RBI Monetary Policy Review and its implcation on investment strategy

1. Monetary Policy
Review
28 Jan 14

2. Announcements
• While leaving the repo rate unchanged in Dec’18 policy, when the
consensus was expecting a hike, this time RBI surprised negatively
with a rate hike when the consensus was of a status quo.
• The repo and MSF rates were raised by 25bps to 8% and 9%
respectively
• The CRR was left unchanged at 4%.
• The decision to hike policy rate was solely driven by elevated level
of core CPI in recent months notwithstanding steep growth
slowdown and 50bps rate hike between Sept-Dec 2013.
Other take-aways:
• CPI Inflation to remain above 9% in rest of FY14 but fall to 7.5% -
8.5% by Q4 FY15.
• GDP growth for FY 14 could be lower than RBI's earlier estimate of
5%. But in FY 15, GDP growth is likely to fall in the 5% - 6% range
(balanced around central est of 5.5%)
• Current Account deficit expected to be below 2.5% of GDP for FY
14 (vs 4.8% in Fy 13)
2

3. Implications
Dr Urjit Patel Committee Report
The rate hike is in-line with the path for dis-inflation recommended by
the expert committee on monetary policy framework which suggests
CPI inflation target of below 8% by January 2015 and below 6% by
January 2016.
Future policy action hinged on CPI trajectory
RBI clearly mentioned that future policy actions would be determined
by the pace of moderation in CPI inflation. If the disinflationary
process evolves according to central bank’s projection, then further
rate hikes may not be warranted. We believe that such critical level of
CPI would be 8%, below which a change in policy stance is unlikely.
Policy rate may have peaked but a long pause will follow
As inflation is expected to recede in coming months on the back of
persistent correction in food prices, we think chances of an
incremental rate hike is negligible and that the rate cycle has peaked.
Therefore, one can expect a fairly long phase of ‘monetary pause’. In
the recent past, transmission of policy rate hikes has been very limited
due to modest credit demand and improved traction in deposits
growth. So, banks are unlikely to respond to this rate hike.
3

4. Suggestions
• Looking ahead, the growth prospects for FY15 would be
constrained by interest rates remaining sticky at the current level.
Further, with Elections in May 2014, investors would wait and watch
for a clear direction to be given in terms of policy and economic
outlook. Therefore, there would be a delay of 3-4 months before
huge investment is committed. In the light of this, our projection for
growth for FY15 would be 5.5%-6%.
• Credit growth in the banking sector, which grew by 17-18% (y-o-y)
during August – October 2013, moderated significantly in December
2013- January 2014 period to 14-15%. Growth is, however,
expected to revive to 16-18% in 2HFY15, after the general elections
(albeit, on a decisive electoral mandate).
• Under such circumstances, tactically –
 for risk-averse investors it makes sense to remain closer to short
end of yield curve with Ultra ST Funds, short tenured FMPs
(preferable monthly interval plans) and ST Funds (with modified
duration of less than 3 years).
 for investors who are willing to have relatively longer investment
horizon (more than 18 months) and who are ready to see interim
volatility, can invest some portion (say, 15-20%) of portfolio in
Dynamic Bond Funds / Income Funds.
4

5. 5
Jignesh Shah
Capital Advisors
+ 91 – 9820296989
jshah@capitaladvisors.co.in
Contact Details

6. 6
Disclaimer
This information has been distributed by CAPITAL ADVISORS or ‘the Firm’). Related financial products or services
are available only to eligible investors who have sufficient financial experience and understanding to participate in
financial markets and are aware of the risks and rewards of any potential investments related to such products.
This document has been prepared by CAPITAL ADVISORS / Issuer of securities solely for information purposes and
is not a solicitation, or an offer to buy or sell any security. The information on which the document is based and / or
the document itself has been obtained from sources that we believe to be reliable, and in good faith, but we have not
independently verified such information and no representation or warranty, express or implied, are made as to their
accuracy. Past performance is not necessarily a guide to future returns. Investors should note that the value of
securities or income may rise or fall and they may receive back less than they may expect to receive. The transaction
may also be subjected to currency fluctuations. CAPITAL ADVISORS and/or any other related parties to CAPITAL
ADVISORS group accept no liability and / or responsibility whatsoever for any consequential loss of any kind arising
out of the use of this document or any part of its contents. CAPITAL ADVISORS and / or any person connected with it
may act upon or make use of the material referred to herein and/or any of the information upon which it is based,
prior to publication of this presentation.
There is no minimum investment period, though we would recommend that you view your investment as a medium to
long term one. All expression of opinion and estimates, if any, contained in this presentation (including the mention of
specific stocks) constitute the Issuer’s judgment and view as of the date of the presentation and are subject to
change without notice.
The information contained is published for the assistance of recipients, but is not to be relied upon as authoritative or
taken in substitution for the exercise of judgment by the recipient.
This document should not be printed, reproduced, distributed, published or advertised in any manner without
expressed prior approval of CAPITAL ADVISORS. In addition, the information is not intended for distribution to or for
use by individuals or legal entities that are citizens of a country, or have their domicile or registered offices in a
country where the distribution, publication, provision or use of this information would violate applicable laws or
regulations, or in a country in which CAPITAL ADVISORS would have to comply with registration or approval
requirements.
This Disclaimer is in addition and not in lieu of any other disclaimers, warranties that the Issuer of the
securities/manufacturers of the products/Distributors may have for this product/information.

7. 7
Thanks