RBI Monetary Policy

December 2019

In a surprise move, the RBI decided to keep rates unchanged despite clamors for further rate cuts. The reverse
repo rate under the Liquidity Adjustment Facility (LAF) remains unchanged at 4.90%, and the marginal standing
facility (MSF) rate and the Bank Rate at 5.40%. The MPC reiterated its accommodative stance, citing weak GDP
numbers, stating that the current policy still offers elbow room to cut rates if needed. The rationale offered by
the governor for a pause in rate cuts was to assess the impact of policy action since February 2019.

All members of the MPC unanimously voted for this decision.

Intraday Impact
3 Month CD +15 bps
1 Year T Bill +15 bps
3 Year AAA NCD +15 bps
10 Year G-Sec +15 bps
Source: Bloomberg, Axis MF Research

The RBI revised its growth estimates for the year to 5.0% from 6.1%. The policy note however highlights several
positives. The business expectations index of the Reserve Bank’s industrial outlook survey indicates a marginal
pickup in business sentiments in Q4. Monetary policy since February 2019 coupled with measures initiated by
the Government over the last few months, in the RBI’s opinion, are likely to revive sentiment and spur domestic
demand. A resolution to global trade tensions are also likely to improve the growth outlook.

On inflation, the RBI raised its inflation forecasts to 4.7% - 5.1% for H2 2019-20 citing high food inflation. Early
estimates of the Rabi crop sowing highlight a delay on account of the late khariff harvest. This is likely to further
exasperate the supply/demand condition. The government on its part has made attempts to augment supply
of essential items through imports. We believe, inflation should stabilize in Q4 FY 2020.

Inflation has remained in the RBI’s Comfort Band

7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19

Source: Bloomberg, Axis MF Research

Our View
While the policy action was a surprise, the intentions of the RBI are prudent. The weak macro-economic
conditions warrant a conservative approach to using policy tools and by attempting to take stock of policy
action. So why pause?
 The next policy is scheduled post the budget. The pause will help the MPC calibrate monetary
policy and chart out a more informed policy factoring announcements from the government.
 Transmission of rates happens with a lag. The intention to step back and monitor this transmission
will help RBI evaluate the impact and take corrective steps as required
 Create a cushion in case of further fiscal stress given the limited scope for rate cuts given how low
current rates are.

The focus on transmission has started to show up in bank lending rates. The current surplus liquidity
environment, resolution of NPL and falling savings/FD rates are likely to further bring down lending rates.
Market rates have already corrected as transmission to debt markets is typically more efficient when
compared to banks and other financial institutions.

Transmission of Rates

0.60

0.40

0.20

0.00
% Change

Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19

-0.20

-0.40

-0.60

-0.80

-1.00 Weighted Average Lending Rates Bank MCLR Repo

Source: RBI, Axis MF Research

From an investment point of view, the liquidity trade is largely over. AAA Long corporate bonds currently
offer attractive investment opportunities for long term investors looking to lock in rates. As the economy
revives, albeit gradually and given the headroom available today on account of the steepness in the yield
curve, we believe this strategy is likely to remain attractive as compared to short term strategies and tax
free bonds. Short term strategies however still offer opportunities for volatility averse investors.

Another theme we like currently is ‘Credits’. The AA segment in general currently looks attractive as
market uncertainty around such papers subsides. Investors who understand credit risk should invest in
highly diversified largely AA oriented credit funds as we see reasonable spreads between AAA & AA curves
making them attractive bets from a risk reward perspective.
 Key Products Snapshot Macaulay Current Positioning
Duration
Axis Short Term Fund 2.0 Years 100% AAA fund with low-risk strategy
Axis Banking & PSU Debt Fund 2.1 Years 100% AAA fund with 3 year Corporate Bond strategy
60-70% in non-AAA bonds with a duration target range of 3-
Axis Strategic Bond Fund 3.1 Years
4 years.
Axis Dynamic Bond Fund 5.8 Years 100% AAA fund with a 10 year Corporate Bond Strategy
th
Data as of 30 November 2019
Above mentioned positioning aspects of the portfolio (Current Portfolio Allocation) are based on the prevailing
market conditions and are subject to changes depending on the fund manager’s view of the markets. For complete
specific information refer scheme information document.

Other Key Announcements

 Draft circular on exposure limits and priority sector lending by primary urban cooperative banks to be
released soon
 Urban cooperative banks with assets of Rs 500 crores and above to be bought under the Central
Repository of Information on Large Credits (CRILC)
 Facilitation of setting up a self-regulatory body towards development of the secondary market loans
 Guidelines for on –tap licensing of small finance banks to be issued today
 Final guidelines on hedging of foreign exchange risk:
o Users may undertake over the counter (OTC) currency derivative transactions up to US$ 10 million,
without the need to evidence underlying exposure
o Banks to pass on net gains on hedge transaction
 Proposal to introduce new pre-paid instruments for purchase of goods and services up to Rs 10,000.

Product Labelling
Fund Name Riskometer Product Labelling
Axis Short Term Fund This product is suitable for investors who are
(An open ended short term seeking*
debt scheme investing in
 Regular income while maintaining liquidity
instruments such that the
Macaulay duration of the
over short term
portfolio is between 1 year to  Investment in debt and money market
3 years) instruments

Axis Banking & PSU Fund This product is suitable for investors who are
(An open ended debt scheme seeking*
predominantly investing in
 Regular income over short to medium
debt instruments of Banks,
Public Sector Undertakings &
term
Public Financial Institutions)  Investment in debt and money market
instruments issued by Banks, PFIs & PSUs.

Axis Strategic Bond Fund This product is suitable for investors who are
(An open ended medium seeking*
term debt scheme investing
 Optimal returns over medium term
in instruments such that the
Macaulay duration of the  Investment in diversified portfolio of debt
portfolio is between 3 years and money market securities to generate
to 4 years)
 optimal risk adjusted returns while
maintaining liquidity

Axis Dynamic Bond Fund This product is suitable for investors who are
(An open ended dynamic seeking*
debt scheme investing across
 Optimal returns over medium to long term
duration)
 To generate stable returns while
maintaining liquidity through active
management of a portfolio of debt and
money market instruments.
* Investors should consult their financial advisers if in doubt about whether the product is suitable for them.

Disclaimer
Source of Data: RBI Monetary Policy Statement dated 5th December 2019, Axis MF Research
This document represents the views of Axis Asset Management Co. Ltd. and must not be taken as the basis for an investment
decision. Neither Axis Mutual Fund, Axis Mutual Fund Trustee Limited nor Axis Asset Management Company Limited, its Directors
or associates shall be liable for any damages including lost revenue or lost profits that may arise from the use of the information
contained herein. No representation or warranty is made as to the accuracy, completeness or fairness of the information and
opinions contained herein. The material is prepared for general communication and should not be treated as research report.
The data used in this material is obtained by Axis AMC from the sources which it considers reliable.

While utmost care has been exercised while preparing this document, Axis AMC does not warrant the completeness or accuracy
of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Investors are
requested to consult their financial, tax and other advisors before taking any investment decision(s). The AMC reserves the right
to make modifications and alterations to this statement as may be required from time to time.

Axis Mutual Fund has been established as a Trust under the Indian Trusts Act, 1882, sponsored by Axis Bank Ltd. (liability restricted
to Rs. 1 Lakh). Trustee: Axis Mutual Fund Trustee Ltd. Investment Manager: Axis Asset Management Co. Ltd. (the AMC) Risk
Factors: Axis Bank Limited is not liable or responsible for any loss or shortfall resulting from the operation of the scheme.

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