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RBI took everyone by surprise in May by raising repo rates by 40 bps and cash reserve ratio by 50 bps. Soon after the hike, RBI Governor Shaktikanta Das made it amply clear that the central bank will raise the rates further in June. Moreover, RBI is also set to revise inflation forecast this month.
The sudden rate hike caused a lot of pain for debt markets as there was a sell-off across the curve. How will the markets react to further rate hikes and which debt fund category is best suited for your clients?
Let’s hear what fund managers have to say.
Akhil Mittal, Senior Fund Manager, Tata Mutual Fund
— RBI's surprise rate hike in May resulted in sharp volatility in debt markets. Markets came under tremendous stress and witnessed lot of selling pressure during most part of the month.
— Considering that inflation has remained above RBI's comfort level for some time now, the central bank is likely to move back to pre-covid repo rate regime and thereafter do calibrated tightening of liquidity.
— While the short-term bonds have priced in the steep rate hikes, the 10-year g-sec will likely to go up to 7.50% in the near term.
Avnish Jain, Head – fixed income, Canara Robeco Mutual Fund
— Markets are pricing in back-to-back rate hikes with expectation of repo rate rising to 5.15%. By the end of FY 2023, the rate may go up to 5.5-6%.
— RBI may not take an aggressive approach towards rake hikes as local demand is still recovering. Also, because RBI's measures may not have much impact on inflation as it is largely driven by global factors.
— Since the start of 2022, 10-year g-sec rates have risen by 100 bps to around 7.35%. Going forward, the rates may remain in the range of 7.3% to 7.7%.
Devang Shah - Co Head Fixed income - Axis Mutual Fund
— The surprise rate hike in May 2022 may have created a bit of a panic, but RBI has taken the right path. Instead of doing large rate hikes, the central bank chose to spread it out.
— It is likely that the market is pricing a couple of more rate hikes amounting to 75-100 basis points in next 2 policies and some more liquidity tightening measures may be seen.
— Markets may continue to trade in a range unless RBI springs a surprise. We expect 10-year G-sec to trade in the 7.4 to 7.6 range.
What to recommend
Akhil Mittal
The priority should be to conserve capital and stay liquid. And hence, investors should look at products with less than one-year maturity.
Avnish Jain
Short term rates have corrected a lot with 3-year sovereign bonds now offering close to 7% yield. These are attractive rates from long term perspective and investors can look at short to medium term funds from a three-year perspective.
Devang Shah
— Investors should continue to avoid long term debt funds as a large supply of government bonds can lead to volatility in long bond yields in near term.
— A lot of negatives and curve flattening has already happened and hence short-term bond funds/ target maturity funds (2026/2027) can now be looked at as a potential investment option for medium term over next 2 monetary policies.
