Fourth Bi-monthly policy October 2019 Highlights

Dovish view with inclination towards further rate cuts going forward.

Key Points

  • Policy repo rate reduced by 25 bps to 5.15%, reverse repo at 4.90% and MSF at 5.40%
  • Monetary Policy stance remains “Accommodative – As long as it is necessary to revive growth, while ensuring that inflation remains within target”.
  • CPI inflation projected at 3.4% for Q2:FY20 and 3.5-3.7% for H2:FY20, with risks evenly balanced.
  • GDP growth forecast reduced to 6.1% from 6.9% in FY 19-20, and in the range of 6.6-7.2% for H2:2019-20 with risks evenly balanced.
  • Liquidity to be Neutral-Positive.


Retail inflation remained in a narrow range of 3.1-3.2% between June & August, driven by food inflation, even as fuel inflation and CPI inflation excluding food & fuel moderated.

Factors shaping inflation path- 

  • With above average monsoon, Kharif production is estimated at close to last year’s level, auguring well for the overall food supply situation.
  • RBIs forward looking survey point to weak demand conditions, with indications of softening of output prices in Q3:2019-20.
  • Geo-political uncertainties affecting oil prices may provide upside risks to the inflation outlook.
  • Three months and one year ahead inflation expectations of households polled by the Reserve Bank have risen
  • Currency depreciations in several emerging economies.


  • Liquidity in the system was in surplus in August-September 2019 despite expansion of currency in circulation and forex operations by the RBI draining liquidity from the system.
  • Reflecting easy liquidity conditions, the weighted average call rate (WACR) traded below the policy repo rate (on an average) by 8 bps in August and by 6 bps in September.

Current Account Deficit and Forex

  • Trade deficit narrowed during July-August 2019. Higher net services receipts and private transfer receipts helped contain the current account deficit to 2% of GDP in Q1:2019-20.
  • On the financing side, net foreign direct investment rose to US$ 17.7 billion in April-July 2019 from US$ 11.4 billion a year ago.
  • India’s foreign exchange reserves were at US$ 434.6 billion on October 1, 2019 – an increase of US$ 21.7 billion over end-March 2019.

Domestic Growth outlook cut to 6.1%

  • Growth in GDP slumped to 5% in Q1:2019-20, extending a sequential deceleration to the 5th consecutive quarter.
  • Real GDP growth for 2019-20 is revised downwards from 6.9% in the August policy to 6.1% – in the range of 5.3% in Q2:2019-20 and in the range of 6.6-7.2% for H2:2019-20 with risks evenly balanced.

Factors that will influence growth

  • Various high frequency indicators suggest that domestic demand conditions have remained weak.
  • The business expectations index of the Reserve Bank’s industrial outlook survey shows muted expansion in demand conditions in Q3.
  • Export prospects have been impacted by slowing global growth and continuing trade tensions.
  • Impact of monetary policy easing since February 2019 is gradually expected to feed into the real economy and boost demand.
  • Several measures announced by the Government over the last two months are expected to revive sentiment and spur domestic demand, especially private consumption.

Assessment of Global Growth

  • Global economic activity has slowed down since the meeting of the MPC in August 2019, amidst elevated trade tensions and geo-political uncertainty. The Institute for Supply Management’s index for September indicates that manufacturing slipped further into contraction to touch its lowest reading in a decade
  • Economic activity remained weak in major emerging market economies, pulled down mainly by a deteriorating global environment in Q3.
  • Crude oil prices were pulled down by softer demand, amidst adequate supplies in early August. Prices remained range bound until mid-September when supply disruptions on account of an escalating geo-political conflict resulted in a spike which has abated faster than expected
  • Gold prices remained elevated on safe haven demand.
  • Central banks became more accommodative with inflation remaining below targets across major AEs and EMEs

MPC voted 5-1 in favour of cutting Repo rate by 25 bps, while 1 member (Dr. Ravindra Dholakia) voted to reduce the policy repo rate by 40 bps.

Other Key Announcement

  • RBI Increase the household income limit for borrowers of NBFC-MFIs from the current level of Rs. 1 lakh for rural areas and INR 1.60 lakh for urban/semi urban areas to INR 1.25 lakh and INR 2.00 lakh, respectively. Raise the lending limit from INR 1.00 lakh to INR 1.25 lakh per eligible borrower.
  • Reserve bank have allowed banks to freely offer foreign exchange prices to non-residents at all times, out of their Indian books. Also, rupee derivatives (with settlement in foreign currency) to be traded in International Financial Services Centres.

Debt Market View

  • RBI reduced policy rate by 25 basis points from 5.40% to 5.15% and maintained its stance at “Accommodative” in order to strengthen domestic growth impulses by spurring private investment which has remained sluggish.
  • Growth is faltering, Inflation is comfortably below the RBIs target, Brent crude prices are in a comfortable zone and Liquidity continues to be in surplus zone.
  • Global central banks are increasing moving towards dovish stance.
  • With tax forgone because of Corporate tax cut, Fiscal deficit target remains a challenge. Lower GST and Direct tax collections also pose threat in achieving Fiscal target
  • High Real-rates continue to make debt an attractive asset class
  • We suggest products having maturity close to investment horizon having highest credit quality and lowest expense for investors having less than 1-year time horizon.
  • For a 3-year investor, we recommend allocation in 1-5-year average maturity segment with high credit quality portfolios mainly focused on accrual. The high-quality PSU and corporate bond spread over G-Sec is attractive
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Primer on Debt Funds

What are Debt Funds?

  • Debt funds are those funds which invest predominantly in various types of debt and money market securities like treasury bills, government securities, corporate bonds, commercial paper and certificate deposit.
  •  In general the debt securities have a fixed maturity date and pay a fixed rate of interest. The returns of debt mutual funds come from two avenues viz. interest income and capital appreciation/depreciation based on market value of the securities.
  • Every debt security is assigned a credit rating helping us to assess the capacity of issuer to repay the debt/loan.

Why Debt mutual funds

  • Debt funds offer investors to participate in debt markets of India with small ticket size. Variety of debt funds running different strategies are available.
  • By investing one debt scheme one holds ~30-40 different securities issued by different issuers like Government of India, State Government, Big Corporate and Banks. The choice of securities is made by professional Fund Managers having vast experience in the field of credit analysis, fixed income security analysis.
  • Usually the returns are not impacted by volatility in equity markets. Thus due to less volatility, debt mutual funds should bring stability to overall portfolio returns.
  • Liquidity need can be met through open-ended structures, although exit loads may be applicable in some cases.

Different types of Debt Funds

There is a wide range of debt mutual funds; suitable to invest depending upon investment horizon and capacity to take risk.

Other than the ones mentioned above there are close-ended debt funds. These include Fixed Income Plans (FMPs) having fixed tenure and interest rate.

Capital protection funds and multiple yield funds also form part of Debt mutual offerings.

Factors affecting returns

Some of the factors which may influence the performance of debt funds are listed below

  • Interest rate scenario-Domestic & Global markets
  • Inflation
  • Liquidity in money market
  • Monetary Policy stance/ Regulations by the RBI, Government of India
  • Growth in economy and overall macro-economic situation

Risks in Debt Mutual Funds

  • Credit risk – Impact due to credit migration or default risk
  • Interest rate risk – Impact on price of a bond due to changes in interest rate changes.
  • Liquidity risk – Inability of the fund to sell its investments and meet redemptions of investors due to poor market conditions 
  • Re-investment risk – Inability to reinvest cash flows (e.g., coupon payments) at a rate comparable to the current investment’s rate of return.