We are welcoming the New Year with some mixed signals on macro. INR is appreciating sharply despite fundamental (inflation differential), flow (limited FII limit in debt, elevated equity valuations, rising trade deficit) and sentiment (rising inflation, fiscal concerns, Fed rate hikes) drivers indicating a moderate depreciation bias over the next 12 months. We believe INR appreciation would be short-lived and still see currency heading towards 66.5 versus USD by March 2019. In the near-term, some appreciation bias exists given the weak dollar trade although we believe there is a backstop at 63.

Apart from the Rupee, Gsec yields have continued to rise to well over 7%, pricing in uncertainties related to the inflation trajectory (which is partly tied to the oil trajectory) and fiscal outturn. We believe there will be clarity on these by mid-year, providing room for correction in long-term borrowing yields.

On the positive side, PMIs show that manufacturing momentum is on an uptick led by both domestic and external order flows.

Meanwhile, the equity markets are quite rightly looking through the dilemma that debt markets are grappling with since positive indications from the retail sector and steady mutual fund flows are cushioning expectations. Anticipated capex revival and the rural push in the budget along with greater participation in world trade this year would be the key drivers of growth this year. We see earnings growth compounding at 20% in FY19 as the impacts of reforms like electricity for all, digital banking for all, housing for all, rural transformation, improving ease of doing business etc begin to trickle down to company performance.