RBI Bi-Monthly Policy April 2021. RBI Maintains “Dovish” tone.

Key Points

    Policy repo rate unchanged at 4%, reverse repo at 3.35% and MSF at 4.25%.

      Monetary Policy stance remains “Accommodative – As long as it is necessary to sustain growth on a durable basis and mitigate the impact of COVID-19 on the economy, ensuring that inflation remains within the target”.

        RBI expects inflation projected at 5% for Q4, 5.8% for Q4, 5.2% to 5.2% in Q1 and Q2 FY22, 4.4% in Q3 and 5.1% in Q4 of FY22 with risks broadly balanced.

          Real GDP growth for FY22 projected at 10.5%: 26.2% in Q1, 8.3% in Q2, 5.4% in Q3 and 6.2% in Q4.

            TLTRO – On Tap scheme extended by a period of 6 months up to September 2021.

              Special refinance facilities of ₹75,000 crore to be provided to All India Financial Institutions like NABARD, SIDBI, NHB and EXIM bank during April-August 2021.

                Surplus liquidity conditions in the system to be maintained and sustained.

                  Secondary Market G-Sec acquisition programme of G-SAP 1.0 – ₹ 1Lakh crore of G-secs scheduled to be purchased in Q1.

                    VRRR (Variable rate reverse repo) auctions of longer maturity to be conducted to manage liquidity.

                      Ways and Means Advances (WMA) limit for states and UTs enhanced to ₹47,010 crore.

                      Inflation:

                        CPI increased to 5% in February after having eased to 4.1% in January 21. While fuel inflation pressures eased somewhat in February, core inflation registered a generalised hardening and increased by 50 basis points to touch 6%.
                        Factors shaping inflation path-

                          Bumper food grains production should soften cereal prices going forward. Incoming Rabi harvest should augment supply which should lead to softening of food prices.

                            Reduction of excise duties and cesses and state level taxes could provide some relief to consumers on top of the recent easing of international crude prices. The impact of high international commodity prices and increased logistics costs needs to be monitored.

                              Inflation expectations of urban households one year ahead showed a marginal increase than over the three months ahead horizon according to the Reserve Bank’s March 2021 survey.
                              Liquidity

                                Systemic liquidity remained in large surplus in February and March 2021.

                                  Reserve money increased by 14.2% on a Y-o-Y basis (as on March 26, 2021). Banks’ non-food credit growth accelerated by 5.6%. Corporate bond issuances stood at ₹6.8 lakh crore during April-February as against ₹6.1 lakh crore on a YoY basis.

                                    India’s foreign exchange reserves stood at US$ 577 billion on March 31, 2021.
                                    Domestic Growth

                                      GDP growth is estimated at 10.5% during FY22.
                                      Factors that will influence growth.

                                        Outlook factors the uncertainty on account of the recent surge in Covid infections, resilient rural demand and expectation of normalization of activity with the vaccination programme.

                                          Strong support to investment demand and exports expected from increased allocation for capital expenditure under Budget 2021-22, expanded PLI scheme and rising capacity utilisation.

                                            Firms engaged in manufacturing, services and infrastructure polled by the Reserve Bank in March 2021 were optimistic about a pick-up in demand and expansion in business activity into 2021-22.

                                              Consumer confidence, on the other hand, has dipped with the recent surge in COVID infections.
                                              Assessment of Global Growth

                                                Lingering effects of the slowdown in the global economy in Q4 of 2020 have persisted, although recent arrivals of high frequency indicators suggest that a gradual but uneven recovery may be forming.

                                                  World trade activity improved in Q4:2020 and January 2021. There are, however, concerns due to COVID-19-related fresh lockdowns and depressed demand in a few major economies, escalation in shipping charges and container shortages.

                                                    Inflation remains benign in major advanced economies (AEs). Inflation ruling above target in some emerging market economies (EMEs), primarily driven by firming global commodity prices, prompting some of them to raise policy rates.

                                                      Equity and currency markets have been turbulent with the increase in long-term bond yields and the steepening of yield curves. With the bond markets sell-offs, EME assets came under selling pressure and capital outflows imposed depreciating pressures on EME currencies in March.

                                                      All members unanimously voted for keeping the policy repo rate unchanged and continue with the accommodative stance at least during the current financial year and into the next financial year.

                                                      Debt Market View

                                                      Bond markets reacted positively with Benchmark 10-year G-sec rallying 6 bps.

                                                      We recommend allocation in

                                                        The combination of committed GSAP together with the hint of complimentary OMOs should prevent any major flare up in yields hence longer end yields should be well anchored. However, VRRRs would likely put some upside pressure on short end yields.

                                                          The yield curve has become very steep and the current steepness in yield curves provides adequate insurance against any adverse movement in yields and offers an attractive opportunity for investors from roll down strategy.

                                                            For 6 months horizon Arbitrage funds, Money market and floating rate funds appear attractive compared to Liquid and Ultra-Short funds.

                                                              Expected returns for 3-year investor are lower than the past, but still attractive than Bank FDs on post tax basis.

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Value Vs. Growth conundrum

Value style of investing and Growth style of investing are two approaches we often hear in investment circles. The arguments supporting and opposing value and growth style of investing create confusion in minds of many investors.

Let us understand what Growth style and Value style means.

Growth stocks represent companies that have demonstrated better-than-average gains in earnings in recent years and that are expected to continue delivering high levels of profit growth, although there are no guarantees.

Value stock represents companies that have fallen out of favor but still have good fundamentals. The value group may also include stocks of new companies that have yet to be recognized by investors.

As an investor let us consider two scenarios:

Scenario 1 – Company “A” is operating in Industry which is currently having good tail winds and strong demand outlook. Policies are supporting growth in that industries. As a result, the Industry can grow at a faster pace compared to GDP growth rate. In that, “Company A” is having strong “Moat” and is consistently delivering higher growth than its peers.
Companies which are in above scenario generally trade at higher valuation multiples. Generally, Growth companies are having higher P/E and P/B ratios. So, hypothetically, “Company A” intrinsic value is Rs. 100, and company A is delivering 40% growth, investors are willing to pay Rs. 105 or Rs.110 as they believe that growth will continue and hence the intrinsic value will increase from Rs.100 to Rs. 140.
Scenario 2 – Company “B” is operating in Industry which is currently having head winds and weak demand outlook. Environment is not supportive for growth in that industries. As a result, the Industry is growing at a slower pace compared to GDP growth rate. Although, environment is challenging “Company B” is having strong fundamental business franchise and is able to survive in this.
Companies which are in above scenario generally trade at lower valuation multiples. Generally, value companies are having lower P/E and P/B ratios. So, hypothetically, “Company B” intrinsic value (as perceived as analyst/investor) is Rs. 100, and company A is delivering 10% growth, investors are willing to pay Rs. 70 or Rs.80 as they believe that this situation will change as economic and market cycle play out. As a result, company which is currently trading below its intrinsic value will catch up so, in our example stock price will move from Rs. 80 to Rs. 110.
Now, if you observe, thought process involved is different for both the scenarios. For “Company A” bet that company will continue to grow at higher rate is the main part, where as for “Company B” the change in environment in which the company operates is the catalyst.

Growth or value… or both?

Which strategy — growth or value — is likely to produce higher returns over the long term? The battle between growth and value investing has been going on for years, with each side offering statistics to support its arguments. One important point is that both styles will have periods where they underperform and periods where they will outperform. In different cycles different sectors and different stocks will appear either “Value” or “Growth” so it is important What style you are comfortable following and continue following the same.

History shows us that:

Growth stocks, in general, have the potential to perform better when interest rates are falling, and company earnings are rising. However, they may also be the first to be punished when the economy is cooling.
Value stocks, often stocks of cyclical industries, may do well early in an economic recovery but are typically more likely to lag in a sustained bull market.
When investing long term, some individuals combine growth and value stocks or funds for the potential of high returns with less risk. This approach allows investors to, in theory, gain throughout economic cycles in which the general market situations favor either the growth or value investment style, smoothing any returns over time.