Leading fund managers share their perspective on the impact of RBI’s mid quarter policy outcome.
RBI kept its key policy rates – repo and reverse repo unchanged in its mid quarter policy review despite high inflation. Read on to find out what leading fund managers are advising investors.
Arvind Chari – Head - Fixed Income & Alternatives, Quantum Advisors
We now do not see the new 10 year bond yield going above the 9% mark. The absence of any changes in the liquidity facilities (specifically in Term Repo) means that tactical OMOs remain a possibility. From a liquidity perspective, this tactical need for OMOs could arise if government cash surplus balance remains above Rs. 500 billion. This is likely as even last year, the government balance averaged above Rs. 500 billion post the December Advance tax payment till March, as they cut spending.
As per our liquidity estimates, we expect system liquidity to worsen above Rs. 1.5 trillion and given that the current non-MSF liquidity facilities add up INR 1.35 trillion; there could be need for some more liquidity provisions to ensure that the overnight rates remain below the MSF rate of 8.75%. If this excess liquidity provision happens through OMOs; then long bond markets would be even more supported.
R. Sivakumar, Head Fixed Income, Axis MF
Over the past few weeks, the repo rate rather than the MSF rate has been the operative overnight rate. With the RBI standing still on the repo rate, money market and short term rates are likely to continue to remain soft going forward. Very short term money market yields (2-3 months) fell by about 20 bps following the announcement of the policy.
Long term yields have risen sharply over the last three months. Compared to a level of about 8.2% in the morning of September 20, 10-year government bond yield (previous benchmark bond) has been trading close to 9.25%. The new benchmark bond was at 8.9% before today’s policy announcement. In response to the policy, yields have dropped by about 10 basis points to 8.8%. At this level, the benchmark yield is about 100 bps over the LAF repo rate – above its long term average.
We believe today’s statement represents a change in RBI’s stance towards further increases in the repo rate. As long as inflation behaves in line with expectation, we are unlikely to see further rate increases. This should allow the long bond to rally and yields to drop over a period of time.
Investors with a short to medium term view should look to invest in short duration funds. With a medium to longer term, investors should look to invest in longer duration funds as yields are likely to fall as the market prices in a change in stance of the central bank.
Santosh Kamath, CIO - Fixed Income, Franklin Templeton Investments - India
A large section of the market was expecting a rate hike at today’s meeting and has reacted positively to the bank’s decision to maintain status quo. Looking ahead, the outlook for policy remains uncertain, given the conflicting inflation and growth trajectories, and tough external environment (read moderate global growth and prospects of Fed tapering). Over the near term, bond yields will be driven by global news flow, in particular US FOMC decision, and local economic data. Investors also await clarity on the new monetary policy framework to be unveiled by end-December. Liquidity conditions are expected to remain comfortable over the near term. Fiscal deficit data will be closely monitored in coming months and any negative surprise is expected to weigh on long-bond yields. Against the current macro-economic backdrop, we continue to see merit in investing in funds focused on the shorter end of the curve and/or accruals. Investors with a medium to long term horizon and high risk appetite can consider funds with exposure to long dated bonds/gilts.
Vidya Bala, Head - Mutual Funds Research, FundsIndia.com
While the ‘no change’ stance provided some relief for long-dated gilts, investors may view this more as a relief rally. Given the rate uncertainty, there could be little trigger for gilt yields to come off sharply.
More importantly, there would be supply of papers coming up over the next 5 weeks; that will likely prevent any big price rally on long-dated gilts. Besides, any open market operation (OMOs) at this stage appears unlikely, given the very comfortable liquidity position in the banking and debt market.
Investors, though, will continue to see softening of yields of short-term instruments up to 1-year treasury bills, thus triggering a price rally.
For mutual fund investors, ultra short-term and short-term debt funds therefore continue to be a more predictable option for appreciation at this point.
Long-term debt funds, especially gilt funds, which took a 0.3% dip over the last week, may recoup their losses in today’s relief rally but may find few triggers to fall for a more meaningful rally. A hold strategy on long-term debt funds is warranted until any further rate move by the RBI becomes apparent.
