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Macroeconomic Contents & Market Update Macroeconomic Update Equity Market Update June 2020 Debt Market Update

Markets during the month of June Indian Equity Market Equities markets gained ~ 7.5% m-o-m driven by optimism around pickup in economic activity. Returns were partly offset by • risk of second wave of COVID-19 infection, • clash between India and China over territorial dispute etc. Fixed Income Market 10Year Gsec yield rose driven by overhang of large supply of government securities. Credit environment improved with spreads of corporate bonds easing. Global Rating of India Moody’s downgraded India’s sovereign rating from Baa2 to Baa3, while maintaining the Negative outlook. Fitch Ratings placed India’s rating on Negative outlook, while reaffirming the rating at BBB-. S&P reaffirmed the rating at BBB- while retaining the Stable outlook. COVID – 19 – Continue to remain a concern In India, though the number of positive cases continues to rise, proportion of such cases were relatively low considering the large population. May June Worldwide ~6.3 million ~10.6 million India ~1,90,000 ~5,86,000 1

Macroeconomic Update June 2020 2

Economy showing early Change in Railway Freight Earnings and Tonnage (YoY, last 7 days) signs of stabilisation - YoY Change in Rail freight earnings and tonnage (last 7 days, %) As economy is reopening - restrictions relaxed, Indian economy - witnessing early -5.0 Freight earnings Tonnage in last 7 days signs of pickup in economic activity. -10.0 Traditional data comes with a lag, few -15.0 activity indicators showing improvement month-on-month (m-o-m) and pace of -20.0 contraction reduced since April 2020 : -25.0 power demand, goods transported by railway, -30.0 unemployment rate etc. -35.0 Some consumption indicators like sale of cars, 2 Wheelers, diesel, etc. continue -40.0 to remain weak. -45.0 Impact of lockdown be felt most in H1FY21, and H2FY21 be significantly better provided spread -50.0 of COVID-19 contained to a large extent. Source:Raildrishti.com Weekly change in power demand (YoY) YoY Change in weekly power demand for the week ended 0.0% -6.0% -6.4% -5.0% -10.0% -10.6% -10.6% -15.0% -20.0% -13.4% -14.2% -25.0% -30.0% -18.0% -18.8% -20.5% -22.9% -25.0% 4/20/2020 4/27/2020 5/4/2020 5/11/2020 5/18/2020 5/25/2020 6/1/2020 6/8/2020 6/15/2020 6/22/2020 6/29/2020 35.0 Source: Motilal Oswal Securities 30.0 25.0 Unemployment rate 20.0 Unemployment Rate moderates sharply 15.0 10.0 Urban Rural 5.0 Overall 0.0 Source: CMIE 3

Current account turned into surplus in Q4FY20 ; FY21 outlook remains positive India’s Q4FY20 current account turned India's external situation Q4FY19 Q4FY20 Change into slight surplus - a first after 13 years. (USD billion) (YoY, %) -35.2 -35.0 Improvement driven by Trade (Deficit) /Surplus -22.6 -24.7 -0.5% Improvement in Remittances, Net Oil imports 9.5% services exports, and Net Gold imports* -5.2 -3.0 -42.0% stable trade deficit. Trade deficit ex oil & gold -7.5 -7.3 -2.0% Net Invisibles exports Surplus/(Deficit) 31 35.6 16.5% Balance of Payment (BoP) remained Current account Surplus / (deficit) -4.6 0.6 NM healthy with % of GDP -0.7% 0.1% FPI outflows offset by higher FDI Capital Account Surplus / (Deficit) 18.8 18.2 -3.1% inflows, FDI increase in External commercial FPI 6.4 12.0 86.3% borrowings and ECB rise in NRI deposits. Others 9.4 -13.7 NM Balance of Payments Outlook for Current account and BoP -4.9 2.9 NM in FY21 remains comfortable with 7.9 17.0 115.2% 14.2 18.8 32.7% * includes net imports of gold, silver & precious stones adjusted for gems & jewellery exports; NM: Not meaningful fall in oil prices, weak domestic demand to result in contraction of imports. exports and remittances - weaken too, on an overall basis, India’s current account might remain in surplus for FY21. 4

Centre's fiscal deficit widens in 2MFY21; likely to remain stretched Significant shortfall in both Gross tax revenue 2MFY20 2MFY21 Change (YoY) direct and indirect taxes, resulted Total Direct Tax in Centre’s fiscal deficit widening Total Indirect Tax 2,146 1,261 -41.2% to 58.6% of Budgeted Estimates Less: Share of States & others 617 527 -14.6% (BE) in first 2 months of FY21 Net Tax collection 734 -52.0% (2MFY21). Non- Tax Revenue 1,529 921 Total Revenue Receipts 991 340 -7.1% Transfers to states remained high Total Capital Receipts 1,155 108 -70.5% despite shortfall in revenues as 284 449 -61.9% Centre continues to transfer the 8.31 -68.8% amount based on budget 1,439 -72.9% estimates rather than actual 30.67 revenue collections. Total Revenue Expenditures 4,653 4,566 -1.9% Capital expenditures grew at Total Capital Expenditures 477 552 15.7% healthy pace while revenue Total Expenditures 5,118 -0.2% expenditures contracted slightly. 5,130 Gross Fiscal Deficit -3,662 -4,663 27.4% Fiscal Deficit as % of GDP -1.9% -2.3% Fiscal Deficit as % of BE 52.0% 58.6% YoY – Year on Year; BE – Budgeted Estimates Fiscal deficit in FY21 to be significantly higher (~7% of GDP*) on back of contraction in revenues because of • weakness in economic activity and • impact of announced fiscal stimulus. Source: *Kotak Institutional equities 5

IIP and Food Inflation Industrial production contracts sharply Food inflation softened; in April 2020, outlook remains muted might remain elevated in near term: IIP contracted sharply by 55% in April 2020 being Due to difficulty in data collection and limited impacted due to nationwide lockdown - driven by number of transactions, full data related to CPI was not released for May 2020. broad based fall in all sub-segments led by capital goods, Data of some sub-components (constituting ~63% of infrastructure goods and original index), mainly consisting of food, housing, consumer durables. health etc., was released. YOY, % Mar-20 Apr-20 The limited data suggests that food inflation has softened on back of easing vegetable prices driven by IIP -18.3 -55.5 lower supply disruption. Primary goods -4.1 -26.6 Capital goods -92.0 Inflation of other constituents of food index like pulses, Intermediate goods -38.3 -66.0 meat, edible oil etc. remained at elevated level. Infrastructure/construction goods -18.5 -83.9 Consumer goods -25.2 -61.8 Inflation in near term can remain at elevated level due Consumer durables -27.0 -95.7 to supply side disruptions and is likely to moderate in Consumer non- durables -36.5 -36.1 H2FY21 on account of base effect, weak aggregate -20.2 demand and normalisation of supply. Impact of lockdown and phased resumption of production - to keep IIP under pressure in near term. 6

Commodity Prices Commodity prices ended the month higher on back of optimism around recovery in economic activity, especially in US and China. Brent crude prices continue to grow at healthy pace driven by production cuts and revival in demand. % Change Market price FY2020 Jun-20 FYTD21^ (USD)* (yoy) (m-o-m) 81.0 Brent Crude (per barrel) 41 (66.7) 16.5 11.6 Gold (per ounce) 1,784 23.6 3.1 11.0 Steel (per tonne) 3,773 (12.6) 3.1 10.1 Zinc (per tonne) 2,057 4.3 25.9 Copper (per tonne) 6,038 (37.8) 7.3 Aluminium (per tonne) 1,602 (26.0) 13.2 4.5 Lead (per tonne) 1,789 (21.2) 4.9 (15.3) 10.7 *Market prices as on June 30, 2020; ^ change in prices since end-March 20, YoY- Year on Year 7

To Summarize and Conclude Lockdown to contract India’s GDP in FY21 - a first in past 40 years Growth rate should recover in 2HFY21 as situation normalises. Fiscal and monetary measures to provide impetus to growth. Growth rate in FY22 to be significantly higher due to low base and absence of disruption caused by lockdown. India better placed as major Emerging Markets (EMs) economies have high dependence on global merchandise trade and/or are net oil exporters. Weakness in global growth and fall in oil prices are likely to hurt EM economies. India a net importer of oil - stands to gain significantly due to fall in oil prices. India’s dependence on exports relatively limited as compared to other EMs. Disruption in global supply chain caused by COVID -19 has highlighted risk of overdependence on a single country. Over medium to long term, many global MNCs to consider diversifying manufacturing operations from China. India could be a likely beneficiary given low corporate tax rate, skilled population, relatively low wages and a large domestic market. For more on this, please refer “A mid year update on the Indian economy and markets” published in June 2020 and available on our website www.hdfcfund.com 8

Equity Market Update June 2020 9

Equity Market – June 2020 Key drivers of movement in Globally, most major indices markets were: delivered positive returns improvement in economic activity, % Change in Indices FY2020 Jun-20 FYTD21 favourable monsoon expectations, escalation of tension between India and China, S&P 500 (8.8) 1.8 20.0 fear of second wave of COVID-19 infection, etc. 1.5 8.8 FTSE (22.1) 6.2 23.9 5.1 12.3 DAX (13.8) 1.9 17.8 6.4 3.5 % Change in Indices FY2020 Jun-20 FYTD21 CAC (17.8) 3.9 20.2 Nikkei (10.8) 4.6 8.5 S&P BSE India Auto (42.9) 8.4 42.1 Hang Seng (18.8) 7.0 17.3 S&P BSE India Bankex (35.4) 9.7 10.2 S&P BSE India Capital Goods (40.6) 4.3 17.1 KOSPI (18.0) S&P BSE India FMCG (12.7) 3.3 9.8 S&P BSE India Healthcare (15.7) 3.9 33.9 Shanghai (11.0) S&P BSE India Metal (49.7) 5.9 26.2 S&P BSE India Power (32.3) 6.3 14.3 MSCI Emerging Market Index (19.8) S&P BSE India Oil & Gas (34.4) 7.0 26.4 S&P BSE India IT (16.0) 5.8 15.9 S& P BSE SENSEX (23.8) 7.7 18.5 NIFTY 50 (26.0) 7.5 19.8 NIFTY Midcap 100 (35.9) 10.8 25.6 NIFTY Smallcap (46.1) 15.3 28.4 Mid and small cap indices outperformed the large caps. Banking, Auto, Oil & Gas and Power were best performing sectors. 10

FPI / MF Flows and Quarterly Results FPIs were net buyers in June 2020 and bought equity worth USD 2.9 billion. Total FPIs equity outflows in CYTD20 was USD 2.5 billion as against inflows of USD 11.3 billion during the corresponding period last year. Net inflows in domestic equity oriented mutual funds were INR 3,893 crore in May 2020 compared to net inflows of INR 5,030 crore a month ago. In first five months of CY20, total inflows in domestic equity oriented mutual fund schemes stood at ~INR 38,000 crore. Q4FY20 results declared so far: Results of Cement, Telecom and Agro chemical were better than expectations. Results of Banks, NBFCs, Auto, Oil & Gas and Power were largely in line with expectations. Results of Consumer staples, Metals, and IT were below expectations. 11

Equity Market Outlook As on 30 June 2020, NIFTY 50 was trading near 23.2x 160 149 Mcap/GDP (%) P/E (X) 25 FY21E and 16.8x FY22E price to earnings ratio. While multiples are reasonable, in uncertain times like the 140 current one, limited reliance can be placed on the Price to earnings multiples for gauging valuations as 20 earnings are difficult to predict, especially for FY21. 120 Indian market cap to GDP is a better indicator of 100 99 98 92 valuation of overall market in current scenario. 80 60 88 72 81 75 71 78 76 15 no. of times As of 30 June 2020, Indian market capitalisation 65 62 57 10 stood at ~64% of GDP (based on 2021 GDP), as 69 56 61 against average of 77% over the past 10 years. 55 48 The gap between 10Y Gsec and 1Y-Forward NIFTY 50 Earning yield* reduced significantly and now below 40 35 26 30 5 10 year average - indicates that equity markets are attractively priced. 20 *Earning yield = 1/(one year forward P/E) 00 Markets hold promise over the medium to long term. 2000 2001 Government under its “Self Reliant Movement” 2002 announced to divest the stake in CPSEs through 2003 strategic sale, rather than through Exchange Traded 2004 Fund (ETF) route. 2005 2006 Strategic Sale should lead to better valuations of 2007 PSUs as regular supply of shares through ETFs was a 2008 big overhang on their share prices. 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E For 2020E and 2021E, Market cap/NIFTY 50 as on 30 June 20 is taken; GDP estimates are for 2020E and 2021E respectively. For 2020E, PE based on free-float EPS as of Mar-21 end and for 2021E EPS of Mar-22 end is used 14.0 10Y Gsec and NIFTY Earning Yield 10.0 6.0 2.0 -2.0 Gap Earnings yields (%) India 10-y G-Sec yields (%) -6.0 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Apr-20 12

To Conclude Indian Equity markets gained ~ 7.5% m-o-m driven by optimism around pickup in economic activity. FPIs were net buyers in June 2020 and bought equity worth USD 2.9 billion. Net inflows in domestic equity oriented mutual funds were INR 3,893 crore in May 2020. Indian market capitalisation to GDP and Gap between 10Y Gsec and 1Y-Forward NIFTY 50 Earning yield are below 10 year average - indicates that equity markets are attractively priced. Merit in increasing allocation to equities in a phased manner or in staying invested as the case may be (for investors with a medium to long term view and in line with individual risk appetite). Key Risks in Near Term: significant rise in spread of COVID - 19, adverse global events, sharp rise in crude oil prices, sharp moderation in equity oriented mutual funds flows, higher than expected NPAs post the moratorium, escalation of tension between India & China etc. 13

Debt Market Update June 2020 14

Debt Market – June 2020 The yield of 10-year Gsec (5.79 GoI 2030) ended the month of June 2020 at 5.89%, up 13 bps over the previous month end. The table below gives a summary view of movement of key rates & liquidity. May-20 Jun-20 Change (%) 10Yr G-Sec Yield (%, 5.79 GoI 2030)^ 5.76 5.89 0.13 AAA 10Year Corporate Bond Yields (%)# AAA 10Y corporate bond spread against 6.45 GS 2029 Yield (bps)@ 7.07 6.85 -0.22 131 96 -0.35 Average net liquidity absorbed / (infused) by RBI* (INR billion) (approx.) 5,099 3,776 -26.0 MIBOR Overnight Rate (%) 4.04 3.89 -0.15 *Average net daily liquidity infused / absorbed through Liquidity Adjustment Facility, exports refinance, marginal standing facility and term repos/re- verse repos; ^ - bi-annual yield; # annualised yields; @ - Spreads have been calculated by subtracting non-annualised Gsec yields from annualised corporate bond yields Average net interbank liquidity surplus increased for the month due to high government spending, soft credit growth vis-a-vis deposit growth, purchases of government securities and foreign exchange by RBI. Increase in pace of withdrawal over the past couple of months and repayment of Ways & Mean Advances (WMA) by Central Government to RBI reduced the interbank liquidity. After being negative for past three months, net debt FPI flows turned slightly positive to USD 0.3 billion for the month. 15

Interest Rates Outlook Factors supporting lower yields Factors opposing lower yields RBI has conducted Operation TWIST, LTROs, Overhang of large supply of Government TLTROs, Open markets purchases, etc.- to ease securities (Central as well as State) especially financial condition and improve liquidity at the longer end, RBI is open to take further conventional and Excess SLR (Statutory Liquidity Ratio) unconventional policy measures to counter investments within banking system, the impact on slowdown due to the pandemic, Any sharp reversal in oil prices, Weak oil prices, High near term inflation, etc. positive outlook on Balance of payment, benign inflation outlook, low global rates and easing liquidity by major central banks bodes well for yields in India. 16

To Conclude The yield of 10-year Gsec (5.79 GoI 2030) ended the month of June 2020 at 5.89%, up 13 bps over the previous month end. Average net interbank liquidity surplus remain high. Yields at the longer end of the curve - to trade within a range in the foreseeable future. Short to medium end of the yield curve offers better risk adjusted returns. Prevailing high credit spreads create a favourable risk rewards opportunity in select pockets. 17

Glossary CPI Consumer Price Index CPSEs Central Public Sector Enterprises ECB External Commercial Borrowings Ems Emerging Markets GDP Gross Domestic Product IIP Index of Industrial Production LTRO Long Term Repo Operation SLR Statutory Liquidity Ratio TLTRO Targeted Long Term Repo Operations 18

Disclaimer This document contains our views as on July 08, 2020. The views expressed herein are based on internal data, publicly available information and other sources believed to be reliable. Any calculations made are approximations, meant as guidelines only, which you must confirm before relying on them. The information contained in this document is for general purposes only and not an investment advice. The document is given in summary form and does not purport to be complete. The document does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. The information/ data herein alone are not sufficient and should not be used for the development or implementation of an investment strategy. The statements contained herein are based on our current views and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Past performance may or may not be sustained in future. Stocks/Sectors referred above are illustrative and not recommended by HDFC Mutual Fund / AMC. The Fund may or may not have any present or future positions in these sectors. HDFC AMC / HDFC Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). Neither HDFC AMC and HDFC Mutual Fund (the Fund) nor any person connected with them, accepts any liability arising from the use of this document. The recipient(s) before acting on any information herein should make his/her/their own investigation and seek appropriate professional advice and shall alone be fully responsible / liable for any decision taken on the basis of information contained herein. MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY. 19

Thank You Source for various data points: Bloomberg, NSDL, CMIE, RBI, Kotak Institutional Research, Worldometers.info, World Bank.