Listen to this article
Investors should avoid investing in long-term bond funds as RBI's decision to keep the rates unchanged will negatively impact longer duration funds, said fund managers post the central bank's latest monetary policy committee (MPC) meet.
"With inflation remaining above 6%, yields are expected to remain under pressure in the near term, Longer end of the yield curve will face headwinds due to government’s humongous borrowing program, no explicit support from RBI, and geo-political uncertainty. The 10-year G-Sec is expected to trade around 7.25% in the near-term," said Akhil Mittal, Senior Fund Manager- Fixed Income, Tata Mutual Fund.
The central bank had some bad news for the equity market too. RBI has announced a sharp cut in its FY 2023 GDP forecast to 7.2% from 7.8% earlier.
However, bank FD rates and short-term debt fund returns are expected to improve soon on the back of RBI measures to remove excess liquidity and rise in short-term interest rates, said Pankaj Pathak, Fund Manager-Fixed Income, Quantum AMC.
What should debt investors do?
Investors looking to allocate to debt strategies are advised to look at fund segments with lower duration profiles and use target maturity strategies to gradually lock in incrementally higher rates over the next 6- 12 months. To reiterate, bond yields are likely to see increased volatility and hence investors should remain vigilant in their allocations, said Axis Mutual Fund.
RBI expected to hike repo rate by 50 bps in FY 2023
Fund managers and analysts expect RBI to start the rate hike cycle soon as they see the central bank raising rates by 50 bps in FY 2023.
"The change in tone in today’s meeting, and narrowing of liquidity adjustment corridor (LAF) will prepare the markets for repo rate hikes, which we expect to be 50-75 basis points in fiscal 2023, beginning with the June monetary policy review. The pace of tightening will be guided by the surprises emanating from inflation and external risks," said Dharmakirti Joshi, Chief Economist, CRISIL.
