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 CP Change 1M 7.07-22 7.28-22 3M 7.07-41 7.30-47 6M 7.20-44 7.91-18 12M 7.31-50 8.36-12 Bond Market Tenure G-Sec Change Change in basis points AAA CB Change 1Y 7.19-23 7.70-33 3Y 7.50-31 8.16-8 5Y 7.63-28 8.26-9 10Y 7.54-24 8.15-16 Macro Economy Data Release Indicator Latest Update Previous Update IIP 4.22% (July) 4.36% (June) GDP 7.0% (1QFY16) 7.5% (4QFY15) USD/INR 65.58 (Sep) 66.48 (Aug) WPI CPI Spread Market -4.95% (August) 3.66% (August) -4.05% (July) 3.69% (July) Data in basis points Tenure AAA AA A 1Y 51 97 189 3Y 66 105 194 5Y 69 108 189 10Y 61 110 191 Data Source FIMMDA, Bloomberg Market Update Money Market rates fell by ~40 to 50 bps in 3 to 12 month maturity segment last month owing to ample liquidity in the system. Inflows from month-end government spending and gilt redemptions widened the liquidity surplus. However, rates were strained to a certain extent due to outflows towards advance tax payments which tightened systemic liquidity. The 50 bps rate cut by the RBI, however, helped rates to settle at lower levels towards the month end. Government bond prices (gilts) hovered in a narrow range for most parts of September 2015, but surged towards the month-end with the yield on 10-year benchmark - the 7.72%, 2025 paper - ending at 7.54% on September 30, 2015, compared with 7.78% on August 31, 2015. Sentiments were positive earlier as tepid domestic GDP data for the June 2015 quarter, coupled with benign inflation figures, strengthened hopes of a rate cut by the RBI. These hopes came alive after the Central Bank, in its fourth bi-monthly monetary policy review on September 29, 2015 cut the repo rate under the liquidity adjustment facility (LAF) by 50 bps from 7.25% to 6.75%. Gilts received a further boost when the RBI hiked limits for foreign portfolio investor (FPI) investment in government securities to 5% of the outstanding stock by March 2018, a move that is expected to bring in an additional Rs 1.2 lakh cr into the market. Macro Update Sluggish economic recovery: The April-June GDP growth moderated to 7.0%, from 7.5% in the previous quarter, with net exports subtracting from growth and private consumption slowing somewhat. Irrespective of the headline 7% GDP print, it is clear from various high frequency indicators (PMI, credit growth, non-oil-non-gold imports, capacity utilization) that economic momentum remains weak and may need further policy support to facilitate a robust recovery. CPI inflation remains benign (3.7%yoy through August 2015), led by lower than anticipated increase in food prices. Given the trend of food and fuel prices, RBI s 6% target for January 2016 seems achievable. Meanwhile, WPI continues to be negative (- 4.9% in August 2015) and could remain so in the near term, while GDP deflator is growing at a modest rate as well (1.8% in April-June). The other area which could benefit from further monetary easing is private sector credit growth, which has hit a multi-decade low. As per RBI s latest data, nominal credit growth has slowed further to 9%yoy by end August 2015 (from 12%yoy in the same period last year). Our Outlook We have been communicating over the last one year on the possibility of sharper rate cuts and hence the 50 bps rate cut by the RBI was not too surprising for us. We now have a cumulative 125 bps rate cut in this calendar year till date. We believe there was substantial scope for interest rates to come down in India as a result of falling commodity prices and severe deflationary pressures across the world. Hence, a 50 bps rate cut is a step in the right direction to improve the long term growth of the economy. Also due to lower transmission of the previous monetary policy by banking sector, RBI saw scope for further reduction in the interest rates. We believe inflation could continue to undershoot the RBI targets for Q1 of FY2016 and FY2017 and may remain around 5% and 4.5% respectively. The RBI continues to emphasize that it would remain accommodative and its future actions will remain data dependent. With this and given the 50bps cut in the repo rate, we think room for further cuts remain intact. A lower for longer period inflation path and moderation in inflation expectations which remains a possibility, in our view could provide room for further rate cuts. Over a period of time, we expect further moderation in interest rates from current levels and investors should continue to invest in duration funds with an aim to benefit from the same. Also, the reaction of 50 bps rate cut on 10 year G-sec yield has been limited which may be owing to quarter end selling pressure by banks, this leaves opportunity for investors to invest. Bond yields may fall more before they entirely price in the 50 bps rate cut.
Debt Valuation We have been maintaining the Debt valuation model that is calculated based on CPI, WPI, Crude oil prices, Current Account and G-Sec yields. This model has been tested since 1995 and provides estimates of interest rate cycles. Currently the index lies in attractively valued territory and indicates that one needs to be invested aggressively in high duration funds. Debt Valuation Index considers WPI and CPI over G-Sec Yield, Current Account Balance and Crude Oil Movement for calculation. Equal weights are assigned to each of these parameters for calculating the index. Our Recommendation With repo rate now at 6.75% and possibility of further rate cuts, the 10 year bond yields at 7.54% levels remains reasonably valued. Long term duration funds seem better placed in a downward rate cycle. But for those looking to diversify, a debt portfolio with shortand medium-term bond funds can be a good combination as well. This is a suitable time to invest into such products with an aim to benefit from the falling interest rates and also limit the re-investment risk. Aggressive investors seeking to benefit from higher duration ICICI Prudential Long Term Plan Investors with moderate risk appetite seeking to benefit from duration ICICI Prudential Dynamic Bond Conservative investors seeking to earn from Accrual + Duration ICICI Prudential Regular Savings ICICI Prudential Income Plan ICICI Prudential Short Term Plan ICICI Prudential Corporate Bond ICICI Prudential Long Term Gilt ICICI Prudential Income Opportunities ICICI Prudential Regular Income (Income is not assured and is subject to availability of distributable surplus)
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 and money market instruments of various maturities. ICICI Prudential Regular Savings is suitable for investors who are seeking*: Medium term savings solution A Debt fund that aims to deliver consistent performance by investing in a basket of debt and money market instruments with a view to provide reasonable returns while maintaining optimum balance of safety, liquidity & yield. ICICI Prudential Corporate Bond is suitable for investors who are seeking*: Long term savings solution A Debt that invests in debt and money market instruments of various maturities with a view to maximize income while maintaining optimum balance of yield, safety and liquidity. ICICI Prudential Income Plan is suitable for investors who are seeking*: Long term wealth creation solution A Debt that invests in debt and money market instruments of various maturities with a view to maximize income while maintaining optimum balance of yield, safety and liquidity. ICICI Prudential Long Term Plan is suitable for investors who are seeking*: Medium Term Savings solution A Debt fund that invests in debt and money market instruments with a view to maximize Income while maintaining optimum balance of yield, safety and liquidity.
ICICI Prudential Long Term Gilt is suitable for investors who are seeking*: Long term wealth creation solution A Gilt that aims to generate income through investment in Gilts of various maturities. ICICI Prudential Dynamic Bond is suitable for investors who are seeking*: Medium term wealth creation solution A Debt that invests in debt and money market instruments with a view to provide regular income and growth of capital. ICICI Prudential Regular Income (Income is not assured and is subject to availability of distributable surplus) is suitable for investors who are seeking*: Medium term regular income solution A hybrid fund that aims to generate regular income through investments primarily in debt and money market instruments and long term capital appreciation by investing a portion in equity ICICI Prudential Income Opportunities is suitable for investors who are seeking*: Long term savings solution A Debt that invests in debt and money market instruments of various credit ratings and maturities with a view to maximizing income while maintaining an optimum balance of yield, safety and liquidity. Abbreviations: LAF Liquidity Adjustment Facility, MSF Marginal Standing Facility, SLF Standing Liquidity Facility, CP - Commercial Paper, CD Certificate of Deposit, CB Corporate Bond, IIP Index of Industrial Production, CPI Consumer Price Index, WPI Wholesale Price Index, GDP Gross Domestic Product, G-sec Government Securities, MSP Minimum Support Price, RBI Reserve Bank of India, PMI Purchasing Managers Index. Disclaimer Mutual investments are subject to market risks, read all scheme related documents carefully. In the preparation of the material contained in this document, the AMC has used information that is publicly available, including information developed in-house. Information gathered and material used in this document is believed to be from reliable sources. The 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 scheme information document. We have included statements 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 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.