1

FIXED INCOME UPDATE

MACRO = RATE CUT,

RISKS = PAUSE FOR A FEW MONTHS

2

Abstract

Rates are headed down on lower inflation

– Inflation is likely to hit the RBI’s disinflationary path

– However Bond yields have risen in recent months on

perceived uncertainties on future RBI action

Macro conditions supportive of lower rates

–Twin-deficits under control

–Currency stable, FX reserves higher

Effect of US rate reversal unlikely to be disruptive

3

Then and Now – Comparing 2014 with 2015

1 year ago Current

CPI Inflation 8.33% 4.87%

Policy Rate 8% 7.25%

RBI action 3 rate hikes in previous 6

months

3 rate cuts in previous 6

months

Crude Oil (per barrel) $109.4 $65.6

Fiscal policy Uncertain Fiscal consolidation underway

External Sector Uncertain but improving trend Stable, Large accretion to FX

reserves

10 year yield* 8.65% 7.98%

Spread (10 yr – repo) 65 bps 73 bps

Despite macro improvement and being in midst of a rate cut cycle,

yield spreads are at the level of 2014

Source of Data: Bloomberg. 1 year ago data refers to 31st May 2014, Current data refers to 8

th June 2015

4

Regime change in inflation management

Source of Data: Bloomberg.

Formal Inflation Target of

4% +/- 2%

RBI sets glide path for achieving sustained lower inflation

Monetary policy loses credibility on sustained

double digit inflation

2011-14 2014-17 2017 onwards

New Monetary Policy Framework

5

Inflation – Undergoing a structural shift lower

Reasons behind disinflationary trend Weak economy, high output gap Fiscal prudence Weakness in rural wages Better food management (MSP, food-stock) Global disinflationary pressures and lower commodity prices

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15

CPI WPI

Source of Data: Bloomberg.

6

Lower inflation – key drivers: Food Inflation

MSP hikes v/s Food Inflation

*

Food inflation represents the average food inflation in the year following the MSP announcements

* 2014-15 data pertains to Jan-Apr 2015

Source of Data: Reserve Bank, Labour Ministry, Axis MF analysis

0%

5%

10%

15%

20%

25%

1999-00 2002-03 2004-05 2006-07 2008-09 2010-11 2012-13 2014-15

MSP hike Food Inflation

7

Lower inflation – key drivers: Non-food inflation

Source of Data: Reserve Bank of India, Haver analytics, Barclays Research

Capacity Utilization

0

2

4

6

8

10

12

14

16

Sep-06 Sep-08 Sep-10 Sep-12 Sep-14

%

Current

Household Inflation Expectations

0

5

10

15

20

25

Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14

% Rural Wage Growth

65%

70%

75%

80%

85%

2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15

8

Market sell-off – Yields back to pre-rate cut levels

Source of Data: Bloomberg.

Despite macro improvement and being in midst of a rate cut cycle,

yield spreads are at the level of 2014

7.0

7.3

7.6

7.9

8.2

8.5

8.8

Aug-14 Oct-14 Dec-14 Feb-15 Apr-15

Yie

ld (

%)

Repo Rate G-sec (8.4% - 2024)

-40

-20

0

20

40

60

80

Aug-14 Oct-14 Dec-14 Feb-15 Apr-15

Yie

ld (

bp

s)

Spread

9

RBI – Key risks/ uncertainties to the inflation trajectory

Comment

Monsoon

- Link between monsoon and food inflation is

weak

- Despite deficient rains in 2014, food inflation

remains contained on account of MSP

discipline

Revival in oil/ commodity

prices - Prices remain well off their levels of last year

External uncertainties

affecting

sentiment/currency

- US Fed action does provide some risk

- However the macro is in a strong position to

handle any impact

Better than expected outcomes on any of the above can create further

headroom for policy easing

10

Deposit growth is ahead of credit growth

Source of data: Bloomberg.

11

Rupee has remained resilient, FX reserves up sharply

Source of data: Bloomberg.

Rupee - Nominal Trade Weighted Foreign Reserves (US$ bn)

60

70

80

90

100

110

May-04 May-06 May-08 May-10 May-12 May-14

12

US rate hikes not likely to be disruptive for local markets

Source of Data: Bloomberg.

0

2

4

6

8

10

12

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

10 yr G-Sec Yield (%)

US Fed Funds Target Rate (%)

Repo Rate (%)

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Summary

• Despite cautious stance of RBI, further rate cuts are expected over the medium

term. Bond market sentiment will reverse once clarity on policy direction emerges

• Investors should look at investments in products that can participate in this

trend

• Investors with shorter horizon (6-12 months) and/or lower risk appetite should

consider shorter duration funds

• Investors with longer horizon (beyond 12 months) and looking for

absolute returns should look at longer duration funds

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Disclaimer: Past performance may or may not be sustained in the future. Sector(s) / Stock(s) / Issuer(s) mentioned above are

for the purpose of disclosure of the portfolio of the Scheme(s) and should not be construed as recommendation. The fund

manager(s) may or may not choose to hold the stock mentioned, from time to time. Investors are requested to consult their

financial, tax and other advisors before taking any investment decision(s).

Statutory Details: Axis Mutual Fund has been established as a Trust under the Indian Trusts Act, 1882, sponsored by Axis Bank

Ltd. (liability restricted to Rs. 1 Lakh). Trustee: Axis Mutual Fund Trustee Ltd. Investment Manager: Axis Asset Management Co.

Ltd. (the AMC) Risk Factors: Axis Bank Limited is not liable or responsible for any loss or shortfall resulting from the operation of

the scheme.

This document represents the views of Axis Asset Management Co. Ltd. and must not be taken as the basis for an investment

decision. Neither Axis Mutual Fund, Axis Mutual Fund Trustee Limited nor Axis Asset Management Company Limited, its Directors

or associates shall be liable for any damages including lost revenue or lost profits that may arise from the use of the information

contained herein. No representation or warranty is made as to the accuracy, completeness or fairness of the information and

opinions contained herein. The AMC reserves the right to make modifications and alterations to this statement as may be required

from time to time.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

Source of Data: Bloomberg, RBI, ACEMF

Data as on 8th June 2015

Statutory Details and Risk Factors