Fund managers recommend investors to invest in liquid and ultra-short term debt funds.
With RBI’s recent move to cut the Marginal Standing Facility (MSF) rate by 50 bps from 9.5% to 9%, returns on short term and ultra-short debt funds havegone up. Fund officials believe that the rally wouldcontinue at least for a week until the release of WPI, CPI quarterly data and the Fed’s decision on quantitative easing.
MSF is the rate at which banks borrow funds from central bank overnight to meet short term liquidity crunch.
RBI said, "It has been decided to reduce the marginal standing facility (MSF) rate by a further 50 basis points from 9.5 per cent to 9 per cent with immediate effect." In September, RBI Governor RaghuramRajan had reduced MSF by 75 bps and increased the repo rate by 25 bps during the mid-quarter policy review against the widely expected belief that it will keep the rates unchanged.
The stock markets reacted positively to the news with both the S&P BSE SensexandCNX Nifty posting gains.Also, till the time of writing, the rupee held up at Rs 61.79 as against a dollar.
Earlier, on July 15, the debt market was spooked as itgave negative returns when RBI had hiked MSF by 200 basis points to 10.25 % to curtail the fall of rupee.
KillolPandya, Senior Fund Manager – Debt, LIC Nomura MF, says, “At this juncture, liquid and ultra-short term debt funds which typically invest in money market and short term debt instruments will give decent returns.” Pandyawas confident that the RBI would maintain the standard difference of 100 bps between repo rate and MSF after reviewing CPI and WPI data for the second quarter ended in September.
“The cut came after a review of evolving liquidity conditions and global market cues. We are strongly recommending our investors to reduce exposure in dynamic bond funds and increase their holdings in liquid and short term income funds,” says a fund manager (fixed income) of a fund house.
Suresh
Soni, CEO, DWS MF believes that RBI is trying to normalize the difference
between MSF and repo rate which was disturbed due to sharp volatility in rupee.
He recommends increasing exposure in short and medium term debt funds with the
tenure of 1 – 5 years at this juncture.
Lakshmi Iyer, Head - Fixed Income and Products, Kotal MF, says “Cut in MSF rate is akin to cut in benchmark rates as MSF was the operational rate. Hence this would be positive for the yields which would likely benefit short term debt funds as well. Given that there could be further reductions in MSF, the shorter end of the yield curve would continue to remain well bid. We therefore continue to recommend an overweight positioning ultra-short and short term funds. Investors should continue to stay invested in long duration funds and look to enter when yields rise.”
