Views of Axis MF on Monetary Policy

Posted On : 2021-12-08 18:31:22( TIMEZONE : IST )

Growth continues to remain the focal point of the RBI policy actions. The commentary today indicates that the RBI is in wait & watch mode to ensure monetary policy remains supportive of growth and the hard fought recovery is not derailed by policy action to normalize rates in a hurry.

Surprisingly the RBI remains comfortable with inflation despite the threat of imported inflation across much of the developed world. We continue to see inflation as a key risk to our portfolio positioning and remain watchful of near term spikes in CPI/WPI numbers.

On the liquidity front, Increasing the quantum of VRRR in liquidity absorption signals the RBI intent to continue with liquidity normalization and be opportunistic about policy and liquidity normalization. Headline liquidity in our opinion is a mirage. In our assessment net banking liquidity is closer to Rs 1 lakh crore. The incremental VRRR effectively brings this number to near zero. The policy action has resulted in Short term rates rising by 20-80 bps YTD. We expect money market rates to inch closer to the repo rate over next few months in line with our projections.

From a portfolio standpoint, in our short and medium duration strategies we are following barbell strategies - a strategy where we mix long duration assets (8-10 year) with ultra-short assets including credits (Up to 2 years) to build a desired portfolio maturity. The ultra-short assets will help us play the reinvestment trade whilst limiting the impact of MTM as yields rise. We continue to like the long bond segment given the steepness in the yield curve.

Credits remain an attractive play for investors with a 3-5-year investment horizon as an improving economic cycle and liquidity support assuage credit risk concerns especially in higher quality names. The capital gain story in this space has incrementally given way to 'carry' as AA names trade at meaningfully higher YTMs compared to comparable AAA securities. While we remain selective in our selection and rigorous in our due diligence, we believe the current environment is conducive to credit exposure.

Source : Equity Bulls


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