RBI Monetary Policy Update Status Quo on Rates

Transcription

1 RBI Monetary Policy Update Status Quo on Rates After the cutting the rate by 25 bps in August policy, the RBI kept the key policy rate unchanged at 6% and maintained the neutral stance of monetary policy in the Fourth Bi-Monthly Monetary Policy meeting. This was in line with the consensus expectations. As expected, the RBI has revised down the economic growth forecast (given the rising growth concerns) and revised up inflation rate (given the sharp decline in headline and core inflation over last couple of months). Four out of five monetary committee members voted in favour of no change in policy rate Reverse Repo Repo MSF CRR SLR (RHS) Rationale for Action: Revised upward trajectory of headline inflation projections (including the HRA impact) in the range of 4.2%-4.6% in 2H FY18. Revised downwards economic growth numbers to 6.7% for FY18 (August projection: 7.3%). Policy Stance: Policy stance continues to be neutral and monitor incoming data closely. RBI continues to remain focused on keeping headline inflation close to 4% on a medium term basis.

2 Fixed Income View: RBI, as expected kept Neutral stance in today s policy with further rate action to be data dependent. It will monitor incoming data to better assess the transient versus sustained headwinds in the recent growth numbers. On the inflation front, it highlighted the recent rise in headline and core inflation numbers and highlighted the upside risks to inflation thereby revising its inflation forecast higher by 10bps. It also believed that the favorable outlook on food prices and better supply side management by the government may offset the possible risks from fuel and core inflation over the coming months. We expect headline inflation to rise in the near future but will remain within RBIs trajectory of % by this fiscal year end. On the growth front, it clearly acknowledged the likelihood of the output gap widening, but requires more data to better ascertain the transient versus sustained headwinds in the recent growth prints. The governor also acknowledged that measures were needed to support growth. On the Liquidity front, the RBI re-iterated its stance on Neutral liquidity and showed concerns on the transmission of lower rates. Thus the current liquidity stance implies rates to remain benign over medium term perspective. On external front, it sounded caution from FEDs balance sheet unwinding program, US Tax reforms, recent stronger growth and inflation print in developed economies and thereby appropriate rate action in respective economies. We expect FEDs balance sheet program to be non market disruptive and rate hikes to be gradual in those economies. Keeping the above factors in mind, we believe that RBI may turn attention to growth as it becomes increasingly confident of achieving its inflation target. Thus growth concerns over next 3 6 months may decide RBIs rate actions. With the current RBIs liquidity stance and relatively higher absolute yields, we expect Liquidity trades to dominate Macros trades from medium term perspective. Carry will be the major driver for returns in the current interest rate regime. We expect spread assets to outperform going ahead & curve to bull steepen as carry remains attractive at the shorter end of the yield curve. Also roll down benefits will add to the returns on steeper yield curves. We also expect bond yields to ease from near term (3-6 months) perspective as market starts pricing in rate cuts subject to upcoming GDP prints & demand supply to take precedence in the short term. We do not foresee any major swings in yields unless commodity prices rally significantly further or US yields jumps materially. Fund Strategy: With expectations of Liquidity trades to dominate Macro trades in the short term, we expect curve to bull steepen and carry to be the major driver of returns. Thus, Ultra Short Term Funds & Short term bond funds (Reliance Short Term Fund & Reliance Banking and PSU Debt Fund) are expected to gain from our above view. Across our long duration funds (Reliance Dynamic Bond Fund, Reliance Income Fund & Reliance Gilt Securities Fund) we will continue with the current strategy of Carry (6 9 year Gsecs, 10yr high grade Corporate bonds) and liquid

3 Gsecs (primarily belly of the curve). With expectation of further rate cuts subject to upcoming GDP prints, tactical duration plays may be captured through these long duration funds. In Reliance Dynamic Bond Fund, we have modified our strategy by reducing duration from years to years by shifting out from Gsecs to private AAA corporate bonds & will consider giving allocation to SDLs at appropriate spreads going ahead, thereby targeting an optimal mix of accruals and medium duration. We recommend Accrual funds (Reliance Regular Savings Fund - Debt & Reliance Corporate Bond Fund) over 3 years investment horizon. These funds have potential to benefit from high carry, credit spread compression due to balance sheet improvements & credit migration and roll down benefits on steeper yield curve.

4 Annexure Highlights of the Monetary Policy: Inflation Outlook: RBI has revised upward headline CPI projection for 2H FY18 in the range of 4.2%-4.6% on the back of 1) some price revisions pending the implementation of GST ; 2)Firming up of international crude prices; 3) Broad-based increase in core CPI inflation. Recent increase in CPI inflation has coincided with an escalation of global geo-political uncertainty and increase volatility in financial markets. Despite upward revision in CPI number, the fan chart of RBI (shown below) incorporating the inflation trajectory over the period (includes the first round impact of HRA) remain more or less similar to August chart. Upside risk to Inflation outlook: Implementation of farm loan waivers by States leading to fiscal slippages and impacting quality of public spending. States implementation of salary and allowances in line with Center government to push up inflation by 100 bps over months.

5 Downside risk to Inflation outlook: Adequate food stocks and effective supply management by the Government to keep food inflation benign. Household inflation expectations have anchored down in recent survey, yet continued to remain at higher levels. Economic Growth Outlook: RBI has revised the GVA projection to 6.7% y/y from 7.3% y/y in August policy on the back of adverse impact of GST, albeit short term, on manufacturing sector and thereby impacting revival of investment activity. Further Consumer confidence and overall business assessment of the manufacturing and services weakened in 2Q FY18. Structural reforms implemented in recent times will likely be growth augmenting over the medium and long term by improving the business environment, enhancing transparency and increasing formalisation of the economy. Upside risk to Growth outlook Household consumption demand to get boost from upward salary and allowances revisions by states. Teething problems linked to GST and bandwidth constraints to get resolved soon, resulting in acceleration in 2H FY18. Downside risk to Growth outlook Corporate margins under pressure due to faster than expected rise in input costs and lack of pricing power. Consumer confidence of Households from latest RBI s survey indicate weakness in terms of outlook on employment, income, prices and spending. Common Source: Bloomberg, RMF Internal Research, RBI

6 PRODUCT LABEL- Reliance Dynamic Bond Fund Income over long term Investment in debt and money market instruments PRODUCT LABEL- Reliance Gilt Securities Fund Income over long term Investment in Government Securities PRODUCT LABEL Reliance Income Fund Income over long term Investment in debt and money market instruments PRODUCT LABEL Reliance Regular Savings Fund Debt Option Income over medium term Investment predominantly in debt instruments having maturity of more than 1 year and money market instruments

7 PRODUCT LABEL Reliance Short Term Fund Income over short term Investments in debt and money market instruments with the scheme would have maximum weighted average duration between years PRODUCT LABEL Reliance Banking & PSU Debt Fund Income over short to medium term Investments in debt and money market instruments of various maturities, consisting predominantly of securities issued by Banks, Public Sector undertakings & Public Financial Institutions PRODUCT LABEL- Reliance Corporate Bond Fund Income over medium term Investment predominantly in corporate bonds of various maturities and across ratings that would include all debt securities issued by entities such as Banks, Public Sector undertakings, Municipal Corporations, bodies corporate, companies, etc Disclaimer: The information herein below is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. Certain factual and statistical information (historical as well as projected) pertaining to Industry and markets have been

8 obtained from independent third-party sources, which are deemed to be reliable. It may be noted that since RNAM has not independently verified the accuracy or authenticity of such information or data, or for that matter the reasonableness of the assumptions upon which such data and information has been processed or arrived at; RNAM does not in any manner assures the accuracy or authenticity of such data and information. Some of the statements & assertions contained in these materials may reflect RNAM s views or opinions, which in turn may have been formed on the basis of such data or information. The Sponsor, the Investment Manager, the Trustee or any of their respective directors, employees, affiliates or representatives do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such data or information. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and opinions given are fair and reasonable, to the extent possible. This information is not intended to be an offer or solicitation for the purchase or sale of any financial product or instrument. Recipients of this information should rely on information/data arising out of their own investigations. Before making any investments, the readers are advised to seek independent professional advice, verify the contents in order to arrive at an informed investment decision. None of the Sponsor, the Investment Manager, the Trustee, their respective directors, employees, affiliates or representatives shall be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. The Sponsor, the Investment Manager, the Trustee, any of their respective directors, employees including the fund managers, affiliates, representatives including persons involved in the preparation or issuance of this material may from time to time, have long or short positions in, and buy or sell the securities thereof, of company(ies) / specific economic sectors mentioned herein, subject to compliance with the applicable laws and policies. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.