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Repo rate and policy rate hikes coupled with constant ECB (European Central Bank) rates have changed the dynamics of the debt market. While the move of the US Fed was expected, RBI’s move was surprising.
In this context, George Heber Joseph, CEO & CIO, ITI Mutual Fund talks about selecting the right debt mutual fund.
What changes took place?
- The RBI surprised the markets on the eve of the US Fed FOMC (Federal Open Market Committee) May 2022 meeting by not only raising the policy repo rate by 40 bps but also by increasing the CRR (Cash Reserve Ratio) by 50 bps in an inter-meeting MPC (Monetary Policy Committee) decision
- The US Fed expectedly increased policy rates by 0.5% in May 2022 and indicated additional 50 bps (100 bps=1%) moves for the next couple of meetings. Furthermore, the Fed also announced its balance sheet runoff to commence from June and reach the maximum runoff pace of USD 95 billion from August
- The European Central Bank (ECB) left its main rates unchanged in April 2022 but saw a growing consensus for a 25-bps rate increase in the third quarter of the current year
What to expect from here on?
- Post the surprise inter-meeting action of the RBI, expectations of further front-loaded repo rate hikes over the coming few meetings have increased. As against our earlier base case of India's policy repo topping around 5%, we now foresee a peak repo rate of 5.5% over the next 18 months. A restrictive Fed policy which can take the Fed's benchmark rate above 2% - 3% neutral remains a risk and this would warrant a 50 bps increase in the repo rate to our base case forecast
- Indian rates markets have largely factored in the tail risk from a potentially restrictive Fed policy and we do not foresee the need to materially change our outlook and return expectations
Which debt funds does the fund house recommend?
- Actively managed strategies are better poised to navigate the expected volatility over the coming few years
- Front-end (2-4 year) bonds from an accrual perspective and we see relative value in sovereign bonds as compared to high grade credit
- ITI Dynamic Bond Fund for investors with a medium to long term perspective and wanting to take advantage of market volatility
