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Credit Policy Review - February 2016

 
 

In line with consensus expectations RBI left all rates unchanged in the credit policy review today. The repo rate remains at 6.75% while the reverse repo rate is 5.75%.

The RBI expects it January 2016 consumer price Index (CPI) inflation target of 6% to be met while it projects inflation to be around 5% by the end of fiscal 2016-17 assuming normal monsoon but without factoring in the impact of seventh pay commission. RBI has left its Gross Value Added (GVA) growth number for current fiscal 2015-16 unchanged at 7.4%. For fiscal 2016-17, the RBI expects growth to strengthen gradually to 7.6%.

In its forward guidance RBI stated that it "continues to be accommodative even as it leaves the policy rate unchanged in this review, while awaiting further data on the development of inflation. Structural reforms in the forthcoming Union Budget that boost growth while controlling spending will create more space for monetary policy to support growth, while also ensuring that inflation remains on the projected path of 5% by the end of 2016-17" – Sixth RBI Bi-monthly Monetary Policy 2015-16, February 2, 2016


Conclusion and Outlook

While keeping rates unchanged in its credit policy review today, RBI has maintained the accommodative stance of monetary policy. The gradual pace of economic recovery, low global crude and commodity prices, and a relatively stable exchange rate vs other emerging market currencies should help in containing inflation over the medium term.

The focus now shifts to the upcoming Union Budget wherein fiscal deficit target for fiscal 2016-17 will be keenly watched. The recent hikes in excise duty on petrol and diesel will provide significant cushion to government to manage fiscal deficit against the additional burden of seventh pay commission and One Rank One Pension (OROP) in our opinion. Low inflation and benign inflation outlook, falling fiscal deficit and low Current Account Deficit (CAD) are all supportive of lower yields^.

As highlighted repeatedly over the past several months or so, we continue to recommend adding duration to fixed income portfolios.

Scheme NamePortfolio positioning# as on 31st January, 2016
HDFC Gilt Fund - Long Term Planpure duration play, nil credit risk, 20.74 years avg. maturity
HDFC High Interest Fund - Dynamic Planactively managed, 90% Gilts, 4.74% AAA corporate bonds, 17.43 years average maturity
HDFC Income Fund80% Gilts, 13% AAA corporate bonds, 16.84 years average maturity
HDFC Corporate Debt Opportunities Fund94.48% corporate bonds, , lower interest rate risk (3.47 years average maturity)

^HDFC Mutual Fund.AMC is not guaranteeing/offering/communicating any indicative yields or guaranteed returns on investments made in the above cited scheme(s).
# For details on latest monthly portfolio

Product Labelling

The following products are suitable for investors who are seeking*RISKOMETER
HDFC Gilt Fund - Long Term Plan
  • Credit risk free returns over medium to long term
  • Investment in sovereign securities issued by Central/ State Government with medium to long term maturities
HDFC High Interest Fund - Dynamic Plan
  • Stable returns over medium to long term
  • Investment to maximize income while maintaining the optimum balance of yield, safety and liquidity by investing in a range of debt and money market instruments of various maturity dates
HDFC Income Fund
  • Regular income over medium to long term
  • To optimise returns while maintaining a balance of safety, yield and liquidity by investment in debt and money market instruments
HDFC Corporate Debt Opportunities Fund
  • Regular income over medium to long term
  • To generate regular income and capital appreciation by investing predominantly in corporate debt

*Investors should consult their financial advisers if in doubt about whether the product is suitable for them.
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