RBI hiked its key policy rate or repo rate by 25 bps to 8% in its third quarter review of monetary policy 2013-14. However, the central bank kept Cash Reserve Ratio (CRR) unchanged at 4%.
Repo rate is the rate at which RBI lends to banks while reverse repo is the rate RBI pays to banks to store their excess funds. CRR is an amount of funds which banks have to keep with RBI.
However, the stock markets were resilient to news as both the key indices S&P BSE Sensex shed 13.53 points and closed at 20,693 while the CNX Nifty dipped 9.60 points to 6126.
So, what should you tell your clients at this juncture? Cafemutual asked some leading fund managers about their recommendations to investors.
Santosh Kamath, CIO - Fixed Income, Franklin Templeton Investments – India
The policy took a large section of the markets by surprise and yields moved up, but the future guidance statement helped in calming the nerves. We continue to adopt a cautious stance – monetary policy actions are likely to be driven by both local as well as global factors. The focus on inflation targeting could be viewed as a positive development, as that enhances policy transparency. However, we continue to believe that higher rates alone are not a panacea for inflation and that structural issues need to be dealt through fundamental reforms. This is essential if India has to transition to a higher growth trajectory on a sustainable basis.
Notwithstanding the recent moderation in food inflation, we believe there is a need to focus on medium term trends rather than near term data points. While the high base effect might help with headline inflation data, there remains concern about food inflation and wage pressures due to indexation. RBI surveys have pointed towards entrenchment of high inflationary expectations. A lot depends on the global commodity prices and a slowdown in the Chinese economy could help. In its recent policy framework paper, the central bank appointed committee has suggested a move towards using CPI as a basis for monetary policy. Whilst there is discomfiture about the current CPI levels, the central bank comments indicate it is yet to evaluate the committee’s recommendations and finalize approach. Meanwhile, the policy statement indicates that further tightening might not take place, if inflation data comes in line with expectations. We also need to keep in mind that there is suppressed inflation in the economy as fuel prices in India are still not fully aligned to global price movement.
Markets are likely to closely follow incoming economic data in coming weeks and developments on the new policy framework. Latest news flow on divestment, spectrum auctions and public sector dividends suggests the government is likely to meet the fiscal deficit targets, despite low tax revenue growth. We continue to believe that accrual focused funds can help investors navigate the current uncertain environment. Investors with higher risk appetite and longer term horizon can look at long dated/gilt focused funds.
Vidya Bala, Head Mutual Funds, Research, FundsIndia.com
Early part of January 2014 saw 10-year gilts easing from 8.85% levels to 8.7 levels, leading to a short rally in long and medium-term gilts funds as well as income funds. Beginning this month, debt funds rallied 1.0-2.7% as a result of gilt yields coming off. With the current rate hike, debt markets may, once again, become more complacent, awaiting further cues, locally and in international markets.
Investors can consider locking into these rates through 1-year plus FMPs if they are conservative. Investing at this juncture would provide double indexation benefits as well. Others, not wanting to lock-in their money can consider short-term debt funds with a similar time frame and enjoy the same indexation benefit.
Lakshmi Iyer, Sr. Vice President and Head - Fixed Income, Kotak Mutual Fund
The RBI hiked the repo rate to 8% from 7.75% contrary to consensus view. The forward guidance however has been a tad tamer where the RBI has indicated that if the disinflationary process evolves according to this baseline projection, further policy tightening in the near term is not anticipated at this juncture. The policy measure taken today seems to set the path for disinflationary process thereby reducing the need for further rate hikes in the near term. This should augur well for the markets which has in a way got some more clarity on the likely future course of action. We expect the bond yields to consolidate at the current levels.
R. Sivakumar, Head Fixed Income, Axis MF
The RBI raised rates unexpectedly, but the bond market has taken the rate increase in its stride. The market has focused on the guidance that further rate hikes may not be required going forward. The governor indicated that if inflation falls below the indicated trajectory, the RBI may turn accommodative, that is the RBI may cut rates if inflation declines. This policy further cements the primacy of CPI inflation from the policy stand point. Historically due to the high correlation between WPI and CPI inflation, RBI found it acceptable to target WPI inflation with the expectation that CPI would follow. The past few years have shown that CPI inflation has remained persistently above WPI inflation. The RBI has therefore shifted to explicitly targeting headline CPI inflation. This is in line with the recommendation of the recent Dr Urjit Patel committee. The RBI has also accepted the committee's recommendations to follow a bimonthly cycle for policy. We expect over a period of time the RBI will implement the other recommendations of the committee too.
Yadnesh Chavan, Head of Fixed Income, Mirae Asset Global Asset Investment Management
Central bank raised rates in precautionary measure sighting the uncertainty among the emerging markets which has impacted rupee in recent week.
Recently we have seen pressure on Rupee because of the news flows on US Fed tempering and other risk aversion based correction in the emerging markets. Combined with other data points like falling growth-inflation the only reason we can sight for rate hike is pressure on currency.
As per RBI further near-term policy tightening is not anticipated. We believe going forward RBI will continue to realign its stance in response to Rupee movement and emerging growth inflation dynamics.
