Impact analysis | Monetary Policy Statement 2021-22 | ICICI Prudential Mutual Fund
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The RBI's monetary policy statement for 2021-22 noted a rebound in economic activity due to declining COVID-19 infections and increased vaccination. Key economic indicators included positive PMI readings in manufacturing and services, stable inflation rates, and unchanged policy rates, with the RBI prioritizing growth without compromising on inflation management. The analysis suggests a gradual normalization of monetary policy, with expectations of rising short-term rates and an active duration management strategy recommended for investors.
Impact analysis | Monetary Policy Statement 2021-22 | ICICI Prudential Mutual Fund
- 1. Impact Analysis Monetary Policy Statement, 2021-22 Economic activity rebounded and gained traction in August-September, facilitated by the ebbing of infections, easing of restrictions and a sharp pick-up in the pace of vaccination The South-west monsoon picked up in September, narrowing the deficit in the cumulative seasonal rainfall In September, the manufacturing PMI at 53.7 and services PMI at 55.2 remained in positive territory System liquidity remained in large surplus in August- September Up to October 1, 2021, India’s foreign exchange reserves increased by US$ 60.5 billion to US$ 637.5 billion in 2021-22 1 RBI POLICY HIGHLIGHTS INFLATION HIGHLIGHTS DOMESTIC ECONOMY WHAT IS RBI’S STANCE? ACCOMMODATIVE • CPI (Consumer Price Index) inflation, for the month of Aug came in at 5.3% • Food inflation decreased to 3.8% in Aug from 4.5% in July • Housing inflation, which primarily includes rental charges came in at 3.9% for the month of August • RBI kept the Repo rate unchanged at 4.00% • Reverse Repo rate remains unchanged at 3.35% • Marginal Standing Facility (MSF) rate and the Bank rate accordingly remains unchanged at 4.25% • Cash Reserve Ratio (CRR) is at 4% • Statutory Liquidity Ratio (SLR) at 18.00% Data Source: RBI Monetary Policy Statement 2021-22 dated October 08, 2021, Data Source for CRR & SLR: RBI RBI’s Inflation Target 2.5 3.5 4.5 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21 Oct-21 RBI Policy Rates Trend- Last 1 year Repo Rate CRR Reverse Repo 0 2 4 6 8 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 CPI Inflation (Month-on-Month %)
- 2. GLOBAL ECONOMY Since the MPC’s (Monetary Policy Committee) meeting in August, the global economic recovery has ebbed across geographies with the rapid spread of the delta variant of COVID-19, including in some countries with relatively high vaccination rates. Commodity prices remain elevated, and consequently, inflationary pressures have accentuated in most advanced economies (AEs) and emerging market economies (EMEs) Change in monetary policy stances and tapering of bond purchases in major advanced economies has led to rise in bond yields in major AEs and EMEs The US dollar has strengthened sharply, while the EME currencies have weakened since early-September OUR ANALYSIS & OUTLOOK The Reserve Bank of India (RBI) kept its policy rates, stance and liquidity management decisions unchanged in October- 2021 was largely expected and following were the key pointers pertaining to the policy: • Increase quantum of variable rate reverse repo (VRRR) of 14-day repo to INR 6 Lakh Crore from the current INR 4 Lakh Crore by Dec 3, 2021 • Discontinuation of GSAP operations, but OT (Operation twist) and OMO (Open Market Operations) would be conducted as and when necessary • RBI lowered inflation projection to 5.3% from 5.7% for FY 22 and real growth outlook maintained at 9.5% for FY 22. Source: RBI Policy Document OUR VIEW • Overall policy was on expected lines and RBI highlighted that India is in much better shape compared to last time, as the Growth impulses are strengthening and inflation trajectory is turning more favourable. • RBI continue to give precedence to growth over inflation and is expected to keep a close watch on the infection rate on the back of upcoming festive season. However, concerns around sticky inflation was adequately highlighted • Policy normalization process began in earnest with RBI not committing further to GSAP operations and by staggered approach of increasing the quantum of VRRRs with outlining option for 28-day VRRRs. • RBI also mentioned that they would move away from Passive liquidity management, which means absorption of term banking liquidity may happen based on determined auctions. • We have been vocal about gradual withdrawal of monetary stimulus and we believe the next step post the normalization of liquidity would be to narrow the policy rate corridor closer to pre-pandemic level. • We believe that economy will continue to revive, supported by ebbing of infections, the robust pace of vaccination, govt’s focus on capital expenditure, supportive monetary and fiscal measures and buoyant external demand. • Due to RBI policy normalization process, we believe the short-term rates may move higher which may lead to reduction in the steepness of the yield curve. • As communicated earlier, we believe that we are at the start of interest rate-rise cycle and in the current phase where growth and inflation dynamics are evolving, more nimble and active duration management strategy is recommended as it may benefit from high term premium (difference in yield between the long and short end of the curve) and to manage portfolios from expected high interest rate sensitivity • We continue to recommend Accrual strategy with an aim to benefit from higher carry. • It may be an opportune time to invest in floating rate bond in this interest rate scenario with expected volatility. 2 Monetary Policy Statement, 2021-22 Data Source: RBI Monetary Policy Statement 2021-22 dated October 08, 2021
- 3. 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*: Moderate • 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 Investors understand that their principal will be at LOW HIGH moderate risk *Investors should consult their financial advisers if in doubt about whether the product is suitable for them. Approach Scheme Name Call to Action Rationale Short Duration Schemes ICICI Prudential Savings Fund ICICI Prudential Floating Interest Fund ICICI Prudential Ultra Short Term Fund Invest for parking surplus funds Accrual + Moderate Volatility Accrual Schemes ICICI Prudential Medium Term Bond Fund ICICI Prudential Credit Risk Fund Core Portfolio with >1 Yr investment horizon Accrual Dynamic Duration Scheme ICICI Prudential All Seasons Bond Fund Long Term Approach with >3 Yrs investment horizon Active Duration and Accrual SCHEME RECOMMENDATIONS DISCLAIMER 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 (includ- ing 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. RISKOMETERS 3 Monetary Policy Statement, 2021-22 Please note that the Risk-o-meter(s) specified above will be evaluated and updated on a monthly basis. The above Risk-o-meter(s) are as on September 30, 2021. 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*: Moderate Investors understand that • 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 *Investors should consult their financial advisers if in doubt about whether the product is suitable for them.
- 4. 4 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* Moderate • 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 *Investors should consult their financial advisers if in doubt about whether the product is suitable for them. ICICI Prudential All Seasons Bond Fund (An open ended dynamic debt scheme investing across duration) is suitable for investors who are seeking*: Moderate •All duration savings • A debt scheme that invests in debt and money market instruments with a view to maximise income while maintaining optimum balance of yield, safety and liquidity LOW HIGH *Investors should consult their financial advisers if in doubt about whether the product is suitable for them. 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*: Moderate • Short term regular income • An open ended ultra-short term debt scheme investing in a range of debt and money market instruments *Investors should consult their financial advisers if in doubt about whether the product is suitable for them. 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*: Moderate • Short term savings • An open ended debt scheme predominantly investing in floating rate instruments *Investors should consult their financial advisers if in doubt about whether the product is suitable for them. *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. RISKOMETERS Monetary Policy Statement, 2021-22 Please note that the Risk-o-meter(s) specified above will be evaluated and updated on a monthly basis. The above Risk-o-meter(s) are as on September 30, 2021. Scheme Name Scheme Benchmark Name Benchmark Riskometer ICICI Prudential Floating Interest Fund CRISIL Low Duration Debt Index ICICI Prudential Medium Term Bond Fund CRISIL Medium Term Debt Index ICICI Prudential All Seasons Bond Fund Nifty Composite Debt Index ICICI Prudential Savings Fund Nifty Low Duration Debt Index ICICI Prudential Credit Risk Fund CRISIL Short Term Credit Risk Index ICICI Prudential Ultra Short Term Fund Nifty Ultra Short Duration Debt Index BENCHMARK RISKOMETERS AS ON SEPTEMBER 30, 2021