Experts advise investors to invest in medium and high duration funds.
In its sixth bi-monthly monetary policy, the Reserve Bank of India slashed the statutory liquidity ratio (SLR) by 50 basis points from 22% to 21.50%. The central bank kept repo rate and cash reserve ratio (CRR) unchanged at 7.75% and 4% respectively. The reverse repo rate was also kept unchanged at 6.75%.
Cafemutual asked fund managers for their advice.
Rahul Goswami, Chief Investment Officer– Fixed Income, ICICI Prudential AMC
In the FY2015-16, we expect CPI inflation to be close to 5.25% with a downward bias which leaves enough scope for RBI to bring down rates close to 7% in the next 2-3 quarters.
Going forward, a likely improvement on the fiscal front and a muted inflation rate could lead the direction towards an interest rate cut along with a pass through effect from the recent decline in commodity prices.
In light of these improving macro-fundamentals, we believe there is potential for interest rates to trend further downwards by 50 bps, over the next three months. For debt mutual fund investors, we continue to recommend medium and high duration funds to our investors, with medium-term funds expected to offer a better risk-reward opportunity.
Santosh Kamath, Managing Director - Local Asset Management, Fixed Income, Franklin Templeton Investments, India
Despite the cheer in the fixed income markets, investors need to also take cognizance of certain risks that prevail, and be watchful of how developments shape up on these factors. One key risk is the strength in the US economy, and strength in the US dollar, coupled with rising expectations of a Fed rate hike. This could result in some flight of capital flows back to the US—thereby putting pressure on emerging market currencies (including the Indian rupee), which could again lead to some volatility in the domestic bond market. Another risk that looms is any intermittent disruption in foreign inflows. Considering the copious volume of foreign inflows in 2014, any disruption or reversal of flows in the short term can once again put pressure on the currency and lead to some volatility in the bond markets.
From an investment perspective, with yields still remaining elevated at the shorter end and with the credit environment improving, we continue to remain positive on corporate bonds and accrual strategies. Duration strategies also continue to be favorably placed for 2015, with interest rates poised to come down further.
Murthy Nagarajan, Head -Fixed Income, Quantum AMC
We believe that RBI is not so much fixated on the fiscal deficit/GDP number as on looking at the quality of fiscal adjustment on increasing investments/ supply side response and also clarity on taxation.
We thus maintain our expectation of a rate cut post a sound budget. And possibly another 25 bps cut in the June-September quarter post clarity on good monsoons.
Markets though will take the lack of a clear guidance in today’s policy release as a sign of uncertainty on the future rate trajectory. Also the removal of the reference to inter-meeting rate changes, would mean that the possibility of the next rate action will be pushed back to the next scheduled policy date of April 7, 2015.
We believe that one should take any bond sell-offs as an opportunity to add duration to play the rate cycle for the next 6-12 months.
Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products, Kotak Mutual Fund
RBI chose to keep the repo and the CRR unchanged, while it slashed the SLR by 50 bps. The action is indicative that the central banker is communicating its softening stance but would defer its rate action to post fiscal deficit numbers for FY16. RBI has stated it explicitly that fiscal consolidation and disinflationary pressure would be the key factor for determining the policy. Against this backdrop, the Union budget and the borrowing figures become increasingly important from the market viewpoint to determine the course and the pace of the rate cuts in the time ahead. Duration funds seem better placed to tap this evolving environment.
Bekxy Kuriakose, Head – Fixed Income, Principal Mutual Fund
Gilt yields have risen post policy probably on disappointment of no rate cut, paring of heavy positions taken prior to policy and SLR cut (which could imply lower demand for gilts from banks).
Overall, we are still in a rate easing cycle and we continue to expect further easing in repo/reverse repo by 25-50 bps in the next six months.
