ICICI PRUDENTIAL MUTUAL FUND

RBI SECOND QUARTER REVIEW OF MONETARY POLICY 2010-11

Besides the usual considerations behind Central Bank’s move that include both global and domestic
macroeconomic situation, RBI in yesterday’s announcements has particularly been guided by

1. Robust domestic growth drivers that in RBI’s view should negate the impact of any slowdown
in global recovery.
2. Given the spread and persistence of inflation, RBI feels the need to contain demand-side
inflationary pressures and anchor inflationary expectations.
3. To contain liquidity deficit within a reasonable limit to ensure that economic activity is not
disrupted.

Highlights of the monetary policy

1. Repo and reverse repo rates increased by 25 bps each to 6.25% and 5.25% respectively. With
this increase, since RBI started reversing the monetary policy stance in March 2010, the repo
rate has increased by 150 basis points and the reverse repo by 200 basis points.
2. CRR was unchanged at 6% of net demand and time liabilities (NDTL) of banks.
3. LTV ratio on housing loans capped at 80%. Risk weights on residential housing loans above
Rs.7.5 mn. increased to 125% from 75%. Provisioning on teaser loans at 2%.

Global and domestic macroeconomic situation

• Persistent sluggishness in advanced economies has raised concerns about the sustainability of
the global recovery.

This slowing momentum of recovery have prompted the central banks of some advanced economies
to initiate round two of quantitative easing to further stimulate private demand. In the medium term
the easing measures may benefit the global economy and in short term lead to an increase in capital
inflows to Emerging markets and put upward pressure on global commodity prices.

• Contrary to what is happening in the developed world, the emerging economies continue to
show strong growth that is primarily led by domestic demand and supported by exports.

Domestic demand coupled with an increase in commodity prices on the back of increased inflows is
causing Inflation, which is a growing concern in several emerging economies including India.

• Amongst emerging economies, India’s economic activity is firmly in place.

• The 8.8 per cent GDP growth for Q1 of 2010-11 suggests that the economy is operating close
to its trend growth rate, driven mainly by domestic factors.
• The South-West monsoon has been normal and should boost agricultural output and rural
demand.
• Most industrial and service sector indicators also point towards sustained growth.
• Notwithstanding some moderation in recent months, headline inflation remains significantly
above its medium-term trend. RBI expects inflation to moderate from the present elevated
level partly due to some easing of supply constraints and its concerted policy action. In RBI’s
July Review, it had made a baseline projection of WPI inflation for March 2011 of 6 per cent
under the old series of WPI. The baseline projection of WPI inflation for March 2011 has been
 placed at 5.5 per cent under the new series which is equivalent to 6 per cent under the old
series.

ICICI PRUDENTIAL Mutual Fund House views

The policy has been in line with market expectations and is fairly lucid. Interestingly two things have
added excitement to the announcements. RBI has detailed variables which will guide it in formulating
further actions. By also touching upon the interpretation of such variables it has given comfort to the
market since such kind of communication is forward looking as it sets the tone for the likely future
course of action that RBI will embark upon. It also has spoken about ‘taking a pause’ which suggests
that it is going to wait and watch for how its policy stance will impact the market environment and
therefore, less likely to increase rates immediately in the future. The other excitement that was
created was that the policy followed immediate action by RBI in terms of RBI announcing an OMO on
the day of policy itself.

From an equity market point of view, this credit policy is very much in line with expectations. There
was consensus that 25 bps will be a rate hike and potentially there will be a pause. The RBI has
exactly delivered on the same. The markets currently are being more driven by flows and less by
fundamentals, so we believe that this policy will not have any material impact on the market side.

For the bond markets, we believe that the policy will be beneficial. There is a ground being prepared
for improving the liquidity condition either by way of CRR cuts or by way of a fixed intervention or by
way of expanding the RBI’s balance sheet. Either way, it will be beneficial for the bond market. Our
view is that one cannot run an economy which wants to grow at 8-9% but with a negative Rs 70,000
crores liquidity for a longer period of time.

We believe that RBI has taken a very healthy step for the reality sector. On one hand they don’t want
housing momentum to stop because there is real demand for housing from millions who actually
need housing. On the other hand RBI doesn’t want a real estate bubble to grow and blow out like it
happened in the US.

Recommendations

Due to liquidity squeeze, the short term interest rates are at historic highs and therefore, provide an
excellent opportunity for investors to lock in yields at the current level.

From our basket of fixed income funds, we recommend allocation as follows:

• Fixed Maturity Plans/ Interval Plans – 50% allocation to take advantage of the spike in short
term rates which are currently above 8%. We continue to recommend investors to invest in
them.
• We have also suggested having a 25% of the fixed income portfolio allocation to ICICI
Prudential Gilt Fund and ICICI Prudential Income Fund with entry at above 8% on 10 year
benchmark yield in a staggered manner. We continue to maintain the same stance.
Recommended investment horizon is upto April-May 2011, as by then inflation is expected to
come down and liquidity is also expected to return to the market which will push the yield
downwards.
• The remaining 25% of the fixed income allocation should be in products like ICICI Prudential
Short Term Plan / ICICI Prudential Long Term Plan and, ICICI Prudential Regular Savings Fund
(NFO closes November 29, 2010) which is positioned to benefit from high accrual income
being built in the current scenario.
Disclaimer
This article is for information purposes only and is not an offer to sell or a solicitation to buy any mutual fund
units/securities. The Fund has used information that is believed to be from reliable sources and is publicly
available, including information developed in-house. These views alone are not sufficient and shouldn't be used
for the development or implementation of an investment strategy. It should not be construed as investment
advice to any party. All opinions and estimates included constitute our view as of this date and are subject to
change without notice. Neither ICICI Prudential Asset Management Company Ltd (the AMC), nor any person
connected with it, accepts any liability arising from the use of this information. While utmost care has been
exercised while preparing the article, the AMC does not warrant the completeness or accuracy of the information
and disclaims all liabilities, losses and damages arising out of the use of this information. The recipient of this
article should rely on their investigations and take their own professional advice.

Statutory Details: ICICI Prudential Mutual Fund (the Fund) was set up as a Trust sponsored by Prudential plc
(through its wholly owned subsidiary namely Prudential Corporation Holdings Ltd) and ICICI Bank Ltd. ICICI
Prudential Trust Limited (the Trust Company), a company incorporated under the Companies Act, 1956, is the
Trustee to the Fund. ICICI Prudential Asset Management Company Ltd (the AMC), a company incorporated under
the Companies Act, 1956, is the Investment Manager to the Fund. ICICI Bank Ltd and Prudential Plc (acting
through its wholly owned subsidiary namely Prudential Corporation Holdings Ltd) are the promoters of the AMC
and the Trust Company.

Risk Factors: All investments in mutual funds and securities are subject to market risks and the
NAV of the schemes may go up or down depending upon the factors and forces affecting the
securities market and there can be no assurance that the fund's objectives will be achieved. Past
performance of the Sponsors, AMC/Fund does not indicate the future performance of the Schemes of the Fund.
The Sponsors are not responsible or liable for any loss resulting from the operation of the Schemes beyond the
contribution of an amount of Rs. 22.2 lacs, collectively made by them towards setting up the Fund and such
other accretions and additions to the corpus set up by the Sponsors.
ICICI Prudential Income Plan [IPIP] (An open-ended Debt Fund. Objective is to generate income through
investments in a range of debt and money market instruments of various maturities with a view to maximizing
income while maintaining the optimum balance of yield, safety and liquidity. Exit load: Nil
ICICI Prudential Gilt Fund [IPGF]: An open-ended dedicated Gilt Scheme seeking regular returns through
investments in Gilts. There are four investment Plans under the Scheme viz., Treasury Plan, Investment Plan,
Treasury Plan – PF Option and Investment Plan – PF Option. The primary investment objective of all the Plans
under the Scheme is to generate income through investment in Gilts of various maturities. However, there can
be no assurance that the investment objective of the Plans/ Scheme will be realized. Exit Load for the plans is Nil
except for Investment Plan - PF Option which is Exit Load: If the amount sought to be redeemed or switched out,
is invested for a period of - (a) upto 1 year from the date of allotment- 1 % of applicable NAV; (b) more than 1
year from the date of allotment- Nil
ICICI Prudential Short Term Plan [IPSTP] (An open-ended Income Fund. is an additional Plan under the existing
ICICI Prudential Income Plan with characteristics similar to ICICI Prudential Income Plan. The objective of the Plan
is to generate income through investments in a range of debt and money market instruments of various
maturities with a view to maximising income while maintaining the optimum balance of yield, safety and
liquidity. Exit Load: If the amount sought to be redeemed or switched out, is invested for a period of – (a) upto
six months from the date of allotment - 0.50% of the applicable NAV (b) more than six months from the date of
allotment – Nil; ICICI Prudential Long Term Plan [IPLTP] (An open-ended Income Fund. Objective is to generate
income through investments in a range of debt and money market instruments of various maturities with a view
to maximising income while maintaining the optimum balance of yield, safety and liquidity. Exit Load: If the
amount sought to be redeemed or switched out, is invested for a period of - (a) upto 1 year from the date of
allotment- 0.75 % of applicable NAV; (b) more than 1 year from the date of allotment- Nil;
ICICI Prudential Regular Savings Fund (IPRSF) is an open-ended income fund that intends to provide reasonable
returns, by maintaining an optimum balance of safety, liquidity and yield, through investments in a basket of
debt and money market instruments with a view to delivering consistent performance. However, there can be no
assurance that the investment objective of the Scheme will be realized. Entry Load Nil; Asset Allocation :Debt
securities (including government securities) with maturity more than 1 year – upto 100%; Money Market
Securities – upto 100%. Including securitized debt (Single loan and / or Pool loan Securitized debt) of upto 50%
of the portfolio. Minimum Application amount- Rs. 10,000 (plus in multiple of Re.1). Terms of Issue: Offer of
Units of Rs. 10/- each for cash during the New Fund Offer and continuous offer for units at NAV based prices.
Liquidity/Repurchase facility: The Scheme will re-open for subscriptions and redemptions on an on-going basis
within five business days of allotment, at NAV based prices subject to the provisions of prevailing load structure.
Investments in the Scheme(s) may be affected by risks relating to trading volumes, settlement periods, interest
rate, liquidity or marketability, credit, reinvestment, regulatory, investment in unlisted securities, default risk
including the possible loss of principal, derivatives, investment in securitised instruments and risk of Co-mingling
etc, . Unitholder Information & General Services: Account statement, indicating the number of unit allotted, will
be sent (by ordinary post or email) to the unit holder within the time stipulated under the Regulation from the
closure of NFO. The account statement will be sent through email, wherever the email id is provided. Application
forms can be submitted at customer service centers, during NFO. The AMC will calculate and disclose the first
NAV not later than 5 working days from the date of allotment of units. Subsequently, the NAV will be calculated
and disclosed at the close of every Business Day. NAV shall be published at least in 2 daily newspapers on daily
basis. In the event of inordinately large number of redemption requests, or of restructuring of the scheme’s
investment portfolio, these periods may become significant. In the view of the same, the trustees reserve the
right in their sole discretion to limit the redemptions (including suspending redemptions) under certain
circumstances. The scheme (at the portfolio level) should have greater than or equal to 20 investors and no
investor should account for more than 25% of the corpus of the scheme. Incase of non fulfillment of the either of
the said conditions, the AMC shall comply with the specified SEBI guidelines in this regard. Application forms
and copy of SID, SAI and Key Information Memorandum will be available at the website of the company
(www.icicipruamc.com) or at customer service centers.
Significant risk factors for debt oriented Schemes: Investments in the Scheme(s) may be affected by risks
relating to trading volumes, settlement periods, interest rate, liquidity or marketability, credit, reinvestment,
regulatory, investment in unlisted securities, default risk including the possible loss of principal, derivatives,
investment in securitised instruments and risk of Co-mingling etc.
IPIP, IPGF, IPSTP, IPLTP and IPRSF is only the name of the Schemes and do not in any manner indicate either the
quality of the Schemes or their future prospects and returns. Mutual Fund investments are subject to market
risks. Please read Statement of Additional Information (SAI) & Scheme Information Document (SID) carefully
before investing.