As widely expected, the RBI has reduced repo rate by 25 bps to 5.15% in its monetary policy meeting today. The central bank also decided to maintain the accommodative stance, which means a rate hike in the near future is off the table.
With today’s rate cut, the central bank has reduced the repo rate by 135 basis points in 2019.
Market participants were expecting at least a 25 bps cut in the repo rate following concerns over growth. Subdued headline inflation numbers also greatly influenced the central bank’s rate cut decision. The central bank’s projections on GDP and inflation reflect the same.
The central bank revised its GDP growth for FY 2019-20 downwards to 6.1% from 6.9% in the August policy. For the July-September quarter of this fiscal, the GDP growth has been estimated at 5.3% and 6.6-7.2% for the second half.
On the inflation front, the CPI inflation projection for July-September was revised slightly upwards to 3.4% from 3.1%, while projections are retained at 3.5-3.7% for October-March this quarter and 3.6% for April-June in FY 2020-21.
Given the accommodative stance and projections on GDP and headline inflation, experts feel that the RBI is likely to cut the repo rate by 15-25 bps from current levels. On the face of it, all these factors indicate long duration bond funds are the most attractive.
Nevertheless, debt fund managers feel that investors should be cautious about their holdings in such funds.
Dwijendra Srivastava, CIO – Debt, Sundaram MF said that today’s policy has a dovish tone (which indicates more monetary policy easing in the near-term). However, he feels that the central bank is approaching the bottom of the rate cut cycle and could cut the repo rate by 15-25 bps going ahead.
“In such a scenario, if you have considerable exposure to 7-10 year tenure papers, it is better to move a part of it to short and medium duration papers. Moreover, you can also look to trim your holding in government bond funds and move to corporate bond funds,” Srivastava added.
Mahendra Jajoo, Head-Fixed Income, Mirae Asset MF said, “RBI largely retained inflation projections for next year and revised growth projections downward. In view of that, further rates cuts may be expected in forthcoming policy reviews.”
Jajoo added that market players would now look forward to any possible OMO purchase operations to get comfort on absorption of additional supplies. “We expect over all bond yields to remain range bound with easing bias. It is safer to invest in short duration funds at this point and wait for clarity before investing heavily in long duration bond funds.”
Lakshmi Iyer, CIO - Debt and Head Products, Kotak MF also said that short end of the yield curve looks attractive. “The RBI MPC remained committed to maintaining accommodative stance that aids growth-revival to the extent needed. The tone seems tilted towards a softening bias. With the intent to maintain adequate liquidity in the banking system, bond yields could remain well anchored. This is conducive especially for short end of the yield curve. Global factors will assume centre stage now, which will determine near-term movements in the yield,” Iyer said.
