The RBI today said that it will launch the much-awaited Inflation Indexed National Saving Securities (IINSSs) for retail investors in November/December 2013.
These 10-year tenor inflation index securities would be linked to the new consumer price index. Hindu undivided families (HUFs), trusts and charitable institutions would also be eligible to invest in these securities. The rate of interest on these securities would comprise a fixed rate plus inflation which would be compounded half-yearly and paid cumulatively at redemption. These securities will be distributed through banks to reach out to the masses, said RBI.
RBI has also withdrawn its special repo window for mutual funds which was introduced on July 17, 2013 to enable banks to meet the liquidity requirements of mutual funds.
These measures were announced in the second quarter monetary policy review today. As was widely expected by market participants, the RBI increased repo rate by 25 basis points to 7.75 per cent and reduced marginal standing facility (MSF) by 25 basis points to 7.75 per cent. It kept the keep cash reserve ratio (CRR) unchanged at 4 per cent.
Equity markets gave a thumbs up to RBI’s move with the S&P BSE Sensex moving up 358 points to touch 20929, just 71 points shy of reaching 21000 level.
“We advise investors to look at incremental investments in short term and ultra-short term funds on a risk reward basis. Also, given that we do not expect interest rates to rise dramatically, we would expect investors to remain invested in long duration funds,” said Lakshmi Iyer, Senior Vice President & Head (Fixed Income and Products), Kotak Mutual Fund.
R. Sivakumar, Head Fixed Income, Axis Mutual Fund said,” Investors could take exposure to short duration funds. Since the last policy announcement, long term yields have risen sharply. Compared to a level of about 8.2% in the morning of September 20, 10-year government bond yield was around 8.65% at close yesterday. In response to the policy, yields have dropped to about 8.59%, about 6 bps lower. At this level, the benchmark 10-year government bond yield is about 85 bps over the LAF repo rate – close to its long term average. Investors with a short to medium term view should look to invest in short duration funds as yields in this segment are poised to drop in the near future. Longer duration funds would outperform once inflation begins to slow allowing the RBI to cut the repo rate.”
Vidya Bala, Head - Mutual Funds Research, FundsIndia.com advised investors to avoid fresh exposure to long term gilt funds. “The MSF rate cut and measures to ease liquidity will further ease rates in the short-end of the yield curve. The latest cut together with liquidity easing measures would mean a price rally in short-term debt instruments for some more time. Debt funds with short-term maturity have rallied over 1% on an average between the last monetary policy and now and saw gains as much as 1.7% in a span of a month. While 10-year gilts fell 6 basis points to 8.58% soon after the policy was announced, this may be seen more as a relief rally. Going forward, with rate decisions hinging mainly on retail inflation, any rally in long-term gilt prices may be unlikely. It would be prudent for investors to avoid any fresh exposure to long-term gilt funds at this juncture.”
