July was a good month for Indian markets. Shrugging off the global concerns of last month, markets continued to show resilience and registered respectable gains in July too. The Benchmark Nifty50 gave monthly returns of 4.23% and has been consistently making new 52-week highs.

All major indices also traced upward sloping curves and ended at their respective monthly highs.Nifty Next50 and Nifty 500, did even better and ended with 9.37% and 5.0% returns respectively.

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On-the-mend fundamentals, increase in near-term global liquidity, hope of this earnings season being better than the previous one and better than expected monsoon, have all contributed towards this up move.

FIIs too are adding fuel to the rally and have pumped in $1.3 billion in Indian equities in July alone (Source: Livemint). Also, the sustained rise in markets in last few months has resulted in many companies coming out with their share sales (mostly IPOs). Infact, till now 47 IPOs have raised close to $1.5 billion in 2016 alone. This amount is twice that of what was raised in entire 2015.

But it is worth noting that this rise in share prices across the market has put India further up in the valuation matrix. So the risks due to high valuations have increased. And in spite of most analysts being bullish, it would not be surprising if volatility increases in the near term.

Though the risk of increasing inflation due to monsoon has receded, those due to increase in international commodity prices and implementation of the 7th pay commission recommendations still exist. So RBI has maintained status quo in its monetary policy meeting in August. There are no changes to the key rates.

Expected* passage of the GST Bill in Upper House of Parliament remains one of the big developments for the economy. (*Update – GST bill was passed in Rajya Sabha on 3rd August 2016.)

GST is expected to be a game changer for the Indian economy. A study commissioned by the 13th Finance Commission to assess the long term boost to GDP due to GST, put the figure at 0.9% to 1.7% of GDP. As of now, multiple layers of taxes under both central and state governments have made it difficult for companies to conduct business.

The GST is expected to simplify the tax structure, encourage compliance, lower costs, and broaden the tax base. As of now though, the precise GST framework is still not clear. Earlier, a GST panel led by Chief Economic Advisor had recommended a revenue neutral rate of 15.0-15.5% (excluding petroleum, real estate, alcohol and electricity). But another view was to have a 3-tier structure where a) lower 12% rate would be applied on essential goods; b) 40% on luxury items and c) 17%-18% on remaining goods (including services).

Till very recently, the opposition parties had been against the GST bill in its current form. But at the time of writing of this update, most issues have been ironed out and the Rajya Sabha has passed the bill. Post passage of the GST bill, a council will then formalize finer details by end of this year. The implementation will take almost an year though government is targeting a rollout by 1st April 2017.

It is possible that initially, the government might adopt a multi-tier, diluted version of the GST. This is to give time to all stakeholders to come up to speed with the GST regime. But in medium term, a switch to single rate is most likely so as to create a real single-rate system. But whatever be the structure eventually, its clear that it will be much preferable to the current VAT based multi-tier structure.

Coming to our portfolio, we remain convinced about the long-term India story inspite of the increase in valuations. Apart from the expected passage of GST bill, we believe that a lot of investments and economic/policy decisions taken in last 2 years have set the stage for the next upmove.

Our portfolio remains adequately diversified across sectors and themes. The month of July saw no change in our holdings and sector allocation remains the same.

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