Fund managers expect further rate cut of 50 basis points within a year.
In a surprise move, the RBI today slashed repo rate by 25 basis points to 7.50%, the second such cut by the central bank in less than two months. The central bank had cut repo rate by 25 basis points in January. The cash reserve ratio (CRR) has been kept unchanged at 4%. “Softer readings on inflation are expected to come in through the first half of 2015-16 before firming up to below 6% in the second half,” RBI Governor Raghuram Rajan said in a press statement.
Here’s what fund managers have to say about the impact of rate cut on the bond market.
Lakshmi Iyer, Chief Investment Officer (Debt), Kotak Mutual Fund
The RBI has cut policy rate by 25 bps to 7.50%. The need to act outside the policy seems to be guided by the faster pace of disinflation as also the government’s intent to adhere to overall fiscal consolidation. It also is pre-emptive given the low credit off take levels in the economy. We expect the gradual pace of monetary easing to continue and expect additional 50 bps rate easing over the next 1 year. Investors can look at investing in duration funds like gilt and bond funds.
Bekxy Kuriakose, Head – Fixed Income, Principal PnB Asset Management
The immediate market reaction has been positive with yields falling by 8-13 basis points across the G-Sec curve. Money market rates have fallen by 20-25 bps. We expect another 25 basis points rate cut in the next couple of months if disinflationary forces continue to play out as expected and CPI inflation remains benign. This should support long end gilt and bond prices positively. On the other hand, if oil prices rise sharply or global bond yields led by US rise then it can lead to a pause. For markets the next three important events during the month will be inflation release, results of government’s gilt switch programme and release of first half borrowing calendar. Liquidity will remain tight during the month and this may cause volatility in short term/money market rates.
Sanjay Shah, Head, Fixed Income HSBC Global Asset Management, India
The cut in the repo rate comes as applause to credible pro-growth budget presented by the Finance Minister. The higher deficit number as percentage of GDP is mitigated by prudent numbers in the Budget, transfer of larger funds to states, which will reduce the states’ fiscal deficit and explicit mandate to RBI to manage inflation. This commitment to improvement in quality of adjustment is seen to be compensating the delay in fiscal consolidation. Concerns on weak economic growth domestically along with the global trend towards easing of interest rates have been driving factors for the repo cut.
