ICICI PRUDENTIAL MUTUAL FUND. RBI s Mid-Quarter Monetary Policy Review: September 2013

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Gerald Bond
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ICICI PRUDENTIAL MUTUAL FUND Impact Analysis 20 th September, 2013 RBI s Mid-Quarter Monetary Policy Review: September 2013 Key Measures Repo rate hiked by 25 bps to 7.50%, reverse repo hiked to 6.

1 ICICI PRUDENTIAL MUTUAL FUND Impact Analysis 20 th September, 2013 RBI s Mid-Quarter Monetary Policy Review: September 2013 Key Measures Repo rate hiked by 25 bps to 7.50%, reverse repo hiked to 6.50% Cash Reserve Ratio (CRR) unchanged at 4.00% Eased Marginal Standing Facility (MSF) recalibrated to 200 bps above the Repo rate and reduced to 9.50% from 10.25% Bank rate reduced to 9.50% (recalibrated to 200 bps above Repo rate) Repo Rate Hiked In a surprise move, the Reserve Bank of India (RBI) hiked its key interest rate viz., the Repo rate by 25 bps or 0.25% to 7.5% at its policy review held on September 20, This is the first hike by the central bank since October 2011 after having cut the repo rate four times (by a total of 125 bps) between April 2012 and May The rise in Repo rate has come in the wake of rise in inflation in the economy. Headline inflation measured by the wholesale price index (WPI) has risen for the third consecutive month to 6.1% in August, 2013 primarily due to a sharp rise in food prices. The central bank s assessment is that in the absence of an appropriate policy response, the WPI inflation will be higher than what was initially projected over the rest of the year. Cut in MSF rate Since mid-july, the Reserve Bank has put in place a number of exceptional measures to tighten liquidity with a view to dampening volatility in the foreign exchange market. These measures have raised the effective policy rate for monetary policy operations to per cent, aligned to the re-calibrated MSF rate. In line with improvement in the external environment, the central bank MSF rate by 75 bps from 10.25% to 9.5% with immediate effect, in part the exceptional monetary tightening measures carried out by it since mid-july. The central bank also reduced the minimum daily maintenance of the CRR from 99% of the requirement to 95% effective from the fortnight beginning September 21, 2013, but kept the CRR unchanged at 4.0%. Despite initiating partial roll back of the liquidity tightening measures, the RBI made it clear that the timing and direction of further actions on exceptional measures will be contingent upon exchange market stability. RBI also stated that further change in the minimum daily maintenance of the CRR was not contemplated. RBI s rationale for policy action Repo rate hike o To anchor inflation and inflation expectations

2 o To normalise the conduct and operations of the monetary policy so as to allow the liquidity adjustment facility (LAF) repo rate to resume its role as the operational policy interest rate Cut in MSF Rate o Exceptional liquidity tightening measures (since Mid-July) to be eased in a calibrated manner in line with the improvement in the external environment RBI s outlook Domestic growth has weakened with continuing sluggishness in industrial activity and services. However, the RBI expects some pick-up in growth on account of better prospects for agriculture due to kharif output and the upturn in exports. Also, as infrastructure investments are expedited, and as projects cleared by the Cabinet Committee on Investment come on stream, growth could pick up in the second half of the year. WPI inflation, which had eased in Q1 of , has started rising again as the passthrough of fuel price increases has been compounded by the sharp depreciation of the rupee and rising international commodity prices. Current assessment shows that in the absence of an appropriate policy response, WPI inflation will be higher than initially projected over the rest of the year. Current high retail inflation (consumer price index) is fuelling the view that inflation is likely to remain at elevated levels and erode consumer and business confidence. Concerns about funding the CAD, amplified by capital outflows due to anticipated tapering of asset purchases by the US Federal Reserve, has increased volatility in the foreign exchange market. RBI s Guidance The RBI will closely and continuously monitor the evolving growth-inflation dynamics with a readiness to act pre-emptively, as necessary. The policy stance and measures set out in the review will begin the process of cautious unwinding of exceptional measures, which will restore normalcy to financial flows. The central bank also intends to address inflationary pressures to provide a stable nominal anchor for the economy, thereby mitigating exchange market pressures and creating an environment conducive for the revitalisation of sustainable growth. Our Outlook We expect the WPI to average at 5.5% 6% through the financial year which is relatively higher than the earlier RBI projection. The announcement by the US Federal Reserve on September 18, 2013 about the postponement of QE3 (quantitative easing) withdrawal may aid the rupee in the near term. This has given RBI some leg room to partly reverse the extra liquidity tightening measures, which were undertaken to stem the volatility in the rupee. As the uncertainty about the timing and speed of withdrawal of QE3 and its

3 impact on rupee remains, liquidity tightening measures initiated in July, 2013 were not fully reversed. We believe that RBI may have to look towards monetary easing as growth continues to weaken on industrial activity and services. The consumption in rural India which was holding till now has also started deteriorating and both the durables & non-durables have been impacted adversely. We believe, as the situation continues to improve on currency and external environment, RBI may come back towards easing monetary policy to support growth. Our recommendations Investors can seek to benefit from accrual strategy of ICICI Prudential Regular Savings Fund and ICICI Prudential Corporate Bond Fund. Investors can also seek to benefit from reasonable risk adjusted returns of ICICI Prudential Blended Plan- Plan B, ICICI Prudential Short Term Plan and ICICI Prudential Dynamic Bond Fund while long term investors may continue to add duration to their portfolio through ICICI Prudential Income Plan. None of the aforesaid recommendations are based on any assumptions. These are purely for reference and the Investors are requested to consult their financial advisors before investing.

4 ICICI Prudential Regular Savings Bond is suitable for investors who are seeking*: Medium term savings solution A Debt Fund that aims to deliver consistent performance by investing in a (BLUE) basket of debt and money market instruments with a view to provide reasonable returns while maintaining optimum balance of safety, liquidity and yield. *Investors should consult their financial advisers if in doubt about whether the product is suitable for ICICI Prudential Blended Plan Plan B is suitable for investors who are seeking*: Short Term income generation and capital appreciation solution. A Debt Fund that aims to generate income and capital appreciation (BLUE) by investing predominantly in debt securities. ICICI Prudential Dynamic Bond Fund is suitable for investors who are seeking*: Medium term wealth creation solution A debt fund that invests in Debt and money market instruments (BLUE) with a view to provide regular income and growth of capital. ICICI Prudential Short Term Plan is suitable for investors who are seeking*: Short term income generation and capital appreciation solution A Debt fund that aims to generate income by investing in a range of debt (BLUE) and money market instruments of various maturities ICICI Prudential Income Plan is suitable for investors who are seeking*: Long term wealth creation solution A Debt Fund that invests in debt and money market instruments of (BLUE) various maturities with a view to maximize income while maintaining optimum balance of yield, safety and liquidity. ICICI Prudential Corporate Bond Fund is suitable for investors who are seeking*: Long term savings solution A Debt Fund that invests in debt and money market instruments of (BLUE) various maturities with a view to maximize income while maintaining optimum balance of yield, safety and liquidity.

5 Disclaimer Mutual Fund investments are subject to market risks, read all scheme related documents carefully. Data source: unless otherwise stated This document is prepared by ICICI Prudential Asset Management Company Limited (the AMC) for general information purposes only and should not be construed as an offer or solicitation of an offer for purchase of any of the funds of ICICI Prudential Mutual Fund (the Fund). In the preparation of the material contained in this document, the AMC has used information that is publicly available, including information developed in-house. Some of the material used in the document may have been obtained from members/persons other than the Fund and/or its affiliates and which may have been made available to the Fund and/or to its affiliates. Information gathered and material used in this document is believed to be from reliable sources. The Fund however does not warrant the accuracy, reasonableness and/or completeness of any information. For data reference to any third party in this material no such party will assume any liability for the same. All recipients of this material should before dealing and or transacting in any of the products referred to in this material make their own investigation, seek appropriate professional advice and carefully read the offer document. We have included statements/opinions/recommendations in this document, which contain words, or phrases such as "will", "expect", "should", "believe" and similar expressions or variations of such expressions that are "forward looking statements". Actual results may differ materially from those suggested by the forward looking statements due to risk or uncertainties associated with our expectations with respect to, but not limited to, exposure to market risks, general economic and political conditions in India and other countries globally, which have an impact on our services and / or investments, the monitory and interest policies of India, inflation, deflation, unanticipated turbulence in interest rates, foreign exchange rates, equity prices or other rates or prices, the performance of the financial markets in India and globally, changes in domestic and foreign laws, regulations and taxes and changes in competition in the industry. All data/information used in the preparation of this material is dated and may or may not be relevant any time after the issuance of this material. The AMC takes no responsibility of updating any data/information in this material from time to time. The AMC (including its affiliates), the Fund and any of its officers directors, personnel and employees, shall not liable for any loss, damage of any nature, including but not limited to direct, indirect, punitive, special, exemplary, consequential, as also any loss of profit in any way arising from the use of this material in any manner. The recipient alone shall be fully responsible/are liable for any decision taken on the basis of this material.

Fixed Income Update October 2015

Fixed Income Update October 2015 Month Overview Average Liquidity Support by RBI Rs -5,527 Cr. Includes: LAF, MSF, SLF & Term Repo Bank Credit Growth Money Market Bank Deposit Growth 9.6% 11.6% Change in basis points Tenure CD Change