In a surprising move, the RBI has reduced repo rate by 35 bps to 5.4% in its monetary policy meeting today. Most market participants were expecting a rate cut of 25 bps, but the central bank did not stick to the tradition of an increase or reduction in repo rate in multiples of 25 bps.
The central bank also decided to maintain the accommodative stance, which means a rate hike in near future is off the table.
Speaking about the rationale for a 35 bps rate cut, RBI Governor Shaktikanta Das said that a 25 bps rate cut might have been “inadequate” considering the concerns of a slowdown in growth and benign inflation while a 50 bps rate cut would have been “excessive”. This is why the central bank decided to cut repo rate by 35 bps, which is a “balanced level of cut” under the current circumstances.
With today’s rate cut, the central bank has reduced the repo rate by 110 basis points in 2019. As a result, gilt funds and long duration funds have performed well so far in 2019. Nevertheless, today’s 35 bps rate cut has thrown a puzzle: Is it a good time to invest in gilt or long duration funds with expectation of more rate cuts in near-term or is the rally in gilts over?
Here is how fund managers read this monetary policy.
Devang Shah, Deputy Head – Fixed Income, Axis Mutual Fund said that the RBI would like to maintain comfortable liquidity in the banking system and focus on transmission of the rate cuts. This will augur well for short-term and medium-term debt funds.
He added that a significant rally in long duration bond funds and gilt funds seems unlikely from current levels. Hence, increasing investment in duration funds may not be a good option.
Pankaj Pathak, Fund Manager - Fixed Income, Quantum MF said, “The Governor reference to 50 bps cut would be ‘excessive’ has raised uncertainty over the future rate cuts. We do not see a long rate cutting cycle from here on. There could be an additional 25 bps cut but that would not be enough to sustain this bond market rally.”
“The best of bond market rally is now behind us and from here on investors should lower their returns expectation from bond funds,” he added.
Pathak feels that investors should look at accrual funds such as short-term and ultra-short funds. Investors looking for 2-3 years investment horizon having higher risk appetite can look at dynamic bond funds.
Murthy Nagarajan, Head-Fixed Income, Tata MF has a different take. He feels deeper cuts in policy rates are required to tackle GDP slowdown. “The number of defaults of companies has led to trust deficit amongst lenders. MFs and banks are shying away from lending to NBFC, HFC and other corporates. Given that many NBFC, HFC cater to the segment, which is not serviced by the banks, the revival of these companies is crucial for the economy to grow at a robust pace.
He expects GDP growth to miss RBI projection of 6.9% in this FY and grow around 6.5%.
“This will necessitate cut of 40 to 50 bps more in repo rates along with providing sufficient liquidity in the banking system.” He thinks dynamic bond funds and long duration bond funds could be a good choice if the investors is ready to stay put for around 3 years.
He cautioned that investors should select debt funds carefully, considering the number of defaults of companies in the recent past.
