2. Mutual Fund
1. LIQUIDITY
• The Liquidity Eco-system
• The Process of Money Creation
• How to Measure Actual Banking System Liquidity
• Factors Affecting Near Term System Liquidity
2. GROWTH AND INFLATION
• How to Look at Demand Strength in Economy
• Broad Heads of WPI Inflation
3. FISCAL
• Broad Revenue and Expenditure Heads
• Why the Denominator (market GDP) is so important / How inflation helps fiscal deficit
4. EXTERNAL
• Broad Categories of Balance of Payments
5. YIELD CURVE AND TRIGGERS
FRAMEWORK
3. Mutual Fund
THE LIQUIDITY ECO-SYSTEM
RBI
THE BANKING SYSTEM
Banks
MFs
Corporate
FIIs
PUBLIC
Repo
Forex Intervention
OMO, CRR
Reverse Repo
Forex Intervention
MSS, CRR
GOVERNMENT
Government Spending
Auctions
WMA Overdraft, Dividend Payout
WMA Surplus
Net Rise in Currency With Public
Why has system liquidity been progressively shrinking over last few
years?
4. Mutual Fund
THE PROCESS OF MONEY CREATION
Sources of Reserve Money Components of Reserve Money
Net RBI Credit to Govt : 37%
RBI Credit to Banks and Commercial Sector: 1%
Net Forex Assets of RBI : 100%
Govt’s Currency Liabilities to Public: 1%
(-) Net Non-Monetary Liabilities of RBI: 38%
Currency in Circulation: 72%
Bankers’ Deposit with RBI: 28%
Other Deposits with RBI : 0%
Why has the RBI had to resort to doing OMOs over the last few years?
5. Mutual Fund
HOW TO MEASURE ACTUAL BANKING SYSTEM LIQUIDITY
Does daily repo balance give an accurate picture of system liquidity?
Actual liquidity is measured as the difference between system cash and
average daily balance to be maintained
6. Mutual Fund
1. Positive Drivers
• Forex Intervention by RBI (buy dollars, sell rupees)
• OMOs
• CRR cut
• Government Spending
2. Negative Drivers
• Forex Intervention by RBI (buy rupees, sell dollars)
• MSS / Bond sale to market
• CRR hike
• Net Rise in Currency with Public
• Government accumulating WMA surplus (tax collections, market borrowing etc)
• Deposit Growth ? (increases CRR requirement
FACTORS AFFECTING NEAR TERM SYSTEM LIQUIDITY
7. WHAT CAN BE THE LIQUIDITY PROJECTION FOR FY13 IN
ABSENCE OF FURTHER RBI ACTION?
7
Mutual Fund
8. Mutual Fund
AGGREGATE DEMAND
AD = C + I +G + X - M
0.05
0.055
0.06
0.065
0.07
0.075
0.08
0.085
0.09
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
0.18
0.2
0.22
0.24
31-Mar-09
30-Jun-09
30-Sep-09
31-Dec-09
31-Mar-10
30-Jun-10
30-Sep-10
31-Dec-10
31-Mar-11
30-Jun-11
30-Sep-11
KEY COMPONENTS OF AGGREGATE DEMAND (3QMA YOY%)
GOVT EXPENDITURE GROSS CAPITAL FORMATION PVT CONSUMPTION
Private consumption has
been anchor to growth
but is now slowing
Government expenditure
has also slowed and
given fiscal constraint is
unlikely to rise in year
ahead
Slower capital formation
lowers potential GDP
growth rate. This may
also cause inflation to
resurge sooner once
growth rebounds
10. Mutual Fund
INFLATION
What Is Core Inflation?
BEVERAGES 1.4
TEXTILES 9.8
WOOD PRODUCTS 0.2
PAPER PRODUCTS 2
LEATHER PRODUCTS 1
RUBBER / PLASTIC 2.4
CHEMICAL PRODUCTS 11.9
NON METAL 2.5
BASIC METALS 8.3
MACHINE TOOLS 8.4
TRANSPORT EQUIPMENT 4.3
Heavily
influenced
by
commodity
prices
Difficult to assess demand pressures in
absence of comprehensive CPI (RBI tracks
‘pricing power’ with corporates)
11. HOW DEEP CAN THE INTEREST RATE CUT CYCLE BE
ASSUMING GLOBAL COMMODITY PRICES REMAIN WHERE THEY
ARE?
11
Mutual Fund
13. Mutual Fund
- Fiscal deficit is expressed as a %age of market GDP
- Government borrowing may be rising even with falling fiscal deficit owing to rising
denominator
- Higher inflation may help fiscal deficit (nominal revenue growth as well as
denominator effect)
THE OPTICS OF FISCAL DEFICIT
14. WHAT COULD FISCAL DEFICIT BE IN YEAR AHEAD AT CURRENT
LEVEL OF COMMODITY PRICES?
14
Mutual Fund
15. Mutual Fund
BROAD CATEGORIES OF BOP
Net
12
A. CURRENT ACCOUNT
I. MERCHANDISE -1,30,593
II. INVISIBLES (a+b+c) 84,647
a) Services 48,816
b) Transfers 53,140
c) Income -17,309
Total Current Account (I+II) -45,945
B. CAPITAL ACCOUNT
1. Foreign Investment (a+b) 39,652
a) Foreign Direct Investment (i+ii) 9,360
b) Portfolio Investment 30,293
ii) Abroad -1,179
2. Loans (a+b+c) 28,437
a) External Assistance 4,941
b) Commercial Borrowings 12,506
3. Banking Capital (a+b) 4,962
a) Commercial Banks 4,433
b) Others 529
4. Rupee Debt Service -68
5. Other Capital -10,994
Total Capital Account (1 to 5) 61,989
C. Errors & Omissions -2,993
D.
Overall Balance (Total Current Account, Capital Account
and Errors & Omissions (A+B+C))
13,050
E. Monetary Movements (i+ii) -13,050
i) I.M.F. –
ii) Foreign Exchange Reserves (Increase - / Decrease +) -13,050
of which: SDR allocation –
No. 41: India’s Overall Balance of Payments
(US$ million)
Item
2010-11
Possible pressure-points
Deteriorating trade balance on
slowing export growth (whereas
commodity imports remain high)
Portfolio investments have dried
up in last year. Partly
compensated by debt flows
(further ceiling relaxations for
FII Debt?)
Rupee volatility and challenging
external markets may make
ECBs less lucrative
16. Mutual Fund
YIELD CURVE AND TRIGGERS
1. Why Does Our Yield Curve Invert
• Shorter end has no ‘natural’ buyers and moves freely in
response to liquidity, C/D ratio, and expected RBI stance
• Long end has ‘artificial’ anchor from SLR demand and PF /
Insurers.
• Over recent years RBI’s OMO s have given additional support
to long end rates
2. What Can Cause the Inversion to Correct
• Better liquidity, falling C/D ratios, change in RBI stance
• Rise in net supply at long end
Basis our analysis of the above triggers, we think the yield curve will
remain inverted till March. However, starting April the curve should
incrementally start to steepen
17. WHERE WOULD OPTIMAL RISK VERSUS REWARD BE IN AN
ENVIRONMENT OF CURVE STEEPENING
17
Mutual Fund
22. Risk Factors: Mutual Funds and securities investments are subject to market risks, reinvestment risk, changes in political, economic
environment and government policy and there is no assurance or guarantee that the objectives of the Scheme(s) will be achieved. The NAV of
the Scheme(s) can go up or down depending on factors and forces affecting the Securities Market including fluctuation in interest rates,
trading volumes and reinvestment risk. Past performance of the Sponsor/AMC/Mutual Fund is not necessarily indicative of the future
performance of the Scheme(s) and may not necessarily provide a basis for comparison with other investments. The name(s) of the scheme(s)
not in any manner indicate either the quality of the scheme(s), their future prospects or returns. The Sponsor or any of its associates is not
responsible or liable for any loss resulting from the operation of the Scheme(s) beyond the corpus of the Trust of Rs. 30,000/-. Please read
Offer Document(s) before investing. Statutory Details: IDFC Mutual Fund has been set up as a trust by Infrastructure Development Finance
Company Limited (IDFC) (liability restricted to corpus of Trust of Rs. 30,000) with IDFC AMC Trustee Company Ltd as the trustee and IDFC
Asset Management Company Ltd as the investment manager. Investors in the scheme(s) are not being offered any guaranteed or assured
rate of return.
Copy of Offer Document (s) / Scheme Information Document (s) and Key Information Memorandum along with application form for all the
schemes may be obtained from the office of IDFC Mutual Fund, One IndiaBulls Centre, 841, Jupiter Mills Compound, Senapati Bapat Marg,
Elphinstone Road, (West), Mumbai 400 013. Contact 1-800-226622 for details.
For details please read the Statement of Additional Information, respective Offer Document / Scheme Information Document /
carefully before investing.
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