Top debt fund managers react to RBI holding rates

Here’s what top debt fund managers had to say about the RBI keeping its policy rates unchanged. The banking regulator kept the repo rate unchanged at 4.00%. The reverse repo rate under the LAF remains unchanged at 3.35% and the marginal standing facility (MSF) rate and the Bank Rate at 4.25%.

“The MPC also decided to continue with the accommodative stance as long as necessary – at least during the current financial year and into the next financial year – to revive growth on a durable basis and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward,” the RBI governor said.

Bekxy Kuriakose, Head – Fixed Income, Principal Asset Management
RBI kept key rates unchanged and stance as accommodative. MPC noted that inflation is expected to remain elevated and this prevented them from cutting key rates further. RBI Governor in his live appearance once again underscored the success of measures taken since the Pandemic broke out and reiterated that Bond market conditions have evolved in an orderly manner. He assured the market that the various measures being used for stabilizing yields like gilt purchases through OMOs, OT (Operation Twist) etc will continue. The key statement which seems relevant is when he repeated that “All instruments will be used at appropriate time while ensuring ample liquidity is available to the system”. Thus we expect that soon some liquidity tightening measures may be introduced in form of term reverse repos of higher tenors or T bills or any other facility to impound liquidity. Currently the NET LAF is close to Rs 6 lakh crores and some of this liquidity may be withdrawn.

Post RBI statement, gilt yields have softened 3-7 bps as there was relief on reassurance of continuation of OMO measures.

We would be cautious of short term money market yields which pre policy had fallen to record lows even below the reverse repo rate. We expect that on introduction of liquidity tightening measures in coming days, yields mar rise in the upto 6 month segment by 10-25 bps.

Overall given the accommodative stance and RBI’s continued focus for growth revival we would advise investors to keep a balanced asset allocation with core allocation to high quality short term debt category.

Kumaresh Ramakrishnan, CIO-Fixed Income, PGIM India MF:
Today’s policy maintained status quo on all counts. Bond markets have welcomed the policy given the continuity from past policies and unchanged liquidity conditions. While sounding hopeful on growth revival, RBI sounded watchful on high and sticky inflation as constraining monetary policy for now. The MPC also raised its CPI forecasts by 100 bps over the next 2 quarters.

Lack of incremental monetary policy room, persistent sticky inflation and high absolute borrowing program together with an economic rebound lowers the odds of outperformance at the longer end of the curve.

As such we prefer the short end (1-3 year) with products such as the Low Duration, Short Duration and the mid segment (2-5 years) with products such as the Banking & PSU and the Corporate Bond as the categories that can be considered in the current environment.

Mahendra Jajoo, CIO, fixed income, Mirae Asset Management India:
In line with near consensus market view, MPC kept key policy rates unchanged and maintained accommodative stance. While the inflation projections have been revised upward, guidance is unambiguous in emphasizing need to continue to support the nascent economic recovery currently underway. In terms of market apprehension of measures to address excess liquidity that has caused money market rates to drop below the reverse repo rate, while there is no immediate direct measure announced, MPC did mention of appropriate measures at appropriate time, hinting some mop up may be forthcoming soon, though most likely non-disruptive in form. With reiteration of assurance to maintain adequate liquidity and softer interest rates well in to the next financial year, its reasonably clear that interest rates are likely to remain range bound in term. Lower bound near current levels, held by rising inflation and high fiscal deficit and higher bound held by an extremely benign central Bank.

Pankaj Pathak, Fund Manager- Fixed Income, Quantum Mutual Fund:
The status quo on policy rates was in line with the consensus expectation. Nevertheless, RBI’s commentary did brought in some cheers for the bond markets.

Despite raising its inflation and growth forecasts upward, the RBI maintained an accommodative tone and keeps growth as its priority. This seems like a right move as the economic recovery is still very fragile and even a talk of normalisation can hamper its future prospects.

Given the collapse in money market rates, there was an expectation that the RBI would announce measures to suck out excess liquidity from the banking system. However, it seems they are not in hurry to absorb the excess liquidity created due to its forex purchases. This will put further downward pressure on short term bond yields.

We expect short term bond yields to drift lower if this liquidity situation persists for longer time. Longer tenor bonds may continue to move sideways with tactical supports from RBI’s OMOs/twists. Given the wide gap between short and long maturity bond yields and a stable interest rate outlook, longer maturity bonds look attractive from accrual stand point. However investors in longer maturity bonds/funds should remain cautious of fiscal and inflation risks over medium term. In this scenario dynamic bond funds can be good option for investors with longer time frame and high risk appetite.

Investors should lower their return expectations from debt funds as the rate cutting cycle is nearing its end and potential for capital gains are limited.

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