Ease in wholesale price inflation, tight liquidity conditions and slowing growth made RBI cut the repo rate by 25 basis points to 7.75%, as was widely expected by experts. The central bank also cut the cash reserve ratio (CRR) by 25 basis points from 4.25% to 4%. The CRR cut will infuse Rs 18,000 crore into the banking system. RBI had last cut its policy rate in April 2012.
“There has been a rally in government securities in anticipation of a rate cut. As interest rates soften over a period of time, long term bond funds will remain attractive. Gilt funds also look attractive but there will be some volatility,” says Gopal Agrawal, CIO, Mirae Asset Mutual Fund.
Lakshmi Iyer, Senior Vice President & Head (Fixed Income and Products) recommends duration funds for investors who have one year time horizon. “The RBI stance seems to be directed towards growth, aided by a lower inflation trajectory going forward. This supports our view that we could see more rate cuts going forward. In such scenario, we could continue to recommend investors to look at duration funds with a 1 year plus investor horizon. The CRR cut would be supportive of the short tenor yield curve, making short term funds a good option.”
According to analysts, the rate cut has already been priced in the markets. “Investors can consider longer tenured bond funds and dynamic bond funds to capitalize on the rate cut and the decline in interest rates. However, it should be noted that bond yields have already declined in anticipation of a rate cut. Therefore there is limited room for another significant round of decline in bond yields. Going forward it will be more gradual will and depend on action taken by the RBI, during the course of the year,” says Dhruva Raj Chatterji, Senior Research Analyst, Morningstar India.
RBI has projected that inflation will remain range-bound around the current levels in 2013-14.
“GDP growth slowed significantly this year, dropping to 5.5 per cent in the first quarter, and dropping even further to 5.3 per cent in the second quarter. Accordingly, we have revised downwards our baseline projection of GDP growth for the current year from 5.8 per cent to 5.5 per cent,” stated RBI.
Arvind Chari, Fund Manager, Fixed Income, Quantum Mutual Fund expects another rate cut in March. “Existing investors should hold their investments in fixed income funds because we expect another 25 basis cut either in March or April. Bond yields can fall further from the current levels. Investors who wish to invest right now should look at income funds having five year duration. Investors can look at dynamic bond funds which are better placed to play the interest rate cycle,” said Arvind.
Dhawal
Dalal, EVP & Head of Fixed Income, DSP BlackRock Investment Managers
too recommends investors to consider investing in income funds with high duration
to benefit from the possible decline in interest rates in the next 3 months.
