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31 Jul 2012 06:42 AM
RBI keeps policy rate unchanged, what should you tell your clients? 
Team Cafemutual
 

Experts say that bond yields could head higher and recommend investors to look at short-term funds with higer credit quality.

The RBI in its first quarter monetary policy review has kept the repo rate unchanged at 8 % and slashed the statutory liquidity ratio (SLR) to 23 % from 24 % earlier in order to boost liquidity. Repo rate is the rate at which banks borrow from RBI. The central bank kept the reverse repo rate at 7%. It kept the cash reserve ratio (CRR), the amount of deposits banks keep with RBI, unchanged at 4.75 %.

Fund managers are advising investors to park money in lower duration funds.

“Bond yields are likely to head higher gradually from here. In that case, investors holding long duration could face mark to market risks. Funds holding low duration papers are likely to outperform as compared to those with higher duration. There is also a risk of credit spread widening. Investors should consider investing in funds with low duration and high credit quality assets,” says Dhawal Dalal,  EVP, Head – Fixed Income, DSP BlackRock AMC.

Experts say that bond yields can go up. “Bond yields can trend up higher from the current 8.25% – August has very high supplies and we would see further increase in bond yields in the coming month. Yields are getting into the attractive zone and we would calibrate our duration increasing strategy to benefit out of the likely easing in the next six months. We prefer increasing duration through government bonds as the market has the support of an RBI Open Market Operations whenever undertaken. If the government does not deliver, we could see the rating agencies move towards a rating downgrade impacting capital flows sentiment towards India,” Arvind Chari, Fund Manager, Quantum AMC.

Alok Singh, CIO – Fixed Income, BOI Axa AMC also advises investors to consider short term funds. “This situation allows us to maintain that currently short terms curve is a better investment option as compared to long bonds as supply side pressure and lower demand shall keep the long bond yield elevated, even if RBI continues with its open market operations (OMO)”.

Gross Domestic Product (GDP) growth decelerated over four successive quarters from 9.2 % in Q4 of 2010-11 to 5.3 % in Q4 of 2011-12, the central bank said. The RBI revised its growth projection for 2012-13 downwards from 7.3 % to 6.5 %.

 
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