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Credit Policy Review - June 2016

In line with consensus expectations RBI kept all rates unchanged in its credit policy review. Thus the repo rate stays at 6.5% while the reverse repo rate stays at 6% and the cash reserve ratio (CRR) also remains unchanged at 4% of net demand & time liabilities (NDTL).

The RBI has retained its GVA (Gross Value Added) growth projection for FY17 at 7.6%. The inflation projections given in the April'16 policy statement have also been retained but with an upside bias. Retail inflation in April'16 rose more than expected largely due to food prices and as per RBI, makes the future trajectory of inflation somewhat more uncertain. However, the expectations of normal monsoon and various supply management measures of the government should moderate unanticipated firming up of food prices.

In its forward guidance RBI has stated that "given the uncertainties, the Reserve Bank will stay on hold, but the stance of monetary policy remains accommodative. The Reserve Bank will monitor macroeconomic and financial developments for any further scope for policy action." Source: Second Bi-monthly Policy Statement for the year 2016-17, RBI

Conclusion and Outlook

The credit policy review today was along expected lines with RBI staying on hold until further clarity emerges on monsoon and its impact on food prices. RBI has reaffirmed that the stance of monetary policy will remain accommodative. Additionally, RBI will continue to provide liquidity as per the changes in its liquidity management framework wherein progressively the deficit in the system is being brought to a position closer to neutral.

The expectations of strong monsoon, low MSP hikes for kharif crops of 2016-17, continued reforms by the government and higher public capital expenditure to augment supply side capacity forms the basis for our positive view on inflation going forward. Additionally, continuing fiscal consolidation, and low current account deficit are also supportive of lower yields.

As highlighted repeatedly over the past year or so (see table below), we continue to recommend adding duration to fixed income portfolios^.

^HDFC Mutual Fund/AMC is not guaranteeing/offering/communicating any indicative yields or guaranteed returns on investments made in the above cited scheme(s). #For details on latest monthly portfolio visit our website, www.hdfcfund.com

Disclaimer:

This document is dated June 07, 2016 and the views expressed herein are based on internal data, publicly available information and other sources believed to be reliable. Any calculations made are approximations, meant as guidelines only, which you must confirm before relying on them. The information contained in this document is for general purposes only. The document is given in summary form and does not purport to be complete. The document does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. The information/ data herein alone are not sufficient and should not be used for the development or implementation of an investment strategy. The statements contained herein are based on our current views and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. HDFC Mutual Fund/AMC is not guaranteeing/offering /communicating any returns on investments made. Past performance may or may not be sustained in future. Neither HDFC AMC and HDFC Mutual Fund (the Fund) nor any person connected with them, accepts any liability arising from the use of this document. The recipient(s) before acting on any information herein should make his/her/their own investigation and seek appropriate professional advice and shall alone be fully responsible / liable for any decision taken on the basis of information contained herein. The recipient(s) before acting on any information herein should make his/her/their own investigation and seek appropriate professional advice and shall alone be fully responsible / liable for any decision taken on the basis of information contained herein.

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