Fund managers recommend investors to invest in short to medium term funds.
In line with market expectations, Reserve Bank of India (RBI), in its second bi-monthly policy review, has kept the repo rate and CRR unchanged at 8% and 4% respectively.
However, in order to infuse capital, the central bank has reduced Statutory Liquidity Ratio (SLR) by 50 bps to 22.5%. SLR is the amount that commercial banks are required to maintain with RBI in the form of gold or securities before providing credit to customers.
Also, RBI will continue to provide liquidity under 7-day and 14-day term repos up to 0.75 per cent. Consequently, the reverse repo rate remains unchanged at 7 percent and the marginal standing facility (MSF) rate and the Bank Rate at 9 percent.
RBI Governor Raghuram Rajan in a press statement said, “Since the first bi-monthly monetary policy statement of April 2014, global activity is evolving at different speeds. A broad-based strengthening of growth is gaining traction in the US and the UK, after a moderation in the first quarter of 2014 due to adverse weather conditions. However, in the euro area, recovery is struggling to gather momentum. The pick-up in sales in Japan in anticipation of the consumption tax hike has been followed by a sharp fall in consumer spending. Growth in coming quarters will depend on all three “arrows” being put in play. Structural constraints continue to impede growth prospects in emerging market economies (EMEs), with concerns about the slowdown in China as its economy rebalances. Financial markets across the world still remain vulnerable to news about the impending normalisation of interest rates in some developed economies, even as some valuations appear frothy.”
Rahul Goswami, CIO - Fixed Income, ICICI Prudential AMC
We continue to believe that bond yields are likely to remain range-bound with a downward bias, in the medium term. Fiscal consolidation, continued improvement in current account and moderating CPI could provide RBI, the space for monetary easing and lower interest rates. We continue to remain positive on interest rates, and in next 4-6 quarters, there could be about 100 bps decline in bond yields. In light of this, we believe that current levels of about 8.75% on 10-yr bond yields are attractive to invest and we continue to advocate fixed income investors to participate in the medium term and long term duration funds from the ICICI Prudential stable.
Vidya Bala, Head, Mutual Fund Research, FundsIndia.com
We believe that the bond market may be ripe for a rally over an 18-month plus time frame if inflation does not stray away from the RBI’s comfort zone. While this may mean taking positions in long-dated funds, we believe that retail investors should be strictly guided by their time frame of investment, when it comes to investment in debt funds to avoid burning their fingers as was the case in mid-2013.
For those with a less than 1 year investment time frame, ultra-short term and short-term debt funds would provide sufficient returns without taking undue risks or enduring volatility.
For investors building a long-term portfolio or those with a time frame of 2 years and above, income funds that have a mix of corporate and government bonds would provide sufficient opportunity to ride any price rally in bonds when rates fall. However, such a holding would mean flat returns in the short to medium term and hence not suitable for those seeking instant gratification.
Alok Sahoo, Head Fixed Income, Baroda Pioneer AMC
The ultra-short term rates have softened in May after the election outcome. The 3 month and 1 year CD rates have come down by 40 bps and 20 bps respectively as compared to end of April 2014. We expect the ultra-short term rates to remain volatile with hardening bias due to higher supply of CD and tight liquidity due to advance tax out flows. We expect long end of the curve to remain volatile with softening bias due to stable government, neutral to dovish stance of RBI, lower fiscal and current account deficit and easing inflation. The 10-year GOI yield is likely to trade in the range of 8.25%-8.75% in next 6 to 9 months.
