7.0 5.8 65000 55,000 45,000 35,000 25,000 6.0 60000 5.0 2.0 1.3 4.0 4.0 5.4 4.7 3.0 Change % 55000 15,000 2.0 5,000 1.0 S&P BSE Sensex Levels 50000 45000 40000 35000 -5,000 0.0 S&P BSE Nifty 50 Sensex S&P BSE S&P BSE Midcap Small Cap S&P BSE S&P BSE 30000 100 500 25000 31-Oct-22 30-Sep-22 -Chg % Source: Bloomberg 21 Confidential/Restricted Mar-18 Aug-18 Jan-19 1500 1011 528 Trend for Equity Investments by FPIs and Dlls (Rs Bn) FPIs Dlls CY19 Source: SEBI, NSDL (*DIls data as of 17 Oct'22) Jun-19 Nov-19 CY20 1703 -541 CY21 725 258 BSE Sensex Price Earning (PE) 1 year forward Mar-20 Aug-20 HDFC BANK RESEARCH Classification - Restricted HDFC BANK We understand your world Aug-22 Source: Bloomberg -1619 CY22* 23x -21x 19x 17x 1763#23Key concerns to watch out .... Classification - Restricted Global factors Ongoing conflict between Russia and Ukraine may have adverse impact on global trade and economic growth Rise in volatility in commodity prices (especially Energy prices) could put pressure on the global financial markets Sharp volatility in the US Bond yields may lead to rise in risk off sentiments Sharp appreciation in US dollar index, which may lead to FPI outflow from EMs Acceleration in the pace of unwinding of liquidity at global level Rising trend of protectionism across economies could pose a risk to overall global growth Rise in global food prices may lead to further rise in food inflation. Domestic factors Higher crude oil prices could put pressure on India's current account balance If Rupee depreciates disorderly, then it may impact India's twin deficit High Inflationary pressure may push the RBI to act faster on interest rates. Any delay in implementation of key reforms may delay the structural recovery in growth Any negative credit rating action by global rating agencies could impact interest rates and currency. 22 Confidential/Restricted HDFC BANK RESEARCH Classification - Restricted HDFC BANK We understand your world#2423 Confidential/Restricted Classification - Restricted Annexure HDFC BANK RESEARCH Classification - Restricted HDFC BANK We understand your world#25Classification - Restricted Sectoral rotation has been the trend in last one year.... Sectors like Banking, Auto and Infra seems to be generating alpha in the near term. MoM changes Nifty Metal Sep-21 Oct-21 Nov-21 Dec-21 Jan-22 -1.8% -0.9% -6.5% 6.2% -0.9% 7.7% BSE Power 9.5% 4.3% 3.6% 0.7% 13.1% -2.1% Nifty IT 1.3% -1.8% 1.8% 10.4% -10.0% -2.8% Nifty Realty 32.8% -2.9% -2.2% -0.7% -0.8% -9.1% 6.2% -4.3% BSE Cons Durable 10.7% 4.5% -0.3% 3.9% -6.4% 2.8% -1.9% 0.9% BSE Telecom 10.6% -2.6% 6.7% -0.8% 0.4% -7.7% 9.5% -4.3% Nifty Infra 6.7% 0.4% -1.7% -0.2% 2.2% -5.1% 4.6% 2.2% Nifty Media 33.5% 5.0% -3.3% 2.2% 0.7% -10.1% 18.3% -9.7% BSE Oil & Gas 7.1% -0.9% -3.5% 0.0% 6.6% -7.3% 8.2% 4.0% -4.6% Nifty 50 2.8% 0.3% -3.9% 2.2% -0.1% -3.1% 4.0% -2.1% -3.0% BSE Sensex 2.7% 0.3% -3.8% 2.1% -0.4% -3.0% 4.1% -2.6% Feb-22 Mar-22 Apr-22 May-22 Jun-22 Jul-22 Aug-22 Sep-22 Oct-22 8.9% -1.5% -15.7% -12.6% 17.7% 8.2% -2.8% 2.2% 4.9% 18.1% -11.5% -3.8% 12.0% 14.7% -9.2% 2.5% 7.3% -12.9% -6.1% -6.2% 4.7% -2.6% -7.2% -6.4% 17.0% 2.7% -8.5% 3.5% -10.9% -8.7% 14.0% 7.9% -0.5% 0.4% -7.1% -4.3% 4.1% 5.6% 1.4% -4.9% -5.3% 5.9% 4.8% -3.3% -4.5% -7.6% 9.6% -0.5% -3.1% 5.4% 6.8% -4.8% -2.6% -4.6% 8.6% 3.4% -5.0% -0.9% 2.2% 5.6% -0.3% 0.0% -8.5% 5.0% 8.7% 3.5% -3.7% 5.4% -3.5% 5.8% Nifty Auto 5.6% 6.6% -6.1% 3.1% 7.0% -7.5% -2.5% 5.0% 4.6% 1.0% 7.2% 5.4% -3.9% 5.4% Nifty Finan Sev 1.3% 2.7% -6.7% -1.2% 2.9% -5.0% 1.2% -3.0% -1.0% Nifty Bank 2.7% 4.5% -8.7% -0.6% 7.0% -4.7% 0.5% -0.8% Nifty Pharma 0.8% -4.1% -1.6% 4.1% -7.3% -1.9% 5.1% -0.9% NIFTY FMCG 2.3% -5.5% -2.2% 0.5% -3.0% -2.6% 2.2% 5.3% -6.1% 12.7% 4.6% -4.0% -1.7% -5.8% 12.2% 5.5% -2.3% -6.4% -3.5% 5.1% -0.6% 2.1% 1.9% 1.3% -2.7% 12.8% 3.1% 1.3% -0.2% 5.9% 6.9% Source: ACEMF 24 Confidential/Restricted HDFC BANK HDFC BANK RESEARCH We understand your world Classification - Restricted#2625 0.0 0.5 Jun-14 Confidential/Restricted 1.0 1.5 Aug-14- Oct-14 2.0 Dec-14 2.5 Feb-15- Apr-15 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 Mar-14 Aug-14 Dec-14 Largecap vs Midcap Apr-15 Aug-15 Jan-16 Classification - Restricted Valuation gap between large cap and mid cap have now started expanding... high inflationary condition could lead to increase in pressure in mid and small cap companies leading to reversion in valuation gap..... 1.3 1.3 Jun-15 Aug-15 Oct-15 Dec-15- Feb-16 1.4 May-16 Sep-16 Valuation differential between Large Cap and Midcap Indices Trailing P/E S&P BSE Midcap 1.9 Jul-18 Valuation Premium of Midcap over Sensex Apr-16 Jun-16 Aug-16- Oct-16 Dec-16 Feb-17- Apr-17 Jun-17 Aug-17 Oct-17- Dec-17 Feb-18 Apr-18 Jun-18 Aug-18- Oct-18 Dec-18 Feb-19- Trailing P/E S&P BSE Sensex 1.4 1.1 Apr-19 Jun-19- Aug-19 Oct-19 Dec-19 Feb-20 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20 Feb-21 Apr-21- 2.0 0.9 HDFC BANK RESEARCH Classification - Restricted HDFC BANK We understand your world 1.1 0.9 Jun-21- Aug-21 Oct-21 Dec-21- Feb-22- Apr-22- Jun-22- Aug-22- Oct-22 Source: Capitaline 0.9 0.9 Source: Capitaline 1.1.1#27Classification - Restricted Fixed Income Markets 26 HDFC BANK RESEARCH Confidential/Restricted Classification - Restricted HDFC BANK We understand your world#28Classification - Restricted 10.00 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 9.1 8.5 8.6 8.3 8.5 8.3 40.0 33.4 7.9 8.2 30.0 20.0 10.0 0.0 -10.0 -5.0 -20.0 -30.0 High Inflation - Low Growth: The World is starting to be divided between controlling Inflation and Driving Economic Growth... US CPI Inflation % US Quarterly GDP Growth % IMF - Overview of the World Projections in October Difference from July Economic Outlook Projections Estimates 2022 2023 2022 2023 World Output 3.2 2.7 0.0 -0.2 Advanced Economies 2.4 1.1 -0.1 -0.3 United States 1.6 1 -0.7 0.0 6.3 6.7 4.3 2.3 6.9 Euro Area 3.1 0.5 0.5 -0.7 2.6 Germany 1.5 -0.3 0.3 -1.1 France 2.5 0.7 0.2 -0.3 -1.6 -0.6 Italy 3.2 -0.2 0.2 -0.9 Spain 4.3 1.2 0.3 -0.8 Japan 1.7 1.6 0 -0.1 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 United Kingdom 3.6 0.3 0.4 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Jan-22 Feb-22 Apr-22 May-22 Jun-22 Jul-22 Aug-22 Sep-22 -0.2 -31.4 -40.0 Canada 3.3 1.5 -0.1 -0.3 Source:- U.S. Bureau of Labor Statistics Q1CY20 Q2CY20 Q3CY20 Q4CY20 Q1CY21 Q2CY21 Q3CY21 Q4CY21 Q1CY22 Q2CY22 Q3CY22 Other Advanced Economies 2.8 2.3 -0.1 -0.4 Emerging Market and Developing Economies 3.7 3.7 0.1 -0.2 Emerging and Developing Asia 4.4 4.9 -0.2 -0.1 12.00 10.00 Euro Area CPI Inflation % Euro Area Quarterly GDP Growth % China 3.2 4.4 -0.1 -0.2 India4 6.8 6.1 -0.6 0.0 10.7 15.0 9.9 ASEAN-5 5.3 4.9 0.0 -0.2 12.6 8.00 6.00 4.00 7.4 7.4 8.1 8.6 8.9 9.1 10.0 Emerging and Developing Europe Russia 0 0.6 1.4 -0.3 3.4 -2.3 2.6 1.2 Latin America and the Caribbean 3.5 1.7 0.5 5.9 4.9 5.0 5.1 4.1. 3.4 3.0 -0.3 5.0 0.4 0.2 0.2 0.1 0.0 Brazil 2.8 1.0 1.1 -0.1 2.1 2.3 Mexico 0.5 0.8 0.6 2.1 1.2 0.2 -0.3 0.0 Middle East and Central Asia 5 3.6 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 2.00 0.00 -2.00 0.9 0.9 1.3 1.6 2.0 1.9 2.2 0.2 0.1 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Jan-22 27 Feb-22 Mar-22 Apr-22 May-22 Source:- Eurostat Jun-22 1-22 Aug-22 Sep-22 Oct-22 -5.0 -0.6 -0.3 -3.8 Saudi Arabia 7.6 3.7 0.0 0 Sub-Saharan Africa 3.6 3.7 -0.2 -0.3 Nigeria 3.2 3 -10.0 -0.2 -0.2 South Africa 2.1 1.1 -0.2 -15.0 Q1CY19 Q2CY19 Q3CY19 Q4CY19 -0.3 -11.5 Q1CY20 Q2CY20 Q3CY20 Q4CY20 Q1CY21 Q2CY21 Q3CY21 Q4CY21 Q1CY22 Q2CY22 Q3CY22 Source:- Eurostat Source:- International Monetary Fund - IMF Confidential/Restricted HDFC BANK HDFC BANK RESEARCH We understand your world Classification - Restricted#290 2 1 May-01 3 4 5 Jun-02 Jul-03 Aug-04 Sep-05 28 16 -0.50 Monetary Policy Tightening continued with inflation rates surging to multi-decade highs... Classification - Restricted US Federal Funds Rate (%) 4.50 4.50 US 10 year Treasury Yield (%) 4.00 -Upper Bound ⚫Lower Bound 4.00 3.50 3.50 3.00 2.50 Federal Reserve raised the policy rate by 75 bps for the fourth 3.00 time in a row 2.50 in 2.00 November 2022 2.00 1.50 1.50 1.00 1.00 0.50 0.50 0.00 0.00 Jan-20 Feb-20 Mar-20 May-20 Jun-20 Aug-2 Sep-20 Nov-20 Dec-20 Feb-21 Mar-21 May-21 May 21 Jun-21 Aug-21 Sep-21 Nov-21 Dec-21 Feb-22 Mar-22 May-22 Jun-22 Aug-22 Sep-22 Nov-22 European Central Bank (ECB) Main Refinancing Rate (%) Oct-06 Oct-07 Nov-08 Dec-09 Jan-11 Feb-12 Confidential/Restricted Mar-13 Source:- US Federal Reserve ECB raised the policy rates by 75 bps in October 2022, with it marking the third major 3.00 2.00 increase in a row. Apr-14 May-15 Jun-16 Jul-17 Aug-18 Sep-19 Oct-20 Nov-21 -1.00 0.00 Jan-20 1.00 4.00 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jul-22 Euro area 10-year Government Benchmark bond yield (%) Source:- Bloomberg US FOMC Comments "The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time. In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. European Central Bank (ECB) Comments "We expect to raise interest rates further, to ensure the timely return of inflation to our 2% medium-term inflation target. We will base the future policy rate path on the evolving outlook for inflation and the economy, following our meeting-by-meeting approach." Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21 Jul-21 Sep-21 Classification - Restricted Nov-21 Jan-22 Mar-22 HDFC BANK RESEARCH May-22 Jul-22 Sep-22 Source:- European Central Bank Country Latest Interest Rate Actions by Central Bank (Bps) 75 Euro Area 75 United States 75 Saudi Arabia 50 South Korea 50 Canada 50 Indonesia 25 Australia HDFC BANK We understand your world#3029 Confidential/Restricted Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 Jul-22 Instruments 31-Oct-22 30-Sep-22 Change in Yields (Bps) 91 Days T-bills 6.42% 6.05% 37 364 Days T-bills 6.91% 6.77% 14 3 Months CD 6.83% 6.20% 63 6 Months CD 7.30% 6.63% 67 1 Year CD 7.65% 7.10% 55 10 Year Benchmark G-sec 7.45% 7.43% 2 AAA Non PSU Bond Yields 1 Year 7.63% 7.33% 30 2 Year 7.65% 7.43% 22 3 Year 7.66% 7.48% 18 5 Year 7.68% 7.63% 5 10 Year 7.78% 7.73% 5 Aug-22 Sep-22 Oct-22 Domestic bond yields remained volatile and traded with an upward bias... 7.80 7.50 7.20 10 Year Benchmark G-sec yield (%) T-bill Yields -91 DAY -364 DAY ти 7% 6% 7.50 7.00 6.90 5% 6.60 G-sec yields remained volatile with an upward 4% bias. 6.50 Short term rates rose more 6.00 than the long term rates 6.30 3% tracking tight liquidity. Source:- Bloomberg 6.00 2% 5.50 5.00 4.50 Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 Jul-22 Aug-22 Sep-22 Oct-22 Source:- Bloomberg Jan-22 A host of uncertainties regarding the global and domestic economies are likely to keep the bond yields volatile in the near term. The direction of bond yields going forward is likely to be dependent on the monetary policies of central banks and the liquidity conditions. HDFC BANK RESEARCH HDFC BANK We understand your world Classification - Restricted Jan-22 Feb-22 Mar-22 Apr-22 Aug-22 Sep-22 Classification - Restricted 2 YEAR 3 YEAR 8.00 Source:- Cogencis Oct-22 AAA Corporate Bond Yields (%) 5 YEAR -10 YEAR#310 2 4 Feb-20 Mar-20 Apr-20 May-20 6 Jun-20 Jul-20 Aug-20 130 110 was down ~11.73% 90 70 50 30 10 Jan-20 Apr-20 Jul-20 30 Confidential/Restricted Oct-20 8 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Source:-Ministry of Statistics and Program Implementation Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 Jul-22 Aug-22 Sep-22 Classification - Restricted Retail Inflation Continued to Surge in September 2022.. While WPI has started to show some deceleration led by consolidation in commodity prices ... Inflation Internals (% YoY) CPI Inflation (% YoY) Fuel and light Headline CPI Upper Limit of Inflation Target 15 7.41 13 7.00 11 9 7 5 3 1 CPI Food India Inflation (% YoY) 18 Core Inflation WPI Inflation YoY (%) ―CPI Inflation YoY (%) 15 12 9 6 3 -1 Brent Crude USD/Barrel Brent Crude oil price increased by ~8.25% MoM in Oct 2022. FYTD23 crude oil price Bloomberg Commodity Index 140 Bloomberg Commodity Index increased by ~1.67% MoM in Oct 2022. FYTD23 the index was down 130 120 ~8.5% Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Source:- Bloomberg Apr-22 Jul-22 Oct-22 70 Jan-21 80 90 100 110 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Sep-21 Oct-21 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 Jul-22 Aug-22 Nov-21 Dec-21 Jan-22 Feb-22 Apr-22 May-22 Source:-Ministry of Statistics and Program Implementation Source:- Bloomberg Jun-22 Jul-22 Aug-22 Sep-22 Oct-22 200- 0 2019:01 400- Sep-22 0 Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21 Jan-22 Mar-22 (Index, January 2019 = 100) Natural gas index Brent crude oil 800- 600- Wheat Inflation Expectations - IMF staff calculations Natural gas index-July 2022 WEO Update Brent crude oil-July 2022 WEO Update Wheat-July 2022 WEO Update 20:01 21:01 22:01 HDFC BANK RESEARCH Classification - Restricted HDFC BANK We understand your world Source: IMF staff calculations. Note: Natural gas index comprises European, Japanese, and US natural gas price indices. WEO = World Economic Outlook. 23:01 23:04 May-22 Jul-22 Source:- Bloomberg Sep-22#3231 Percentage points Classification - Restricted RBI is also likely to remain focused on controlling inflation... Inflation rate (Per cent) 13- 12- 11 10- 2 2 0 0 0 7 Inflation Expectations of Households 80 70 60 ➢ ིི ཉྭ ༈ ཋ ཊུ 20 Proportion of respondents (Per cent) 50 40 냉 30 Per cent k in # CPI Inflation YoY : Projection versus Actual 6.2 6.3 7.3 5.8 6.9 Three months ahead (Median) One year ahead (Median) Three months ahead price increase more than the current rate (RHS) One year ahead price increase more than the current rate (RHS) Source: Inflation Expectations Survey of Households, RBI. 2.0- 1.0 0.0 -1.0 MoM Chang Base Effect CPI Headline Monthly Change in YoY Inflation Why 0.5 0.3 -0.2 -2.0 -3.0 Feb-20 Apr-20 Jun-20 Confidential/Restricted Aug-20 Oct-20 Dec-20 Feb-21 Apr-21 Jun-21 Aug-21 Oct-21 Dec-21 Feb-22 Apr-22 Jun-22 Source:- RBI Aug-22 3. N 04:2021-22 01:2022-23 Apr 2022 MPR path 02:2022-23* Actuals Projections for entire Q2:2022-23 vis-a-vis actual average inflation during July-August 2022. Sources: NSO; and RBI staff estimates. Percentage points 8 00 NO in m Contribution of Imported Inflation 17.0 5.8 RBI is likely to continue its aggressive fight against inflation, given the elevated inflation exceptions of households, inflation coming in higher than RBI's projections on a sustained basis and risk of imported inflation. D Aug-20 Oct-20 Domestically generated inflation CPI headline inflation (y-o-y. per cent) Jun-22 Aug-22 Imported inflation HDFC BANK RESEARCH Classification - Restricted HDFC BANK We understand your world#3332 22 Confidential/Restricted Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 -12 -16 -20 -24 -28 -32 Source:- Bloomberg -4 -8 404 ∞ Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21 Jan-22 Mar-22 May-22 Jul-22 Sep-22 Forex Reserves (USD Bn) 30 640 620 600 580 540 520 500 ៖ ៩ ៖ ៖ ៖ ៖ ឱ ន 25 20 Since the start of FY23, Forex Reserves have declined 15 560 by ~USD 82 bn, following RBI's aggressive intervention in Forex Markets to ensure stability of the exchange rate. 10 5 Source: Bloomberg Sep-21 Oct-21 Nov-21 Dec-21 Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 Jul-22 Aug-22 Sep-22 Oct-22 0 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21 Jan-22 Mar-22 May-22 Declining Forex Reserves amidst strengthening US Dollar remains a key monitorable for Bond Markets... US Dollar Index Trade Balance (USD Bn) 120 70 Trade Deficit continued to be high while improving marginally in September 2022 The US Dollar Index continues to show strength. 115 110 The US GDP rebounding in Q3CY22, may signal resilience of the economy. 75 105 100 95 80 90 Jul-22 85 80 source:- Bloomberg Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 Jul-22 Aug-22 Sep-22 Oct-22 85 Source:- Bloomberg Jan-21 Feb-21 Mar-21 May-21 Jun-21 Jul-21 Classification - Restricted Source:- RBI * Approximate Import Cover* Import Cover declined sharply from ~10 months at the start of FY23 to 8 months as of October 2022. Here Import Cover is calculated by Dividing current Forex Reserves by the Imports for the month Currently, the INR seems to be relatively better placed than some of the Emerging markets in terms of contained inflation, a positive growth differential with its peers, and low external sovereign debt. ■That said the INR could remain under pressure given the global economic uncertainty. The RBI has been so far successful in ensuring an orderly depreciation of the Rupee and is likely to continue doing so. ■This would mean further drawdown on the Forex Reserves. ■ Thus the level of Forex Reserves, movement in USD, and India's Balance of Payments remain key monitorables. Sep-22 HDFC BANK RESEARCH Classification - Restricted HDFC BANK We understand your world Aug-21 Oct-21 Nov-21 Dec-21 Feb-22 Mar-22 Apr-22 Jun-22 Jul-22 Aug-22 Oct-22 INR/USD Exchange Rate#3433 3 2 5 4 Jan-21 Feb-21 Mar-21 Confidential/Restricted -1000 500 2000 5000 3500 Jan-20 Jan-20 Mar-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 8 7 Short term yields turned volatile and traded with an upward bias 6 Certificate of Deposit Yields (%) 3 Month CD (PSU) 6 Month CD (PSU) 12 Month CD (PSU) Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Jan-22 Source:- RBI Classification - Restricted Banking system liquidity remained in Deficit mode for most part of October 2022... 8000 6500 Net Banking System Liquidity Rs. Bn Banking system liquidity moved in the range of surplus Rs.1.17 trillion to 20 deficit Rs.983.72 bn 18 during the month. 16 14 Bank Credit Growth % (YOY) Bank Deposit Growth % (YOY) As on 21 Oct 2022 Banks' credit growth stood at 17.9% YoY whereas Deposit growth was at9.6% YoY Jun-22 Jul-22 Aug-22 Sep-22 Oct-22 Source:- Bloomberg Feb-22 Mar-22 Apr-22 May-22 Jun-22 Jul-22 Aug-22 Sep-22 Per cent Oct-22 6.9 6.4- 5.9- 5.4- 4.9- 4.4- 3.9- 3.4 2.9 18-May-21 06-Jun-21- 25-Jun-21- 14-Jul-21 02-Aug-21- 21-Aug-21- 09-Sep-21- 28-Sep-21- 17-Oct-21- 05-Nov-21- Tri-party repo 3-month T-bill 3-month CP (NBFC) 12 10 ° 00 64 Jan-21 Mar-21 Apr-21 May-21 Jun-21 24-Nov-21- 13-Dec-21- 01-Jan-22- 20-Jan-22- 08-Feb-22- 27-Feb-22- Jul-21 Aug-21 Oct-21 Nov-21 Dec-21 Jan-22 Feb-22 Mar-22 source:- Bloomberg b: Money Market Rates HDFC BANK RESEARCH Classification - Restricted HDFC BANK We understand your world 18-Mar-22- 06-Apr-22- 25-Apr-22- 14-May-22- 02-Jun-22- 21-Jun-22- 10-Jul-22- 29-Jul-22- 17-Aug-22- 05-Sep-22- 24-Sep-22- 13-Oct-22- Market repo 3-month CD Source:- RBI Apr-22 Jun-22 Jul-22 Aug-22 Sep-22 Oct-22#35Cetral Government State Government 2500 2000 Classification - Restricted Rising credit growth and G-sec supply may continue to exert upward pressure on shorter end of the yield curve... Gross Govt Borrowing Rs. Bn Bank Credit Growth % (YoY) 1500 1000 500 0 النابلس Apr-22 May-22 Jun-22 Jul-22 Aug-22 Sep-22 Oct-22 Nov-22 Dec-22 Jan-23 200000 External Commercial Borrowings Debt Outstanding USD Million 180000 160000 140000 120000 100000 80000 60000 40000 20000 0 FY91 34 Feb-23 Mar-23 FY93 FY95 FY97 FY99 FY101 FY103 FY105 FY107 FY109 FY111 FY113 FY115 PR: Partially Revised; P: Provisional Source:- GOVERNMENT OF INDIA FY117 FY119 FY121PR Confidential/Restricted 20 18 16 14 12 10 8 6 4 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 Source:- Bloomberg ■ The demand for liquidity is likely to remain high, given the rising credit growth and G-sec supply. ■ With the cost of borrowings rising globally, it will be crucial to track how the short term External Commercial Borrowings (ECB) are getting refinanced. ■ Should this demand for funds also come to Indian markets, the pressure on system liquidity could get accentuated. ■ Thus, the pressure on liquidity is likely to continue in the near to medium term which in turn can add to the upward pressure on the shorter end of the yield curve. Classification - Restricted HDFC BANK RESEARCH HDFC BANK We understand your world#3635 25 20 22 Yield (%) 7.50 6.70 5.90 5.10 4.30 3.50 Yield Curve flattened further as the short term yields continued to rise amidst negative banking liquidity... 3 M 6 M 1 Y 2 Y 3 Y Tenor (Years) 6 Y 7 Y 9 Y 10 Y 13 Y 22 Y Yield Movement MoM (Bps) Oct-22 Classification - Restricted G-sec Yield Curve ■G-sec Term Spreads (Bps) as on 30 Sept 2022 ■G-sec Term Spreads (Bps) as on 31 Oct 2022 50 46.00 -29-Apr-22 -30-Aug-22 -30-Sep-22 ---31-Oct-22 40 32.00 28.92 30 While the yield curve flattened further, the Shorter end of the yield curve still has some steepness especially upto the 4 years mark 10 20 16.00 9.43 2.90 19.60 17.47 14.382 10.57 10.32 5.60 6.82 5.47 3.85 6.45 5.88 6.07 3.91 1.59 1.08 1.43 0.16 0.23 1.69 1.91 1.01 0 -0.31 -10 -4.28 -5.93 -7.98 24 Y 28 Y 29 Y Source: Cogencis 15 10 8 8 5 1 766 6 4 5 4 3 3 2 2 1 0 -5 -10 -8 -15 3 M 6 M 1 Y 2 Y 3 Y 4 Y 5 Y 6 Y -12 Source: Cogencis 7 Y 9 Y 10 Y 13 Y 22 Y 24 Y 28 Y 29 Y 38 Y 39 Y Confidential/Restricted 38 Y 39 Y -20 3-6 Mths 6 Mths - 1 Yr 1-2 Yrs 2-3 Yrs 3-4 Yrs 4-5 Yrs 5-6 Yrs 6-7 Yrs 7-9 Yrs 9-10 Yrs 10-13 Yrs 13 - 22 Yrs 22-24 Yrs 24 - 28 Yrs Source: Cogencis 28-29 Yrs 29 - 38 Yrs 38 - 39 Yrs G-sec yield curve flattened further in October 2022 wherein term spreads declined on a MoM basis. That said the shorter end of the yield curve was relatively steep as compared to the other segments of the yield curve. ■ Spread between the 1 year and the 4 years G-secs stood at 51 bps as of 31 Oct 2022. ■ Beyond 4 years the yield curve is almost flat. The Shorter end of the yield curve is better placed from risk-reward perspective due to relatively stability on account of lower duration and benefit of reset in yields on the higher side due to monetary policy tightening. HDFC BANK RESEARCH Classification - Restricted HDFC BANK We understand your world 1.08 -2.53#37Classification - Restricted Fixed Income Outlook Liquidity is likely to remain under pressure going forward given the rising credit growth and G-secs supply pressure. Also, RBI's Forex interventions are likely to continue in the near term to smoothen Rupee volatility, which could to be another factor leading to lower liquidity surplus. We may see liquidity moving in a range between the deficit and surplus levels with the RBI stepping in on either side as and when the need so arises. With unseasonal rains having impacted crops and festival season demand, food inflation is likely to remain elevated in the near term. Low base effect of last year even in October 2022, is another pressure point for the next inflation print. The recent rise in commodity prices if sustained could also add to the inflationary pressures. Additionally, the depreciation in the INR could also add to the overall inflation through imported inflation. Thus, in the near term we expect inflating to remain above the RBI's flexible inflation target of 2%-6%. India's Current Account (CAD) deficit is likely to widen, leading to implications on Rupee exchange rate and thereby pries of imported items. Here the Balance of Payments' situation and RBI's Forex management will be critical. Thus, currently a host of variables both global and domestic are imparting uncertainty to the inflation trajectory. Going forward, the RBI is likely to continue with the monetary policy tightening unless it sees a structural decline in domestic inflation. Given the fact that even the US Fed is likely to continue monetary policy tightening, other nations grappling with high inflation albeit with relatively better growth rates could also adopt a similar approach to tame the current unbridled inflation. The supply of government bonds continues to remain elevated, which is likely put upward pressure on G-sec yields. That being said so far the demand-supply have remained balanced with the weekly G-sec auctions seeing strong demand. So far, the RBI does not seem to be in favour of conducting OMO purchases despite the liquidity tightness. In terms of fiscal deficit, while the tax collections have been strong, should the government need to take further measures for ensuring macro-economic stability amidst global uncertainty, it may have implications on its revenues. Despite of growth slowdown and possibility to further impact on economic growth due to tight monetary policies, major global central banks have shown strong intent of decisively bringing the elevated inflation down to their respective target range. For this, further rate hikes are being talked about by the policy makers. Thus, the trajectory of yields and yield curves is likely to be determined by the growth-inflation dynamics, commodity prices, energy prices (including food prices) and currency exchange rate going forward. Domestically, flattening of the yield curve is likely to continue given the interest rate hikes by RBI and tightening liquidity conditions. The markets are pricing in a terminal Repo rate in the range of 6.25%- 6.50%. Thus, currently, there is a lot of uncertainty surrounding the global as well as domestic economies, leading to volatility in capital markets. Given the expected volatility and uncertainty and expectations of flattening of the yield curve, staying invested at the short and the very short end of the yield could be better from risk reward perspective currently. Thus, investors should look at funds oriented towards the shorter end of the yield curve for relative stability in the near term and to benefit from the reset in interest rates on the higher side. For this one can look at Short Duration Funds, Money Market Funds, Ultra Short Duration and Low Duration Funds for a horizon of 12 months and above. For investors looking for accrual strategies, they can consider Target Maturity Index Funds that invest in a mix of better quality bonds with investment horizons matching the maturity of the funds. Investors who are comfortable with volatility and have a longer investment horizon could look at Dynamic Bonds for a horizon of 24 months and above. For a horizon of 3 months and above Arbitrage and Money Market Funds can be considered. Whereas, for a horizon of up to 3 months investors can consider Overnight Funds and Liquid Funds. Investors should invest in line with their risk profile and product suitability. 36 Confidential/Restricted HDFC BANK RESEARCH HDFC BANK We understand your world Classification - Restricted#38Classification - Restricted Disclaimer: This document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. HDFC Bank Limited ("HDFC Bank") does not warrant its completeness and accuracy. This information is not intended as an offer or solicitation for the purchase or sale of any financial instrument / units of Mutual Fund. 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