Key Rates Measures

CRR Unchanged at

Reverse Repo rate readjusted

Repo Rate reduced by 25 bps

MSF Rate readjusted by

Bank Rate readjusted by

SLR Unchanged at

In keeping with the guidance and

7.50%. While doing so, it also emphasized that

RBI to achieve this outcome, the revival of investments would be necessary

down the cost of capital has become

However, the structural imbalance in demand and

supply, along with the lagged impact of r

prices may act as a limiting factor in repo rate

moderation in the days ahead.

• Inflation continues to moderate

o Inflation in WPI has been on a declining

trend since Sep 2012 and

for Feb-13. This was better than

expected figure and provides a

headroom to the central banker.

Op

tim

isti

c

Sta

nce

Q3-FY13 GDP at 4.5%

Feb 13 WPI at 6.8%

Jan IIP at 2.4%

FY14 fiscal deficit target at 4.8%

H1 FY14 govt borrowing lower

Kotak30 September 2010

Mid Quarter Monetary Policy Review

March 13

March 19th , 2013

Unchanged at 4.00%

readjusted by 25 bps to 6.50% (affixed at 100 bps below repo)

by 25 bps to 7.50%

readjusted by 25 bps to 8.50% (affixed at 100 bps spread over repo)

eadjusted by 25 bps to 8.50%

Unchanged at 23%

In keeping with the guidance and an increasingly benign stance, RBI reduced the repo rate by 25 bps to

While doing so, it also emphasized that supporting growth is going to be a priority

revival of investments would be necessary; and thus the need for bringing

has become vital.

the structural imbalance in demand and

lagged impact of rising fuel

prices may act as a limiting factor in repo rate

moderate.

WPI has been on a declining

trend since Sep 2012 and stood at 6.8%

This was better than the

and provides a

headroom to the central banker.

FY13 GDP at 4.5%

FY14 fiscal deficit target at 4.8%

H1 FY14 govt borrowing lower

Do

wn

sid

e

Ris

k Q2 FY13 Current Account Deficit at US$ 22.3 bn.

Structural inflation in commodities

Conitnued imbalance in Macro Supply-Demand aggregates.

Economic Trend

Monetary Measures

WPI Primary Fuel MFG

6.8%

9.7%10.5%

4.5%

7.6% 7.1%

15.1%

January-13

January-12

Mid Quarter Monetary Policy Review –

% (affixed at 100 bps below repo)

% (affixed at 100 bps spread over repo)

increasingly benign stance, RBI reduced the repo rate by 25 bps to

a priority in days ahead. For

and thus the need for bringing

Q2 FY13 Current Account Deficit at

Structural inflation in commodities

Conitnued imbalance in Macro Demand aggregates.

MFG Core Inflation CPI

4.5%3.8%

10.91%

5.8% 5.9%

8.83%

Kotak30 September 2010

Mid Quarter Monetary Policy Review –

March 13

March 19th , 2013

o The Core Inflation, which is inflation in non-food manufactured products, eased to 3.8% in Feb-

13. This goes to higlight the demand-constraining effect of high interest rates on the core

manufacting products.

Growth Woes

• The growth in the Indian economy

has also moderated significantly

during the period. GDP growth in

Sept-Dec 12 was at around 4.5% yoy.

In the last three quarter of FY13, the

gdp growth was at around 5%. This

is much below the potential of the

Indian economy.

• At that, the flat growth in the mining

sector, and steep moderation in the

agriculture and manufacturing

sector highlight the structural

imbalance that may have got built-

in; and may require a prolonged

redressal.

Outlook

We remain largely optimistic with respect to the debt market for the following reasons:

• The steep moderation in the economy, coupled with moderating inflation provides a robust

grounding for implementing a repo rate cut in the future. The decline and de-growth in the

manufacturing sector and mining sector makes it imperative that the investment cycle in the system

be revived, lest the deflationary pressure sets in.

• Already, the core inflation, which is inflation in non-food manufactured products, has come down to

3.8% in Feb-13. It is noteworthy here, that the monetary policy has a restraining impact mostly on

the core inflation. (The inflation in the food and fuel segment is largely determined by demand supply

interaction and is relatively less responsive to the policy rates). Therefore the impact of high interest

rates seems to have been fully effected; and a policy reversal may be needed to support the

manufacturing prices.

• The gilt supply pressure in first half of FY14 is slated to be lesser than what it was in H1-FY13. In H1-

FY14, the government is scheduled to borrow a net amount of Rs 2.7 trillion. For the market to

absorb this supply smoothly, RBI may need to resort to OMO in the range of around Rs 600 bn during

the period. This is expected to push down the gilt yields further.

However, the central banker remains circumspect about the risk which the large current account deficit

poses to the economy. With current account deficit at around 5.4% of the GDP, India may need to

Industry FY12 FY13

Agriculture, forestry and

fishing 4.3 1.7

Mining and quarrying -2.8 0.1

Manufacturing 3.6 1.2

Electricity, gas and water

supply 7.6 4.7

Construction 5.7 7.7

Trade, hotels, transport and

communication 7.8 4.9

Financing, ins., real est. and

Business services 11.8 9.4

Community, social and

personal services 5.7 6.9

GDP at Factor Cost 6.6 5

Source: CSO

Apr-Dec 2012 GDP Growth Rate

Kotak30 September 2010

Mid Quarter Monetary Policy Review –

March 13

March 19th , 2013

discourage unproductive imports and also attract inflows on the capital account to meet the resource

requirement. For this purpose, RBI may need to maintain the high rates to attract foreign investments.

Also, the lagged effect of the fuel price; along with the upward pressure from the structural inflation may

cause WPI inflation to remain sticky. This also restricts the headroom for RBI with regard to the monetary

policy.

We continue to favor the fixed income investments across the maturity spectrums. The short term category

provides a better risk reward profiling in the current market scenario. Actively managed duration funds also

would be suited for investors who maintain a 1 year and beyond investment horizon.

Disclaimer & Risk Factors

The information contained in this (document) is extracted from different public sources. All reasonable care

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suitable for their particular circumstances and, if necessary, seek professional advice. Clients may read

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before investing. Past performance does not indicate the future performance of the Schemes of the Fund.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.