Demonetization Drive: Biggest Economic Reform by the MODI Government

Rate cuts, good liquidity, positive demand-supply situation and improving Indian macros over last couple of years have been
big drivers of returns in duration funds. Investors who had stayed invested in funds, such as Reliance Dynamic Bond Fund, for a
reasonable period of time had reaped the benefits, despite intermittent volatility (such as mid-2013). This was largely possible
due to the dynamic fund management mandate of the fund, which allows for dynamically varying the duration and asset
profile of the fund, while not diluting the quality of the portfolio.
In last few years, we have seen positive developments in the bond market:

Global events along with regime change both at central government as well as RBI also had positive ramification on
domestic macros
o Consumer Price Inflation (CPI) has fallen to sub 5% level, Governments fiscal discipline & Current Account Deficit
(CAD) is largely under control.
o Though the bond yields moved in a volatile band of 200-250 bps with 10 year benchmark GSecs making a low of
6.70-6.80% and high of 9.25-35% due to various global and domestic events, Indian bond markets have largely
been benefited by improving fundamentals.

The recent historic demonetization move by the government is seen as a war on parallel economy, corruption, money
laundering and to stop financing aid enjoyed by the terrorists. We believe this move would have a far-reaching impact on
Indian economy. It might have short-term pain but sure long-term gains. Apart from flushing liquidity in the banking system,
demonetization could create short-term disruption in consumption and lead to behavioural changes in households saving and
consumption demand.
We expect the following macro-economic impact may play out.
Improvement in Governments fiscal position going forward: The implication for the fiscal deficit is a clear positive, as the
government could gain windfall assuming large number of unaccounted currency does not make its way back into the banking
system. Also incrementally we might see tax reporting discipline and hence the increase in tax collection through better
reporting and audit.

Higher benefits for the Government if lesser currency notes comes back into the system - The high denomination
currency which has to be demonetized accounts for 85.2% of total notes which is nearly Rs. 15 trn worth currency in the
economy. Conservatively, we assume that 80% of this old currency (Rs. 12 trn) will be deposited back in banks in order to
get the new currencies in exchange. RBI will have to replace this Rs. 12 trn old currency with new currencies, which will be
part of RBIs liability. The balance amount (unaccounted part of the demonetized currency) to the tune of Rs. 3 trn will not
be deposited back in the banks will reduce RBIs liability to that extent as these notes may cease to exist.
This windfall could arguably be a net gain for the government. It can have far reaching positive implications on the fiscal
deficit next year. At the very least, this will lead to added flexibility for the government on fiscal and market borrowing,
while allowing it to pursue accelerated infrastructure and banking sector related spending.

Increase in Tax Reporting leading to better revenue hence better fiscal Going forward an increase in tax collection
through better reporting and audit is likely. Once cash holdings are deposited into the banks to exchange new currencies,
understating true income for tax purposes will be very difficult. This may potentially lead to better compliance, thereby
increasing the tax base and revenues of the government.

System Liquidity to increase going forward: Banking system liquidity will get a major boost with deposits increasing and
currency in circulation growth reducing going forward, as unaccounted cash money is flushed out of the system and future
cash transactions also reduce.

Despite an expected improvement in banking sector liquidity, we do not expect credit growth to improve meaningfully going
forward. In fact credit growth could slow down in the short term as loans to the retail sector, NBFCs and services slow down
further due to the adverse impact of demonetization in these segments. We expect banks to continue investing in government
securities as part of their mandatory SLR requirements as well as an improved inflation and fiscal outlook will likely provide
them with a greater opportunity in GSecs. The additional SLR demand over the next 6 to 12 months could be in vicinity of Rs 1
trn, purely on account of this move.
Inflation expected to fall further: The move is likely to have a strong disinflationary impulse. The real estate sector, where a
sizable proportion of transactions were conducted in cash (and often with black money), will be the worst affected followed by
an expected slowdown in consumption demand. In our CPI forecast, we have assumed in housing inflation as well as
slowdown in consumption demand, which has the potential to reduce CPI inflation average to 4.3% - 4.6%, from our current
forecast of 4.8%.
Growth to be positively impacted over medium to long term with near term hiccups: The move is likely to be negative for
growth in the near-term, as informal sector activity, which is supported primarily through cash transactions, slows down in a
knee-jerk response. By expenditure, personal consumption accounts for nearly 60% of total GDP. Sectors such as agriculture,
construction, trade, hotels, transport, real estate and other services amount to around 56% of total GVA. Our assumption is
close to 30% of the economy (50% of the above sectors) will be affected due to limited availability of legal tender. However this
impact should be felt only in the short run as money from informal channels getting converted into formal banking channels
because of the current measure would lead to faster expansion of our GDP ( due to higher multiplier than parallel
economy),thereby leading to higher GDP growth going forward.
Market View:
Even as the world bond markets are shocked with the surprise election outcome in US, India bond markets are enjoying the
latest move of our Prime Minister Modi. We have been constructive on Indian bonds for a while now with the view that
monetary easing cycle will continue and better liquidity in the banking system will push bond yields lower. With the
Governments latest announcement of de-monetizing higher denomination notes our view further got strengthened and we
would like to re-iterate our positive view on Indian bonds.
We continue to remain constructive on Indian rates as from a bond market perspective, immediate improvement in bank
deposit base would lead to higher SLR demand. Further the fiscal impact will also be positive to the extent that there might be
windfall gains from RBI which will help achieve deficit targets and could conceivably leave government balances on stronger
footing. Also on the longer term, the move towards non cash economy and the introduction of GST should lead to structural
improvement in tax compliance and tax/GDP ratio implying rerating of Indias fiscal position. Further with the expectations of
disinflationary trend & anticipation of monetary easing would support bond yields. We expect further easing in terms of 50-75
bps of rate cuts in the near future.
Macroeconomic factors such as lower inflation and better fiscal will aid bond markets. On the other side, it is likely that the
RBI will have to defer open market operation purchases to infuse liquidity into the banking system. That said, we believe rate
cuts, better liquidity, better medium-term fiscal and disinflationary impulse should outweigh the lack of OMO purchases.
RELIANCE DYNAMIC BOND FUND : Investment Philosophy
Despite of all the volatility in the recent years, our Active Fund Management strategy in Long Duration Fund like Reliance
Dynamic Bond Fund has paid off. The strategy to differentiate Tactical Positions from CORE Positions has paid off and we
continue to re-iterate that it should be the right strategy going ahead in the current market scenario.
Core allocation - Determined by medium to long term view on interest rates executed via G-Secs & Bonds
Tactical Allocation - To take benefit of short term opportunities mainly executed via on the run G-Secs

The fund does not take extreme digital (0 / 1) calls under any market scenario & tries to capture short term market moves
efficiently through tactical positions.
The point that we want to highlight is apart from capturing the right interest rate cycle moves, the market gives lot many
opportunities across cycles to generate Alpha for the funds, like spread contraction between different fixed income asset class
(Gsec, SDL, UDAY SDL, PSU AAA and Pvt AAA) and opportunities on the yield curve at different points in time within tenors. Our
Active duration management strategy along with asset allocation strategies in Dynamic Bond Fund helps us to generate alpha
across interest rate cycles.
In light of the above facts and expectations we would continue with our high duration strategy in this fund and feel that the
investors should consider the fund which would benefit on further easing of yields over next 12 to 18 months.
Reliance Dynamic Bond Fund aims at generating returns even in stable interest rate markets by exploring different trading
strategies. Despite of all the volatility in the recent years, our Active Fund Management strategy in Long Duration Fund like
Reliance Dynamic Bond Fund has paid off. The strategy to differentiate Tactical Positions from CORE Positions has paid off and
we continue to re-iterate that it seems to be the right strategy going ahead in the current market scenario.
Hence we feel that investors with the preference for active duration management along with an investment horizon of 3
years and above can consider investing in Reliance Dynamic Bond fund.
st

Portfolio Details as on 31 Oct, 2016

Weighted Average YTM

7.38%

Modified Duration

6.56 Yrs

Weighted Average Maturity

11.56 Yrs

The weighted average YTM displayed above is for the invested amount of the portfolio ( i.e. excluding other receivables) For
the entire portfolio weighted average YTM , i.e. including other receivables is 7.21%

Asset Type

Weight age

Government Bond including SDLs

Corporate Bond
Money Market Instruments and Cash & Other Receivables

55.33%
40.40%
4.27%

For complete details refer www.reliancemutual.com

Common Source: Bloomberg, RMF Internal Research, RBI, Finance Ministry
PRODUCT LABEL
This product is suitable for investors who are seeking*:
Income over long term.
Investment in debt and money market instruments

*Investors should consult their financial advisors if in

doubt about whether the product is suitable for them.

Disclaimer:
RNLAM is not guaranteeing/offering/communicating any indicative yields or guaranteed returns on investments made in the
scheme.
The information herein below is meant only for general reading purposes and the views being expressed only constitute
opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers.
Certain factual and statistical information (historical as well as projected) pertaining to Industry and markets have been
obtained from independent third-party sources, which are deemed to be reliable. It may be noted that since RNLAM has not
independently verified the accuracy or authenticity of such information or data, or for that matter the reasonableness of the
assumptions upon which such data and information has been processed or arrived at; RNLAM does not in any manner assures
the accuracy or authenticity of such data and information. Some of the statements & assertions contained in these materials
may reflect RNLAMs views or opinions, which in turn may have been formed on the basis of such data or information.
The Sponsor, the Investment Manager, the Trustee or any of their respective directors, employees, affiliates or representatives
do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such data or
information. Whilst no action has been solicited based upon the information provided herein, due care has been taken to
ensure that the facts are accurate and opinions given are fair and reasonable, to the extent possible.
This information is not intended to be an offer or solicitation for the purchase or sale of any financial product or instrument.
Recipients of this information should rely on information/data arising out of their own investigations. Before making any
investments, the readers are advised to seek independent professional advice, verify the contents in order to arrive at an
informed investment decision.
None of the Sponsor, the Investment Manager, the Trustee, their respective directors, employees, affiliates or representatives
shall be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including
on account of lost profits arising from the information contained in this material.
The Sponsor, the Investment Manager, the Trustee, any of their respective directors, employees including the fund managers,
affiliates, representatives including persons involved in the preparation or issuance of this material may from time to time,
have long or short positions in, and buy or sell the securities thereof, of company(ies) / specific economic sectors mentioned
herein, subject to compliance with the applicable laws and policies.
Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.