The primary objective of RBI in the policy has been to moderate inflation and anchor inflation expectations, while sustaining growth in the medium term.

The goal of monetary policy last year was to nurture the economic recovery while trying to contain the food inflation from spreading into generalized inflation. However, as high inflationary environment is not conducive for sustained high economic growth, this year the stance of the policy seems to have shifted clearly towards softening inflation even if it impacts growth in the short term. With this in view, RBI increased the repo rate by 50 bps to 7.25% Factoring its anti-inflationary monetary stance, the RBI has projected GDP growth of around 8%. Also, considering an increase in administered fuel and power prices and a normal monsoon, the RBI has projected WPI inflation for March 2012 at 6% with an upward bias.

RBI has for long been concerned about the banks investment in liquid schemes of mutual funds. It has finally proposed to limit the investment in liquid schemes to a prudential cap of 10% of net worth as on March 31 of the previous year. In the short run this move could result in fall in the assets under management (AUM) of the liquid schemes while in the long run this is likely to result in lower volatility in AUMs and consequently better returns for investors. The move is indeed welcome as it does address the issue of potential development of systemic risk and also supports a better Asset Liability Management environment for the fund houses.

With RBI focusing on controlling inflation, in our view yields could harden a bit and stay there till we see some softening in growth and inflation.

In light of the above, we recommend investors to stick to liquid / ultra short term income schemes. Investment in Bond funds and G-sec funds may be done in a staggered manner with a 2-year view.

These are views of HDFC Mutual Funds