In its fourth bi-monthly monetary policy review meeting, RBI has kept the repo rate unchanged at 6.50%.
Consequently, the reverse repo rate stands at 6.25%. However, RBI changed its stance from ‘neutral’ to ‘calibrated tightening’ indicating that going forward a rate cut seems unlikely until RBI changes its stance.
As inflation targeting is the key objective of RBI, the change in stance reflects the upside pressure on inflation namely escalating trade tensions, rising oil prices and tightening global financial conditions.
On a positive note, the Deputy Governor Viral Acharya reiterated that RBI would provide liquidity support to the market similar to previous months. Currently, when markets are reeling under tight liquidity conditions post the recent credit events in the NBFC space; this comes as welcome news.
Overall, RBI retained its growth outlook at 7.4%. According to RBI report, despite first quarter of FY 2018-19 reporting strong growth numbers, uncertain domestic and global scenario pose threat to overall investment activity. Moreover, RBI revised its inflation outlook downwards; however; it stressed that upside risks to inflation persist.
We spoke to a few fund managers to understand what distributors should advice to their clients.
Lakshmi Iyer, CIO (Debt) & Head of Products, Kotak Mahindra Mutual Fund views today's policy announcement as positive for the market. "Given the status quo, we expect short term rates to ease while long term yields may trade range bound. The macro needs monitoring and INR and crude oil prices could be leading the way for markets going forward. We continue to maintain our long term view that ultra short term and short term funds offer better risk adjusted returns to debt investors," she said.
Mahendra Kumar Jajoo, Head, Fixed Income Mirae Asset believes that in the current scenario, investors should look at funds having average maturity in the 2-3 year range. "Along with portfolio average maturity, advisors should also analyse portfolio composition. They should recommend schemes having 2-3 year average maturity (known as butterfly strategy) rather than investing in a mix of long and ultra short term bonds (barbell strategy)," he added.
According to Murthy Nagarajan, Head-Fixed Income, Tata Mutual Fund, debt funds offer attractive entry point with 2-3 year bond yields. “With repo rate at 6.5% compared to liquid funds, investors in the 2-3 year bracket have the potential to generate substantial excess returns," he added.
Sampath Reddy, CIO, Bajaj Allianz Life Insurance mentioned that the outcome has been taken favourably by the markets with an easing of bond yields post policy. However, the move could have some weakening bias in Rupee. “Moreover, with MPC changing the stance from neutral to calibrate tightening, it might want to wait and watch growth-inflation dynamics going ahead. We feel that future monetary policy action will continue to be data dependent,” he added.
Kunal Shah, CFA, Fund Manager - Debt, Kotak Mahindra Life Insurance said, “With big rate hikes out of the way for now, markets will try to position for further liquidity infusion by RBI through OMO purchases. 10y treasuries should trade in the range of 7.80-8.20% in near term. However, bond markets will closely track currency market, as no change in rates today has upset the currency market.”
