Note: None of the aforesaid recommendations are based on any assumptions. These are purely for reference and the investors are requested to consult their financial advisors

before investing.

O v e r v i e wThe MarketFixed Income Market Outlook

Average Liquidity Support by RBI

Rs -4.18 trillion Includes: LAF, MSF, SLF & Term Repo

Bank Credit Growth

5.5%

Bank Deposit Growth

11.6%

Money Market

Tenure

Change in basis points (bps)

CD

1M

Change CP Change

3M

6M

12M

Bond Market Change in basis points

Tenure G-Sec ChangeAAA

CBChange

1Y

3Y

5Y

10Y

Macro Economy Data Release

IndicatorLatest

Update

Previous

Update

IIP

GDP

USD/INR

WPI

CPI

Month Overview (as on April 28, 2017)

6.50

6.80

7.16

7.30

0

30

3

-5

6.48

6.78

7.02

6.96

24

21

20

27

7.09

7.31

7.47

7.73

29

8

7

13

-1.2% (Feb)

7.0% (3QFY17)

64.25 (Apr)

5.70% (Mar)

3.81% (Mar)

3.3% (Jan)

7.4% (2QFY17)

64.85 (Mar)

6.55% (Feb)

3.65% (Feb)

5

22

19

11

6.15

6.32

6.49

6.60

INDICATORS

Credit Markets

Credit Spreads

Credit Spreads as on April 30, 2017

Tenure 6M 1Y 2Y 3Y 5Y 7Y 10Y 15Y

AAA 0.44% 0.75% 0.64% 0.56% 0.32% 0.62% 0.65% 0.09%

AA+ 0.66% 1.01% 0.86% 0.86% 0.68% 0.95% 0.99% 0.44%

AA 0.91% 1.26% 1.11% 1.13% 0.97% 1.24% 1.47% 0.81%

AA- 1.05% 1.41% 1.36% 1.45% 1.30% 1.60% 1.87% 1.30%

A+ 1.31% 1.65% 1.57% 1.74% 1.59% 1.84% 2.21% 1.64%

A 1.48% 1.82% 1.89% 2.06% 1.93% 2.19% 2.46% 1.89%

A- 1.80% 2.14% 2.28% 2.73% 2.53% 2.86% 3.06% 2.55%

LAF – Liquidity Adjustment Facility, MSF – Marginal Standing Facility, SLF – Standing Liquidity Facility, CP - Commercial Paper, CD – Certificate of Deposit, CB – Corporate Bond, IIP – India Industrial Production, CPI – Consumer Price Index, WPI – Wholesale Price Index, CAD – Current Account Deficit, GDP – Gross Domestic Product

Source: CRISIL

Data Source – RBI, Mospi.Nic.in, CRISIL Fixed Income Database

Credit Ratio

CRISIL's rating actions during fiscal 2017 underscore credit quality of India Inc is gradually recovering. CRISIL's credit ratio for fiscal 2017 was 1.22 times, similar to the 1.29 times seen for fiscal 2016. The improvement was driven by firm commodity prices, stable macros, improving capital structure and lower interest costs. Going forward, CRISIL expect gradual improvement in credit quality to sustain. In all, there were 1,335 upgrades and 1,092 downgrades, during the year. Like last fiscal, upgrades were driven by consumption-linked sectors, while downgrades were led by investment-linked sectors. The impact of demonetisation on credit quality is expected to be transient.

Source: CRISIL

Bank Credit / Deposit Growth

Bank credit growth rose to 5.5% year-on-year in the fortnight ended April 14, 2017 compared with 4.4% on-year in the fortnight ended March 17, 2017. Non-food bank credit rose to Rs 75.83 trillion as on April 14, 2017 compared with outstanding credit of Rs 75.09 trillion as on March 17, 2017. Time deposit growth fell to 10.6% on-year in the fortnight ended April 14, 2017 against 11.2% on-year in the fortnight ended March 17, 2017. Demand deposits witnessed 21.1% on-year growth in the fortnight ended April 14, 2017 compared with 30.6% on-year growth in the fortnight ended March 17, 2017. India's M3 money supply rose 7.1% on-year in the fortnight ended April 14, 2017 compared with 10.4% a year ago. Reserve money fell 12.0% on-year in the week ended April 21, 2017 compared with growth of 14.3% a year ago.

Source: RBI

Our Outlook

A credit ratio in FY17 has printed at a healthy 1.22 times. This improvement goes on to show that the credit cycle has bottomed out. With the commodity prices being stable, commodity-led businesses and financial companies that were heavily invested in these sectors will witness further improvement. As capacity utilisation is low, we do not expect further investment in capital expenditure, thus, these companies are expected to repay their loans and reduce debt, thereby improving the balance sheet. Credit profile of many corporates has been improving and we have witnessed upgrades in our portfolios of companies engaged in various sectors. Therefore, it reflects that economic recovery cycle is well underway, and that the credit market is gradually improving.

Inflation

India's Consumer Price Index (CPI)-based inflation rose 16 basis points (bps) to 3.81% in March 2017 from 3.65% in the previous month. The rise was attributed to higher inflation in fuel, housing and clothing, and footwear. Fuel inflation jumped in March 2017 led by rising global oil prices. Average global crude oil prices were 40% higher year-on-year in the month, and about 3% higher in fiscal 2017, pushing up the imported component of inflation. That was reflected in fuel inflation (petrol, diesel, fuel and light), which rose to 8.4% in March from 6.5% in February. Food inflation was unchanged from the previous month, at 2%, as inflation in fruits, vegetables, eggs and meat rose; while that in pulses, cereals and sugar, inflation slipped. However, food inflation dropped to 4.2% in fiscal 2017 from 4.9% in fiscal 2016.

Wholesale price inflation (WPI) eased to 5.70% in March 2017 from 6.55% in February 2017. Food inflation rose to 3.12% in March 2017 from 2.69% in February 2017 owing to the sharp jump in the vegetable prices. Fuel and power inflation fell 290 basis points to 18.16% while core (non-food, non-fuel) inflation fell 60 bps to 3.1%.

Source: Mospi.Nic.in, CRISIL Centre for Economic Research (CCER)

Currency in circulation dropped 17.8% on-year in the week ended April 21, 2017 against 15.5% growth a year ago. Average liquidity was in surplus at 4.18 trillion vis-a-vis the surplus of Rs. 4.54 trillion in February 2017.

Source: RBI, CRISIL Fixed Income Database

Money Markets

INDICATORS

Liquidity

Our Outlook

Interbank call money rates remained below the repo rate of 6.25% in the month owing to comfortable liquidity in the system. As demand for funds remained low owing to ample surplus cash balance, the central bank regularly held reverse repo auctions during the month. Meanwhile, the RBI's Monetary Policy Committee (MPC), during its review meeting on Thursday, April 6, narrowed the policy rate corridor from 50 basis points (bps) to 25 bps, bringing the reverse repo rate to 6% and the marginal standing facility (MSF) rate to 6.5%. This will now help mop up

Spread Market Data in basis points

Tenure AAA AA A

1Y

3Y

5Y

10Y

0.75%

0.56%

0.32%

0.65%

1.26%

1.13%

0.97%

1.47%

1.82%

2.06%

1.93%

2.46%

O v e r v i e wThe MarketFixed Income Market Outlook

Note: None of the aforesaid recommendations are based on any assumptions. These are purely for reference and the investors are requested to consult their financial advisors before investing.

Physical assets

Indian gold prices (up 1%) ended higher in April to close at Rs 28,880 per 10 grams on April 28 vis-à-vis Rs 28,590 per 10 grams on March 31 on the National Commodity and Derivatives Exchange (NCDEX), following upbeat global trend amid improved buying by local jewelers.

Source: NCDEX

Government Borrowing

In the Union Budget 2017-18, the government pegged the net market borrowing at Rs 3.48 trillion after taking into account the buyback of Rs 750 billion in FY18 compared to Rs 4.07 trillion (after cancelling Rs 180 billion of auctions in January 2017) in FY17. The gross market borrowing has been set

Debt ValuationAs our debt valuation index shows, investors can choose Moderate Duration or Dynamic Duration Funds as they may offer better risk-adjusted returns. Long-term investors in debt are recommended to invest in Dynamic Duration Funds as they have flexibility to change duration stance.

The RBI's policy

The Monetary Policy Committee (MPC), during its review meeting on Thursday, April 6, 2017, left the policy repo rate unchanged at 6.25%, and retained its 'neutral' monetary policy stance. All six members of the committee voted to stay put. In order to also make the Reserve Bank of India's (RBI) liquidity stance consistent with its monetary stance, the policy rate corridor was narrowed from 50 basis points (bps) to 25 bps, bringing the reverse repo rate to 6% and the marginal standing facility (MSF) rate to 6.5%. This will now help to mop up liquidity and correct the recent steep fall in money market rates at the short end, by steering them closer to the repo rate. On inflation, the MPC reaffirmed its consumer price index (CPI)-based inflation target of 4% for the medium term. But now, it has telegraphed a glide path that takes CPI inflation to an average of 5% in the second half of fiscal 2018, and 4.6% in the fourth quarter of fiscal 2019. These can be seen as interim targets in the journey towards 4%.

Source: RBI, CCER

at Rs 5.8 trillion. The Centre will borrow Rs 3.72 trillion in the first half of FY18, frontloading 64% of its gross market borrowing for the year. Auctions of government securities worth Rs 600 billion are scheduled for May 2017.

Source: Union Budget 2017-18, RBI

INDICATORS

Bond Markets

Current Account India's current account deficit (CAD) widened modestly to $7.9 billion (1.4% of GDP) in the third quarter of fiscal 2017 from $7.1 billion (1.4% of GDP) year-on-year. It was, however, a significant jump from $3.4 billion (0.6% of GDP) in the second quarter. The increase in CAD was owing to a fall in services trade surplus, and net income receipts from abroad. Imports growing faster than exports in information technology (IT), IT enabled services (ITeS) and financial services skewed the services trade balance. However, lower goods trade deficit contained the rise in deficit.

Capital flows (comprising capital account and financial account balance) increased 7.8% on-year to $7.4 billion in the third quarter. Capital flows had declined by 53% to $4.3 billion in the previous quarter. The growth in capital flows was driven by loans, financial derivatives, reserve assets, and trade and credit advances. Loans recorded net inflows of $20.4 billion in the third quarter of fiscal 2017, as against an outflow of $0.8 billion a year ago. Net inflows into financial derivatives rose to $3.1 billion from $0.3 billion. Trade and credit advances increased to $3 billion from -$1.8 billion, while reserve assets increased to $1.2 billion from -$4.1 billion.

Source: CCER

Debt Valuation Index considers WPI and CPI over G-Sec Yield, Current Account Balance and Crude Oil Movement for calculation. Equal weights are assigned to each of these parameters for calculating the index.

Debt Valuation Index

liquidity and correct the recent steep fall in money market rates at the short end, by steering them closer to the repo rate. We believe that money market rates will remain stable given easy systemic liquidity.

Source: CRISIL Research

Fixed Income Outlook

Government bond prices (gilts) declined in the month. Yield on the 10-year benchmark – the 6.97%, 2026 paper – rose to 6.96% on April 28, 2017 from 6.69% on March 31, 2017. Prices fell as the RBI, in its policy announcement, increased inflation projections and outlined measures to rein in surplus liquidity in the banking system. Gilts retreated further as the MPC's meeting minutes released later in the month cited upside risks to inflation arising from price pressure excluding food and fuel as the main reason for keeping its policy repo rate unchanged and as remarks from some MPC members suggested an interest rate hike could be on the cards in the coming months. Intermittent rise in US benchmark bond yields also weighed on prices. The sentiments turned bearish in the fixed income market, after the minutes of RBI Monetary Policy Committee's meeting, held on Apr 5-6, were released on April 20, 2017. The same indicated a cautious stance on inflation. The fixed income market remains supportive for investments, due to favourable macro-economic indicators such as inflation, CAD (current account deficit), Fiscal deficit and credit growth. Thus, we believe that the fundamentals are not bearish but the sentiments are amidst RBI's neutral Monetary Policy stance. Therefore, yields are trading at higher levels. We expect yields to moderate from the current levels on the backdrop of real interest rates being higher, weak inflation drivers and impact of trumpflation receding. With reasonable state and central fiscal deficit, appreciating INR and a forecast of a normal monsoon are also positive triggers for bond yields.We believe that the outlook for debt funds over the next three to six months can be favourable. Therefore, investors could consider investing in short-to-medium duration funds. Investors looking to invest for a longer time horizon can consider ICICI Prudential Long Term Plan, a fund where duration is managed based on an in-house quantitative model.Source: CRISIL Fixed Income Database

Accrual Funds

This fund can dynamically change duration strategy based on market conditions.

These funds are better suited for investors looking for accrual strategy.

Dynamic Duration Funds

FIXED INCOME RECOMMENDATIONS

Our RecommendationFor new allocations we recommend short to medium duration or accrual based funds or dynamically managed funds.

ICICI Prudential Corporate Bond FundICICI Prudential Regular Savings FundICICI Prudential Savings FundICICI Prudential Regular Income Fund(An open ended income fund. Income is not assured and is subject to the availability of distributable surplus)

ICICI Prudential Dynamic Bond FundICICI Prudential Long Term Plan

Short Duration Fund

ICICI Prudential Short Term PlanThis fund maintains short-duration maturity.

1.01

-6

-4

-2

0

2

4

6

8

Aggressively in High Duration

High Duration

Moderate Duration

Low Duration

Ultra Low Duration