MUTUAL FUNDS

We Continue To Maintain That the Investing In Short Term Income Fund At This Point Is Better On Risk Adjusted Return Basis<
20-Jun-12   10:48 Hrs IST

Mr.Alok Singh

RBI contrary to the market expectation of the rate cut in Mid Quarter Monetary Review refrained from changing any of the policy rates. That means that Repo rates remains at 8% and Cash Reserve ratio (CRR) for scheduled banks remains at 4.75%.

1) What would have motivated RBI to do so when GDP growth in last quarter (Q4 FY12) was reported at 5.3% and the IIP in April 2012 printed only 0.1% suggesting a significant drop in industrial activity?

1. Reasonably high inflation: The WPI and CPI are last reported at 7.55% and 10.36%, which are still on the higher side without factoring the fuel price adjustments. Though one can argue that the lowering growth will automatically bring down the inflation over a period of time, but RBI seems to remain conservative on this side also at a point, when the situation of monsoon so far is not very clear.

2. Rupee depreciation: The rupee has recently depreciated significantly against dollar impacting India's current account balance, which anyway is strained because of India being a net importer. Any lowering of interest rate at this juncture would have resulted in further depreciation of INR, which may result in putting further pressure on the already stretched fiscal situation. The RBI has quoted The RBI had frontloaded the policy rate reduction in April with a cut of 50bps. This decision was based on the premise of fiscal consolidation critical for inflation management would get underway, along with other supply side initiatives.

This all means that the market has to wait for some more time to see monetary policy push for the slowing economy. The markets may be seen moving the range for the time being, after giving away some of the last weeks' gains as an after effect of today policy statement. The markets may also get some comfort from the fact the Greek election result has confirmed existence of Euro in preset form for some time now.

The money market may also give away the last week's gain which came on hope of rate cut by RBI. One can see money market curve moving up by 10 to 20 bps initially. Anything beyond that shall be contained because RBI has committed to continue to conduct open market operation (OMO) as and when required. We continue to maintain that the investing in short term income fund at this point is better on risk adjusted return basis.

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