DECEMBER 2016

MONETARY POLICY REVIEW NOTE FROM FIXED INCOME DESK

Highlights
No change in Policy Rates Repo, Reverse Repo, MSF remain at 6.25%, 5.75% and 6.75%
respectively
Reversal of incremental CRR from the fortnight beginning December 10th, 2016
CPI target remains at 5% in March 2017
Growth forecast lowered for FY2016-17 by 50 bps to 7.1%
The six-member monetary policy committee kept policy rates unchanged
Contrary to market expectations of a 25-50 bps repo rate cut, RBI kept rates unchanged in the
monetary policy.
Repo rate remains at 6.25%.
Reverse repo rate and Marginal Standing Facility (MSF) rates remain at 5.75%
and 6.75%, respectively.
The Cash Reserve Ratio (CRR) remains at 4%.
All six members of the Monetary Policy Committee (MPC) were unanimous in their decision of
keeping rates unchanged.
Incremental CRR reversed

RBI announced that the incremental CRR of 100% (announced on Nov 26th, 2016) will be withdrawn

from the fortnight beginning December 10th, 2016.

An increase in the market stabilisation securities ceiling to 6 lakh Crore (on December 2nd, 2016) will
be used by RBI to absorb surplus liquidity.

RBI keeps CPI forecast constant

RBI maintained its CPI target of 5% in March 2017 with upside risks, albeit lower than earlier.
However RBI expects some risks to emanate from
Rising crude prices on OPEC production cut
Re-emergence of food inflation due to disruptions in supply
Highly sticky core inflation
Weaker currency leading to imported inflation
Future stance of Federal Reserve and US Fiscal policies
Fuller impact of the 7th Pay commission on House Rent Allowance

Although market participants believe that the current demonetization program is likely to exert

downward pressure on inflation, RBI intends to wait and observe as it considers the impact to be
transient and limited to 10-15 bps.
While demonetisation has lowered prices of perishables, prices of other food items (wheat, gram and
sugar) have firmed up.

RBI lowers growth forecast

On the growth front, the RBI has reduced its growth estimate (GVA) for FY2016-17 by 50bps to 7.1%
mainly due to the lower-than-expected growth in QE December 2016.
GVA growth is expected to slow from 7.1% in QE September 2016 to slightly above 6.5% in QE
December 2016, and then to rise back to above 7% in QE March 2017.
As per the RBI the near-term negative impact of demonetisation will be partly offset by higher
agriculture output and implementation of the 7th pay commission awards.
RBI remains in wait and watch mode
The RBIs policy stance remains accommodative and it is currently in a wait-and-watch mode. Since
the easing cycle began in January 2015, the 175 bps repo rate cut has resulted in an almost complete
transmission to a reduction in deposit rates by 170 bps while the lending rates have seen a reduction
of only 88 bps.
Impact of demonetization
The demonetization program is likely to impact growth in the short term but growth is likely to bounce
back sharply in QE March 2017.
The total value of high denomination currency notes ( 500 and 1000) received by RBI till now
amounts to 11.5 lakh crore out of approximately 15.4 lakh crore.
Conclusion

Majority of the market participants were expecting the RBI to reduce rates by 25-50 bps

in the policy.
Since there were no changes announced by the RBI, yields went up across the curve by
20 to 25 bps.
The difference between market participants expectations and RBIs actions was largely due to
different perspectives on the evolving impact of demonetization on GDP growth and the underlying
inflation trajectory.
While the market was positioned for a sharp policy rate reduction, the MPC preferred to look through
the short term impact of the slowdown induced by demonetization and chose to wait and watch and
assess how risks pan out. The RBI is likely to be data dependent going ahead.
As deposits have surged into the banking system, the potential impact of negative wealth effect due
to demonetization has reduced. In the short run though, the impact could be negative as was reflected
in the recently released Purchasing Managers Index (PMI) numbers (services PMI came at 46.7 in
November from 54.5 in October and Composite PMI fell to 49.1 in November from a
near-four-year-high of 55.4 in October, suggesting contraction of the economy).
While RBI maintains its cautious outlook on inflation, the high frequency indicators suggest inflation is
likely to remain subdued and would be closer to 4.50-4.75% in March 2017; which could lead to future
rate cuts.

What should investors do?

The recently released PMI data suggests the RBI may be underestimating the short term impact
on growth and may have to revise the full years growth numbers lower.
With CPI likely to undershoot March/2017 target levels, there is still significant room for rate cuts
as we go into the first quarter of 2017. With global growth languishing, risks of crude price and
global yields moving higher are contained at this point of time.
Hence the current sell-off is a great opportunity for investors to add exposure to short to
medium duration funds.

In this material DSP BlackRock Investment Managers Pvt. Ltd. (the AMC) has used information that is publicly available, including information developed
in-house. Information gathered and used in this material is believed to be from reliable sources. The AMC however does not warrant the accuracy,
reasonableness and / or completeness of any information. The data/statistics are given to explain general market trends in the securities market, it should
not be construed as any research report/research recommendation. This is a generic update on Fixed Income and Equity Market ; it shall not constitute
any offer to sell or solicitation of an offer to buy units of any of the Schemes of the DSP BlackRock Mutual Fund. We have included statements / opinions
/ recommendations in this document, which contain words, or phrases such as "will", "expect", "should", "believe" and similar expressions or variations
of such expressions that are "forward looking statements". Actual results may differ materially from those suggested by the forward looking statements
due to risk or uncertainties associated with our expectations with respect to, but not limited to, exposure to market risks, general economic and political
conditions in India and other countries globally, which have an impact on our services and / or investments, the monetary and interest policies of India,
inflation, deflation, unanticipated turbulence in interest rates, foreign exchange rates, equity prices or other rates or prices etc. All figures and other data
given in this document are dated and the same may or may not be relevant in future.

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