In line with market expectations, the RBI has reduced the repo rate by 25 bps to 5.75% in its monetary policy meeting today. This was the third time in a row that the central bank has cut the repo rate, largely due to concerns over slowing economy.
Moreover, the central bank changed its monetary policy stance to ‘accommodative’ from ‘neutral’, which further sharpened the dovish tone. The change in stance means possibility of a rate hike is now off the table, and the RBI could be more open to consider rate cuts in the upcoming policy meetings.
To understand what should distributors’ advice their clients at this juncture, we spoke to a few fund managers:
Dwijendra Srivastava, CIO Debt, Sundaram MF believes that distributors should look at recommending medium duration accrual funds. Despite change in stance and three rate cuts in a row, he cautioned distributor from recommending long-duration funds. He said, “One should not be adventurous on the longer end of the curve, as India is in need of foreign funds and if the rupee takes a beating due to any global events, the RBI would be under pressure change its current stance.”
Dinesh Ahuja, fund manager, SBI MF said, “ Given the fact that the repo rate stands at 5.75% and yield on AAA rated papers range from 7.2-7.5%, the 2-3 year space looks attractive.”
R Sivakumar, Head – Fixed Income, Axis MF feels that investors with high risk appetite should look at dynamic bond funds while investors who want to play safe should look at banking PSU funds and short-term funds.
Suyash Choudhary, Head – Fixed Income, IDFC AMC said that the focus should remain on quality schemes that predominantly invests in sovereign papers, sub-sovereign State Development Loans (SDL) and AAA rated papers. He warned that the lower rated credit markets are ‘far from settled’ and the spreads may not yet be ‘compensating’ for the risks involved.
Kumaresh Ramakrishnan, Head - Fixed Income, DHFL Pramerica MF noted that short (1-3 years) and medium term funds (2-5 years) remain attractive. This is because the yield curve has already witnessed steepening and may likely to continue further, aided by improved liquidity conditions.
He added that some allocation to dynamic bond funds is also a good strategy to take advantage of fall in long-end (7-10 years) yields.
