RBI has hiked repo rate by 25 basis points to 6.25% in the second bi-monthly monetary policy. Consequently reverse repo rate stands at 6%; the marginal standing facility (MSF) rate and the bank rate are revised to 6.50%.
Uncertainty in global markets, volatile crude oil prices, inflationary impact of revision in government employees house rent allowance (HRA) and revision in minimum support price (MSP) for kharif crops were the key risks guiding RBI’s decision.
On a positive note, RBI has retained growth projections for FY 18-19 at 7.4%. Additionally, a well-distributed monsoon may help keep the food inflation in check.
Lakshmi Iyer, CIO Debt and Head Products at Kotak Mahindra MF feels that the market sentiment is not likely to improve in near term. “RBI’s neutral policy stance means that the possibility of another rate hike cannot be denied. We expect markets to remain circumspect in the near term. In the current scenario, we feel advisors should look at short-term or credit funds for their clients. We could expect some easing at shorter end of the yield curve. Prudence demands to stay at short end of the yield curve and continue to favour accruals over duration.”
Dwijendra Srivastava, Chief Investment Officer (Debt), Sundaram MF feels that though rate hike was imminent, the decision to increase repo in June was driven by currency considerations. “Market participants expected RBI to increase repo rate in August. However, falling rupee, depreciating emerging market currencies, tightening global liquidity and rising oil prices were key contributors to RBI’s decision. We expect the central bank to announce another hike in rates in the next 3-6 months, as there still exist inflationary concerns. In this scenario, we feel advisors should look at accrual and shorter duration funds for their clients having investment horizon between 12-18 months. Investors with long-term fixed income allocation targets can take exposure to long duration funds in a staggered manner.”
