RBI has hiked the repo rate by 25 bps to 6.50%, citing food and fuel inflation as concerns for the economy.
Consequently, RBI has hiked reverse repo rate and the marginal standing facility (MSF) rate by 25 bps to 6.25 and 6.75%, respectively.
While repo rate is the rate at which RBI lends money to the banks, reverse repo is the rate at which banks lend to RBI. The central bank controls inflation by incorporating changes in repo rate, it manages liquidity through change in reverse repo rate. MSF is the rate at which the banks borrow overnight funds from RBI against the approved government securities.
The central bank has maintained neutral stance that means the banking regulator can either cut or hike rates in the near future.
Also, RBI has decreased growth projection for April-September FY 18-19 from 7.6% estimated earlier to 7.5%.
R Siva Kumar, Head, Fixed Income, Axis Mutual Fund told Cafemutual that advisors should recommend their clients to be on the short end of the curve. “Since June, RBI has hiked the rate twice i.e. by 50 bps. Despite this, the yields have actually gone down since then. If you look at 10 year g-sec, it has come down by 13 bps since June. This is because market participants have sold out aggressive expecting hawkish stance. However, RBI has continued its neutral stance. For advisors, they should continue to recommend their clients to remain at the short end of the curve i.e. short term funds and credit funds with maturity of up to 3 years. While investors having low risk appetite should invest in short term funds, investors who can digest volatility should consider credit funds.”
Sujoy Das, Head, Fixed Income, Invesco Mutual Fund expects no further rate hike this year. “Since inflation is likely to ease considering the good monsoon, the rate hike is here to stay. We expect that the central bank would soften its stance going forward. Hence, we would recommend advisors to recommend their clients to invest in short term funds having maturity between 1 and 3 years.”
