Impact Analysis - Monetary Policy Statement, 2020-21
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The Reserve Bank of India (RBI) reduced the repo rate to 4% and adjusted other key rates in response to economic challenges due to COVID-19. The report highlights a sharp decline in India's merchandise trade and ongoing proactive liquidity management by the RBI to support specific sectors. Recommendations include increasing portfolio duration and investing in spread assets as the financial markets improve amid RBI's supportive measures.
Impact Analysis - Monetary Policy Statement, 2020-21
- 1. Impact Analysis Monetary Policy Statement, 2020-21 What is RBI’s Stance? RBI policy highlights: • RBI reduced the Repo rate by 40 bps to 4.00% • Reverse Repo rate accordingly is adjusted to 3.35% • Marginal Standing Facility (MSF) rate and the Bank rate accordingly is adjusted to 4.25% • Cash Reserve Ratio (CRR) remains unchanged at 3% • Statutory Liquidity Ratio (SLR) stands adjusted to 18.00% Inflation highlights: • CPI (Consumer Price Index) inflation, ex food and fuel, moderated from 4.08% in February 2020 to 3.94% in March 2020. • Owing to ease in food inflation and fuel deflation, retail inflation moderated from 6.58% in February 2020 to 5.84% in March 2020 Domestic Economy • Global economic activity in Advanced Economies (AE's) as well as in major Emerging Market Economies (EMEs) has come to a near standstill since the last MPC meeting in March 2020 as COVID-19 related lockdowns and social distancing are imposed across a widening swathe of affected countries • Equity markets recovered some lost ground in the AE’s as well as in EMEs as large fiscal and monetary policy responses helped to soothe market sentiments • Government bond yields remained range bound in AE’s, although somewhat elevated in some EMEs due to country specific factors • Most AE’s as well as EMEs currencies are experiencing severe appreciating bias due to dollar weakening • Gold prices remained elevated on hedging demand Global Economy Accommodative RBI’s Inflation Target Data Source: RBI Monetary Policy Statement 2020-21 dated May 22, 2020, RBI Statement on Developmental and Regulatory Policies dated May 22, 2020 ; Data Source for CRR & SLR: RBI • The domestic economic activity has tightened considerably due to the lockdown which got extended over the past two months • India’s merchandise trade slumped in April 2020 year-on-year (y-o-y), with exports shrinking by 60.3% and imports by 58.6% • The Reserve Bank of India remained in pro-active liquidity management mode, expanding its array of measures, both conventional and unconventional, to augment system-level liquidity as also to channel liquidity to specific sectors facing funding constraints. • The weighted average lending rates (WALR) on fresh rupee loans of commercial banks declined by 43 bps in March 2020 alone • India’s foreign exchange reserves reached a level of US$ 487.0 billion on May 15, 2020 – an increase of US$ 9.2 billion in 2020-21 so far – equivalent to 12 months of imports. 2.5 4.5 6.5 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 RBI Policy Rates Trend- Last 1 year Repo Rate CRR Reverse Repo 0 2 4 6 8 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 CPI Inflation (Month-on-Month %)
- 2. In yet another unscheduled press conference today i.e.May 22, 2020, the Reserve Bank of India (RBI) announced below mentioned key measures: 1. Repo rate cut by 40bps; 2. Moratorium extension by three months; 3. Conversion of working capital interest into funded terms loans. Our View • Overall, RBI MPCs decision on policy rate was in line with expectations. • We expect growth to remain low, due to administered restrictions due to COVID-19 and temporary shortage of labour. • We expect inflation to remain within RBIs comfort zone, due to gradual relaxation in lockdown, crude prices likely to remain low and forecast of a normal monsoon. • We still continue to see a good scope for RBI to cut rates based on the future inflation-growth trajectory. • Also, we think RBI is still left with lot of ammunition which should help in improving transmission of rates, some measures which we believe can have major impact are: 1. Measures to prevent banks from deploying large amount of surplus liquidity at RBI’s reverse repo window. 2. Increase in HTM (Hold to Maturity) limit of bonds for banks 3. RBI may be buying large quantity of govt. bonds either through Open Market Operation (OMO) purchases or in the primary market to _____help improve demand-supply. 4. Ultra Long Term Repo Operations of 5 Years & above. • We believe RBI may have to continue providing strong covering fire to support the economy by maintaining conducive financial conditions. • Based on the above assessment, we clearly believe the case for duration remains intact as we expect more strong measures from RBI in the coming quarters. We have been maintaining a higher duration across our portfolios. • Hence, the window of opportunity remains and we strongly recommend investors to add duration into their portfolios. • Finally, we would like to highlight that we have seen improvement in the financial markets, due to various measures undertaken by Govt. and RBI. • These measures resulted in the cooling down of corporate bonds, but we still believe there is lot of space for the spread assets (AA Corporate Bonds) to compress. • Hence, we recommend investing in schemes with good exposure towards spread assets (AA Corporate Bonds). • In the end, to summarize, focus should be on : 1. Adding duration to the portfolios and move up the duration curve, to benefit from capital appreciation. 2. Adding spread assets (AA Corporate Bonds) to the portfolios to benefit from higher carry over repo. Our Analysis & Outlook Scheme Recommendations Short to Medium Duration Schemes ICICI Prudential Savings Fund ICICI Prudential Floating Interest Fund ICICI Prudential Ultra Short Term Fund ICICI Prudential Short Term Fund ICICI Prudential Banking & PSU Debt Fund ICICI Prudential Medium Term Bond Fund These schemes aim to benefit from steepness of yield curve Credit Risk Scheme ICICI Prudential Credit Risk Fund This scheme aim to benefit from accrual income Dynamic Duration Scheme ICICI Prudential All Seasons Bond Fund This scheme aim to benefit from interest rate changes Gilt Schemes (Tactical Call) ICICI Prudential Constant Maturity Gilt Fund ICICI Prudential Gilt Fund These schemes aim to benefit from duration Impact Analysis Data Source: RBI Monetary Policy Statement 2020-21 dated May 22, 2020, RBI Statement on Developmental and Regulatory Policies dated May 22, 2020 ; Data Source for CRR & SLR: RBI
- 3. Disclaimer Scheme Risk-o-meters Mutual Fund investments are subject to market risks, read all scheme related documents carefully. 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. All data/information used in the preparation of this material is specific to a time and may or may not be relevant in future post issuance of this material. ICICI Prudential Asset Management Company Limited (the AMC) takes no responsibility of updating any data/information in this material from time to time. The AMC (including its affiliates), ICICI Prudential Mutual Fund (the Fund), ICICI Prudential Trust Limited (the Trust) 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. Nothing contained in this document shall be construed to be an investment advice or an assurance of the benefits of investing in the any of the Schemes of the Fund. Sectors/stocks mentioned in the article do not constitute any recommendation and the Fund through its schemes may or may not have any future position in these sectors/stocks. Recipient alone shall be fully responsible for any decision taken on the basis of this document. The information contained herein is only for the purpose of information and not for distribution and do not constitute an offer to buy or sell or solicitation of any offer to buy or sell any securities or financial instruments in the United States of America ("US") and/or Canada or for the benefit of US persons (being persons falling within the definition of the term "US Person" under the US Securities Act, 1933, as amended) or persons residing in Canada. ICICI Prudential Short Term Fund (An open ended short term debt scheme investing in instruments such that the Macaulay duration of the portfolio is between 1 Year and 3 Years) 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 Credit Risk Fund (An open ended debt scheme predominantly investing in AA and below rated corporate bonds) is suitable for investors who are seeking*: Medium term savings A debt scheme that aims to generate income through investing predominantly in AA and below rated corporate bonds while maintaining the optimum balance of yield, safety and liquidity ICICI Prudential Medium Term Bond Fund (An open ended medium term debt scheme investing in instruments such that the Macaulay duration of the portfolio is between 3 Years and 4 Years. The Macaulay duration of the portfolio is 1 Year to 4 years under anticipated adverse situation) is suitable for investors who are seeking*: Medium term savings A debt scheme 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 All Seasons Bond Fund (An open ended dynamic debt scheme investing across duration) is suitable for investors who are seeking*: All duration savings A debt scheme 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 Ultra Short Term Fund(An open ended ultra-short term debt scheme investing in instruments such that the Macaulay duration of the portfolio is between 3 months and 6 months) is suitable for investors who are seeking*: Short term regular income An open ended ultra-short term debt scheme investing in a range of debt and money market instruments ICICI Prudential Floating Interest Fund (An open ended debt scheme predominantly investing in floating rate instruments (including fixed rate instruments converted to floating rate exposures using swaps/derivatives) is suitable for investors who are seeking* Short term savings An open ended debt scheme predominantly investing in floating rate instruments ICICI Prudential Savings Fund (An open ended low duration debt scheme investing in instruments such that the Macaulay duration of the portfolio is between 6 months and 12 months) is suitable for investors who are seeking* Short term savings An open ended low duration debt scheme that aims to maximize income by investing in debt and money market instruments while maintaining optimum balance of yield, safety and liquidity ICICI Prudential Banking & PSU Debt Fund (An open ended debt scheme predominantly investing in Debt instruments of banks, Public Sector Undertakings, Public Financial Institutions and Municipal Bonds.) is suitable for investors who are seeking* Short term savings An open ended debt scheme predominantly investing in Debt instruments of banks, Public Sector Undertakings, Public Financial Institutions and Municipal Bonds ICICI Prudential Constant Maturity Gilt Fund (An open ended debt scheme investing in government securities having a constant maturity of 10 Years) is suitable for investors who are seeking* Long term wealth creation A gilt fund that aims to provide reasonable returns by investing in portfolio of Government Securities while maintaining constant maturity of the portfolio at 10 years. ICICI Prudential Gilt Fund (An open ended debt scheme investing in government securities across maturity) is suitable for investors who are seeking* Long term wealth creation A Gilt scheme that aims to generate income through investment in Gilts of various maturities. Impact Analysis *Investors should consult their financial advisers if in doubt about whether the product is suitable for them Note: The Macaulay duration is the weighted average term to maturity of the cash flows from a bond. The weight of each cash flow is determined by dividing the present value of the cash flow by the price.