In a surprise move, the Reserve Bank of India (RBI) has cut repo rate by 50 bps from 7.25% to 6.75% in its fourth bi-monthly monetary policy statement which is more than what analysts have expected. Many analysts have expected a rate cut of 25 bps.
However, RBI has kept cash reserve ratio (CRR) unchanged at 4%. Consequently, the reverse repo rate under the liquidity adjustment facility (LAF) stands adjusted to 5.75 per cent and the Marginal Standing Facility (MSF) rate and the Bank Rate to 7.75 per cent.
Repo rate is the rate at which RBI lends to banks while reverse repo is the rate RBI pays to banks to store their excess funds. CRR is an amount of funds which banks have to keep with RBI. Similarly, MSF is the penal rate at which banks can borrow money from the central bank over and above what is available to them through the LAF window. MSF, being a penal rate, is always fixed above the repo rate.
This is the fourth rate cut of this year. A few media reports suggest that this rate is the lowest repo rate in the past 4.5 years.
So, what should you tell your clients at this juncture? Cafemutual asked some leading fund managers and experts about their recommendations to investors.
S Naren, CIO, ICICI Prudential MF
We believe there was substantial scope for interest rates to come down in India as a result of developments in commodities prices across the world. Hence, a 50 bps rate cut is a step in the right direction to improve the long-term growth of the economy. Going forward the key factors required for driving growth would be Goods and Services Tax (GST), resolution of Nonperforming loans (NPL) problems and ease of doing business.
Over a period of time, we expect further moderation in interest rates from current levels and investors should continue to invest in duration with an aim to benefit from the same. On the equity side, as long as emerging market redemptions continue, Indian equities present a good investment opportunity; the fact that Foreign Institutional Investors (FIIs) are selling is a strong positive for investors to consider investing for the long term.
Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products, Kotak MF
We at Kotak AMC had expected a 50 bps rate cut for the remainder quarter of the year. Yet, the alacrity and the swiftness of the policy response by RBI has positively surprised the market. The inflation pressure is declining and the long term inflation trajectory is on the downward slope as supply bottlenecks continue to open up. This creates an enabling environment for a more accommodative policy stance in future. Moreover, with global economy increasingly seeing India as a lucrative growth spot, it will be incumbent on the government and the central banker to work in tandem to further boost opportunities. We believe that equities with 2-3 year timeframe, and duration funds with 1 year plus timeframe may provide competitive return for the investor.
Vidya Bala, Head of Mutual Funds Research at FundsIndia.com
The current rate cut is clearly a boost to the debt market. A rally caused by easing yields could lead to capital appreciation in gilts as well as corporate bonds. That means medium to long-term debt funds could gain further, even though many of them touched double-digit 1-year returns already.
For retail investors, we continue to recommend income accrual and dynamic bond funds that hold a combination of gilts as well as quality corporate bond instruments.
