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Bond yields may remain range-bound: ICICI Pru MF

As the economy recovers, demand for investment and credit will pick up, to meet this demand, RBI has reduced the SLR requirement for the banking system

June 03, 2014 4:01 IST | India Infoline News Service
The Reserve Bank of India (RBI) left its key policy interest rates- repo rate under LAF unchanged at 8%, CRR unchanged at 4%; however, the bank reduced the Statutory Liquidity Ratio (SLR) by 50bp to 22.5% of banks net demand and time liabilities, from 23% previously along with a minor tinkering in the liquidity facility provided to the banking system. Taking cognizance of the fact that CPI inflation (ex. Food & energy), has moderated but is still elevated as per RBIs target, the repo rate has been kept unchanged. There are concerns regarding El Nino, which may impact the monsoon, and in turn the food inflation but the risk to RBIs medium-term target of CPI inflation- 8% by Jan 2015, and 6% by March 2016, is likely to be balanced by governments efforts towards fiscal consolidation and better food supply management.

Rahul Goswami, CIO - Fixed Income, ICICI Prudential AMC said, As the economy recovers, demand for investment and credit will pick up. To meet this demand, RBI has reduced the SLR requirement for the banking system to expand credit to the non-government sector.
This action is neutral to the market and unlikely to affect the G-sec yields, as the credit growth is already low at 13.5%, so even if there is some improvement in the credit growth, it will get accommodated by the banking system, as we expect liquidity in the system to be at appropriate levels, supported by the RBI.

We continue to believe that bond yields are likely to remain range-bound with a downward bias, in the medium term. Fiscal consolidation, continued improvement in current account and moderating CPI could provide RBI, the space for monetary easing and lower interest rates, he added.
We continue to remain positive on interest rates, and in next 4-6 quarters, there could be about 100 bps decline in bond yields. In light of this, we believe that current levels of about 8.75% on 10-yr bond yields are attractive to invest and we continue to advocate fixed income investors to participate in the medium term and long term duration funds from the ICICI Prudential stable.

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