Fund managers recommend investors to take exposure to short-term and accrual funds.
The Reserve Bank of India, in its first bi-monthly monetary policy announcement, kept repo rate and CRR unchanged at 8% and 4% respectively which was in line with market expectations.
It increased the liquidity provided under 7-day and 14-day term repos from 0.5 per cent to 0.75 per cent, and decreased the liquidity provided under overnight repos under the LAF from 0.5 per cent to 0.25 per cent with immediate effect.
RBI Governor Raghuram Rajan in a press statement said that the central bank may not go for further rate hikes going ahead. “Our policy stance is firmly focused on keeping the economy on a disinflationary glide path that is intended to hit 8 per cent CPI inflation by January 2015 and 6 per cent by January 2016. At the current juncture, it is appropriate to hold the policy rate, while allowing the rate increases undertaken during September 2013 through January 2014 to work their way through the economy. Furthermore, if inflation continues along the intended glide path, further policy tightening in the near term is not anticipated at this juncture.”
So, what should you tell your clients at this juncture? Cafemutual asked some leading fund managers about their recommendations to investors.
Dhawal Dalal, EVP and Head- Fixed Income, DSP BlackRock Investment Managers
The
policy is on expected lines and we do not expect any major impact on the
fixed income market. The reduction in the amount available under LAF borrowing
may result in a marginal increase in borrowing costs. However, there are
sufficient maturities and government spending. Based on that, we do not expect
any material impact on the overall funding cost. Today’s announcement is in
line with the development of term money market and reduction of reliance on
overnight funding."
The announcement on banks providing partial credit enhancement is a step in the right direction. The investment appetite will depend on nature of the transaction and other covenants & terms but in general we are happy with the announcement of banks’ partial credit enhancement facility."
Lakshmi Iyer, Chief Investment Officer (Debt) & Head, Products, Kotak Mutual Fund
There
was no surprise in RBI’s monetary policy with respect to the repo rate. The
central banker continues to remain wary of the CPI headline inflation,
especially with respect to the vegetable prices, which have declined on the yoy
basis in the recent past. The Central banker may be of the view that
seasonality could be in play here and therefore further monitoring of inflation
for more conclusive proof might be needed before any policy change. Having said
that, we believe that the inflation and rate peaks might be behind us; and we
may see a slow transition towards a more stable stance in the months ahead.
Rahul Goswami, CIO, Fixed Income, ICICI Prudential Mutual Fund
In the bimonthly monetary policy stance, the RBI kept repo rate
unchanged at 8 per cent, consequently reverse repo and MSF rates also remained
unchanged at 7% and 9% respectively. There was marginal shift in liquidity
support provided by RBI to the system from Liquidity Adjustment Facility (LAF)
to Term Repo. RBI lowered cap on overnight repo under LAF from 0.50% of NDTL of
banking system to 0.25%; compensating by increase in term repo for same amount
under 7 day and 14 day repo which has been increased to 0.50% to 0.75%. These adjustments will not change the
overall liquidity situation, but the cost of liquidity could go up marginally
and will be the function of market demand for money rather than at current repo
rate of 8%.
For the FY2015, RBI expects the GDP growth to remain muted in
the range of 5-6% and have kept CPI target unchanged at 8% by Jan’2015. Though
CPI inflation is likely to moderate till the last quarter of the year 2015, RBI
has highlighted the upside risks. Domestically, real GDP growth continued to be
modest in Q3 of 2013-14, with some strengthening in Services but the drag
continuing on Industrial activity. To our understanding RBI will keep the
stance cautious and wait for June’2014 policy to get more information and
clarity on uncertainties around elections and monsoon for further direction on
the monetary policy.
However to us, as the trade deficit remaining low and current account deficit contained within 2 per cent of GDP, we maintain positive bias on interest rates and strongly recommend investments in long duration products like Income fund and gilt fund.
Santosh Kamath, CIO - Fixed Income, Franklin Templeton Investments - India
Although wholesale price index (WPI) inflation has edged towards RBI’s comfort zone of 5-5.5%, headline and core CPI inflation still remain at elevated levels (near 8%). Also, in an election year, dole outs might end up in fiscal pressures and increased consumption that could be inflationary in nature. We need to also keep in mind that fuel prices in India are still not fully aligned to global price movement, and there is seasonality in vegetable prices. These risks could keep policy rates at current elevated levels for an extended period of time. We therefore need to look at medium term trends rather than near term data points.
We also have a large government borrowing calendar for the upcoming fiscal year, with around 60% of the borrowing scheduled in the first half of the fiscal. Due to this large supply of government paper expected by the markets, government bond yields have not witnessed a drop commensurate to the recent sharp moderation in inflation. On the macro front, although things have improved considerably on the twin-deficit front, economic growth and industrial activity still remains quite sluggish. As a result, we continue to remain cautious and expect better visibility of interest rate direction in the coming months, depending on incoming data. Meanwhile, on the political front, a stable coalition government will be positive for bond markets.
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 could look at long dated/gilt focused funds.
Dr. Renu Pothen, Research Head, Investment Advisory Division, Fundsupermart
We have been informing our investors that the debt market is
going to be in a volatile phase as the policy stance of the RBI has not been
too optimistic about easing of rates. This inference has been drawn from the
policy documents and the observations that we have made after listening to Dr.
Rajan’s statements at various forums. Hence, in this scenario we continue to be
positive on short term funds for a one-year time horizon and dynamic bond funds,
if the holding period is more than a year.
The RBI’s ‘gliding path’ approach to disinflation means that we may not be able to expect rate cuts any time soon given the elevated prices of vegetables, concerns over monsoon and high core inflation. The RBI has a CPI target of 8% by January 2015 and 6% by January 2016.
That means bond markets do not have too many reasons to fluctuate save for marginal movements. That said, lower availability of liquidity in the overnight call market could mean some return opportunities in liquid funds. But this may not be significant. Also, higher tapping of 14-day term repos would influence rates of 1-month CDs. It is noteworthy that CD and CP rates have been on the decline, triggering some price rally.
Investors would do well to remain with short-term funds that could provide sufficient opportunities at this juncture. Longer-dated bonds have not received any signal from the policy, for any kind of price rally, and may not in the near future.