Balanced and positive policy from the market stand point: Fund Managers

RBI’s Monetary Policy Committee (MPC) has kept the benchmark repo rate unchanged at 6.50 per cent, thereby keeping its stance at 'calibrated tightening'. Also, the reverse repo rate, as well as, the bank rate remains unchanged at 6.25 per cent and 6.75 per cent respectively.  For most fund managers it is more of a neutral delivery and highly anticipated.

“It is an overall positive move because with yields coming down, the cost of borrowing for the corporate is set to ease. And with the likelihood of the open market operation (OMO) continuing, it seems positive on the long-term basis. RBI has put up a balanced and positive policy from the market stand point,” explained Lakshmi Iyer, CIO (Debt) and Head – Products, Kotak Mutual Fund.

According to mutual fund managers, the move is good for the debt fund investors, especially for the long-term bond investor and short-term debt investors, as the market has seen the bond yield coming down at 7.44 per cent as on December 5, 2018.

The prices of fixed income securities are governed by the interest rates prevailing in the market and they are inversely proportional. So, if the interest rate increases from the current level, the price of fixed income securities decreases. Pankaj Pathak, Fund Manager - Fixed Income, Quantum Mutual Fund, said, “RBI will remain on an extended pause on policy rates and OMOs could continue for few more months. Given the increased macro-economic uncertainty, we advise investors to remain cautious about the interest rate and credit risk in their debt fund portfolio and focus on short duration (short maturity bonds) and good credit quality funds.”

Further, the fund managers believe that there won’t be any other rate hike in the remaining fiscal period of 2019. Bekxy Kuriakose, Head – Fixed Income, Principal Mutual Fund, said, “Growth forecasts have been broadly kept unchanged.  Barring any adverse movement in crude oil prices, Indian Rupee or food prices, RBI is expected to be on a pause mode for a long period. Gilt yields have fallen post today’s announcement. The ability of the government to meet the fiscal deficit target remains a key risk for the markets.”

From a medium-term perspective, fund managers at Tata mutual fund expect that they would not be surprised to see the RBI's policy stance on "calibrated tightening" to be retained through Q3 of Financial Year (FY) 2020 given the inflation trajectory in Q1-FY2020 through Q3-FY2020. However, the near-term inflation estimates through March 2019 are seen to be revised lower by ~60-80 basis points. RBI’s liquidity measures, including OMOs, continue to remain the preferable tool for infusing durable liquidity. “We expect 10-year Gsec benchmark to trade between 7.25 per cent to 7.75 per cent ranges in the near term. OMO buybacks (due to tight liquidity conditions) will keep the upside in Gsec yields limited,” said a fund manager at Tata mutual fund.