January 2010

Upward revision of 2010 global economic growth by IMF,  India and China raising their reserve ratios as a move towards monetary exit policy, successful completion of huge FY10 gross borrowings programme in India, rising domestic inflation and better than expected domestic economic numbers were the key highlights of the month.

Following the deepest global downturn, the global economy recovered in 2H 2009. Taking note of better than expected hi-frequency economic data points, IMF has revised upwards global growth to 4% in 2010 - driven mainly by emerging economies. With recovery in sight, many economies are planning exit strategies for monetary unwinding. Latest to join the club are China and India, who have hiked reserve ratios by 50 bps and 75 bps to suck out the excess liquidity from the system. At the same time, there is growing concerns about the deteriorating fiscal balances especially about certain European countries like Greece, Portugal, Ireland and Spain, resulting in rise in risk aversion.

Back home, RBI has revised upwards the GDP growth figures to 7.5%, based on better than expected performance of economic indicators.  Given the rising concerns about the inflation, it has also revised upward March end WPI-inflation numbers to 8.5%.  To suck out the excess liquidity and thereby anchor the inflationary expectations, RBI raised the cash reserve ratio by 75 bps in its January policy meeting. This move is expected to absorb Rs. 36,000 cr of excess liquidity from the system.

From close to 0.6% in April’09, industrial production has grown by leap and bound to 11.7% in Nov - driven mainly by domestic recovery, inventory restocking and fiscal stimulus. In first nine months of FY10 (April-Nov), IIP grew at 7.6% as against 4.1% in previous year same period. In coming months, we might see good IIP numbers on lower base and revival of domestic demand. Impressive Jan PMI (Purchasing Manager Index) – gauge for manufacturing activity in the economy – shows further improvement in manufacturing and export orders. Going forward, industrial and services sector is expected to contribute more to 2H GDP growth.

Credit growth has declined from 18% in April’09 to below 10% levels in Oct’09, thereafter improved to around 11.7% in Dec and 13.8% by Jan 15. Sequential data is also showing revival. Despite this, it will still be below the RBI’s revised annual target of 16%.

Inflation, after starting the year at 1.3% in Apr’09, was negative between June through August (on base effect), and thereafter has been moving northwards. WPI inflation rate grew at 7.31% in Dec’09 as against 4.78% in Nov’09, driven mainly by primary articles (both food prices and non-food) and partially by fuel and manufacturing and unfavourable base effect. Rapid spiraling of inflation numbers is reflected in April-Dec 2009 WPI inflation numbers which is already at 8.02% (RBI’s year-end target is 8.5%).

On currency front, the rupee started the year at above 50 per dollar levels and thereafter has been appreciating - driven by dollar weakness and foreign inflows on back of economic turnaround. Rupee has appreciated by 1.5% in Jan’10 over the previous month and by 10% between April-January 2009-10.

Rising inflation and better than expected economic data has resulted in rising expectations of monetary policy unwinding. This has resulted in the G-Sec yields in secondary market moving up during the first half of the month, with 10 year benchmark yield moving up 7.59% at the beginning of month to 7.72% by middle of the month. Policy makers statement about the economic growth soothe the market sentiments and pressure on the yields came down, with 10 year benchmark closing the month at 7.57%. Market participants expected CRR hike in RBI policy meeting and stayed away from building fresh positions.  The spread between 2 year -10 year widen to 287 bps by month end from 198 bps at the start of the month

During the month, the corporate bond yields moved in narrow range ahead of RBI policy  meeting, depicting the uncertainty regarding the policy movement. 10 year AAA increased marginally to 8.68% by month end from 8.67% in the previous month, while 5 year decreased to 8.30% from 8.37% in the previous month.  

The liquidity conditions continued to be comfortable. Average LAF balances came down to Rs. 68,000 cr (Previous month: Rs.1,01,700  crore). The overnight call rates hovered in the range of 2% to 3.5% levels during the month. Anticipating likely CRR hike in the monetary policy meeting, the CD levels moved up, with CDs trading in the range of 4.60%-6.10% as against the previous month’s level of 3.40%-5.80%.

Outlook

With the schedule G-Sec borrowing for fiscal year completed, we expect G-Sec yields to be range-bound. We expect state borrowing figures to be lower than the budgeted. Markets are expected to take cues from Budget FY11 regarding fiscal deficit and gross borrowing figures. Market participants are expected to take further cues from monthly inflation numbers, hi-frequency economic data like IIP, GDP, credit numbers etc. and policy-makers comments and actions. Global policy-makers actions on fiscal and monetary front will also act as a guiding factor. Short term yields will be under pressure from February end onwards on implementation of CRR hike.  Corporate bond spreads may not shrink further over the medium term as credit growth picks up and higher SLR requirement generates higher demand for G-Secs.

Common Source for Debt Market View : RBI, CMIE, Bloomberg

By: Mr. Prashant Pimple - Fund Manager, Debt.

* Disclaimer

The views expressed herein are the personal views of the Fund Manager. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. This information is meant for general reading purpose only and is not meant to serve as a professional guide for the readers. This document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The Sponsor, The Investment Manager, The Trustee or any of their respective directors, employees, affiliates or representatives do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and opinions given fair and reasonable. This information is not intended to be an offer or solicitation for the purchase or sale of any financial product or instrument. Recipients of this information should rely on information/data arising out of their own investigations. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investments. None of The Sponsor, The Investment Manager, The Trustee, their respective directors, employees, affiliates or representatives shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in this material.

Sponsor: Reliance Capital Limited Trustee: Reliance Capital Trustee Co. Limited Investment Manager: Reliance Capital Asset Management Limited Statutory Details: The Sponsor, the Trustee and the Investment Manager are incorporated under the Companies Act 1956. The Sponsor is not responsible or liable for any loss resulting from the operation of the Schemes beyond their initial contribution of Rs.1 Lac made towards the setting up of the Mutual Fund and such other accretions and additions to the corpus.

Mutual Fund Investments are subject to market risk, please read the Scheme Information Documents & Statement of Additional Information carefully before investing.