Impact of the recent monetary policy on debt mutual fund schemes


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Impact of the recent monetary policy on debt mutual fund schemes

  1. 1. 1Mutual Fund Analysis October 29, 2011 Impact of the announcement of 2nd Quarter monetary policy on debt mutual fund schemes: As widely expected, the Reserve Bank of India has upped the key short term rates – Repo and Reverse Repo by 25 basis points each at its Second Quarter review of monetary policy for 2011 – 12 on October 25, 2011 to curb persistent inflation, which remains above the comfort level. Highlights: • Hikes repo rates 25 bps to 8.50%. • Reverse Repo rates goes up 25 bps to 7.50%. • Marginal Standing Facility is set at 9.50%. • Bank Rate and CRR rates kept unchanged at 6%. • Deregulates savings bank deposit rate with immediate effect. • FY 2012 GDP projection revised downwards to 7.6% from 8%. • March end inflation projection retained at 7%. • Inflation to moderate below 7% in H1 2012-13. • FY 12 Money supply growth projection maintained at 15.5%. • Non-Food Credit growth projection maintained at 18%. This is the 13th hike since March 2010 with the cumulative increase of 525 bps in the repo rate aiming to anchor inflationary expectations, stimulate investment activity, reinforce emerging downward inflationary trajectory and ensure liquidity is in moderate deficit. The RBI hinted that the present rate hike could possibly the last in the current interest rate cycle as inflation could start come off from the current level of 9% and above by December. For instance, the RBI projected that the inflation will cool off and touch 7% level in March 2012. And it reiterated its medium term objective of monetary policy to contain inflation at 3% level.Impact of recent monetary policy on debt schemes Retail Research
  2. 2. 2Mutual Fund Analysis contd… Inflationary concerns: Even though the demand side inflationary pressures are expected to cool off due to global economic slowdown that affects investment and consumption demand, the supply side constraints such as instability in global commodities prices and domestic fuel price hikes elevate the pressure on inflation. Rising global crude oil prices is also a present threat to inflation expectations. WPI Inflation Vs. Repo Rate 13 WPI Inflation (RHS) Repo Rate (RHS) 11 9 9 7 6 5 3 3 1 Jan-10 Feb-10 Mar-10 May-10 Jun-10 Jul-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 May-11 Jun-11 Jul-11 Oct-11 Sep-10 Sep-11 Apr-10 Aug-10 Apr-11 Aug-11 Bond Market: As far as fixed income market in India is concerned, the yields of the bonds have been under intense upward pressure over a year where prime factors such as heightened global uncertainties, sharp rupee depreciation, weak Govt finances, higher Govt borrowing, tight liquidity conditions, instability in the global commodities prices, rate hike in the wake of persisting inflation, and significant growth risks weigh the sentiments over the short term. Indian bond market got a respite and cheered a bit post policy announcement as the rate hike was in line with the expectation. However, the market will take cue from the government borrowing, liquidity and global concerns going forward.Impact of recent monetary policy on debt schemes Retail Research
  3. 3. 3Mutual Fund Analysis contd… Global uncertainties such as concerns on growth slowdown in the US, debt overhang situation in the Euro zone nations, increased inflation level that is relatively high in the emerging economies like China, Brazil and others, clearly indicate the downtrend in the growth spectrum over the global front. All such worrisome factors have a negative impact on the Indian economy. Potential benefits from the recent decline in global commodities prices have been offset by the sharp depreciation in the rupee against the US dollar. There has been tight liquidity condition prevailing in the system for months. Liquidity that is measured by LAF window witnessed deficit of around Rs. 53,500 crore on a daily average basis for last six months period. The projection on GDP growth for FY 12 which has been revised to 7.6% against initial estimate of 8% clearly indicates the slowdown in India’s economic growth. The overhang of bond supply (that is visible in the increase in the borrowing figure for 2011-12 by Rs. 53,000 crore) and probable slippages in the fiscal deficit numbers also influence the market. India GDP Growth Rate (%): 11 10 9.6 9.7 9.3 9.4 9.4 8.8 8.9 9 8.5 8.6 8.3 7.8 7.8 8 7.5 7.7 7.3 7 6.3 6.1 5.8 6 5 Mar-07 Jun-07 Dec-07 Mar-08 Jun-08 Dec-08 Mar-09 Jun-09 Dec-09 Mar-10 Jun-10 Dec-10 Mar-11 Jun-11 Sep-07 Sep-08 Sep-09 Sep-10Impact of recent monetary policy on debt schemes Retail Research
  4. 4. 4Mutual Fund Analysis contd…. Deregulation of the savings bank deposit rate: The RBI also announced the deregulation of the savings bank deposit rate with immediate effect. With this, banks are free to determine their savings bank interest rate subject to conditions. This will push up funding cost for banks and impact their earnings (and may be passed on the borrowers). A possible increase of 100 to 200 bps in the savings bank deposit rates may affect the inflow into the liquid mutual funds going forward. Conclusion: Considering the above, we are of the opinion that the present scenario in the market is likely to continue at least for next three months. The yields of bonds including money market instruments are expected to remain at the present level or inch down by up to 100 bps in the near term. Investors are advised to stick with the present strategy of investing in the short term mutual fund categories like liquid, ultra short term and short term income. As interest rates seem to have peaked out (except a small chance of them rising further due to fiscal slippages) investors can allocate part of their corpus in a SIP manner in Income / Long term gilt funds over the next six months to benefit out of an impending fall in interest rates (whose timing is uncertain at this point and hence the SIP advice). When interest rates start dropping, income & LT Gilt funds appreciate the most due to their longer average maturity and exposure to long term papers. Analyst: Dhuraivel Gunasekaran. Database sources: RBI & Newspapers HDFC Securities Limited, I Think Techno Campus, Bulding –B, ”Alpha”, Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone (022) 30753400 Fax: (022) 30753435 Disclaimer: This document has been prepared by HDFC Securities Limited and is meant for sole use by the recipient and not for circulation. This document is not to be reported or copied or made available to others. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein. We may from time to time solicit from, or perform investment banking, or other services for, any company mentioned in this document. This report is intended for Retail Clients only and not for any other category of clients, including, but not limited to, Institutional ClientsImpact of recent monetary policy on debt schemes Retail Research