Fund managers recommend investors to invest in medium term income funds.
Reserve Bank of India (RBI), in its third 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%. 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 second bi-monthly monetary policy statement of June 2014, global economic activity has been picking up at a modest space from a sharp slowdown in Q1. Investor risk appetite has buoyed financial markets, partly drawing strength from assurances of continuing monetary policy support in industrial countries. Portfolio flows to emerging market economies (EMEs) have risen strongly. This implies, however, that EMEs remain vulnerable to changes in investor risk appetite driven by any reassessment of the future path of US monetary policy or possible escalation of geopolitical tensions.”
Rahul Goswami, Chief Investment Officer– Fixed Income, ICICI Prudential AMC
RBI has acknowledged the moderation in retail inflation, indicating that broad based moderation is accompanied by deceleration in the momentum as well. We expect the CPI inflation coming much lower than RBI’s expectation of 8%, panning out closer to 7.5% by Jan 2015. On the growth projections, we continue to believe that there is high probability of GDP close to 5.50%, with somewhat downside risk because of lower monsoon impacting agricultural production.
Our medium term expectation on moderation of interest rates continue to be strong, and this comes from the view that CAD will remain moderated at less than 2% of GDP and CPI inflation coming below RBI target of 6% by Jan'2016, thereby we continue to be believe that long-term duration funds are good investments to buy for an investment horizon of medium to long term.
Vidya Bala, Head - Mutual Funds Research, FundsIndia.com
The bond markets remained somewhat nervous post release of the policy statement. The 8.4% 2024 G-Sec yields rose 0.78%, perhaps sensing some hawkish tones. That said, rates are likely to remain in a range of 20-30 basis points from the current 8.55%.
The reduction in HTM was also not viewed too kindly by stock markets as banking stocks fell. Lower HTM would expose banks’ investments to the price vagaries (as they have to be marked to market).
For investors in debt funds, no change in their strategy towards their investments would be required at this juncture. It is noteworthy that yields of short-term medium term maturity instruments have already come off from a year ago. This has resulted in double digit gains in quite a few short-term debt funds as well as income funds over a 1-year period. A hold strategy would be ideal on these funds, if an investor’s requirement for funds is more than a year away.
Kunal Shah, Fund Manager - Debt, Kotak Mahindra Old Mutual Life Insurance
We expect current disinflation process to continue and core inflation to moderate further however sharp fall is unlikely in short-term given weak start of monsoon. Bond yields will initially inch up however should continue to trade in the narrow range in future till the time inflation actually drops. In medium term as inflation drops and sustains at lower levels yields will drop along with drop in policy rates.
