Mutual Funds

RBI holds rates; What should debt mutual fund investors do?

The Reserve Bank of India on Wednesday held the policy rates again. Repo rate has been kept unchanged at 4.00% and the reverse repo rate at 3.35%. The decision seems to be highly influenced by the uncertainty over the impact of the ‘Omicron’ strain of the coronavirus and the rising number of cases across the globe. The Monetary policy Committee also voted to retain the accommodative stance of.

“On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today (December 8, 2021) decided to continue with the accommodative stance as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward. These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth,” Shaktikanta Das said in his address.

Many market participants expected a rate hike this time because of the concerns surrounding inflation. “I would say that the policy this time is a little surprising. We did expect a rate hike this time due to inflationary concerns. It depends on what data the RBI is looking at. However, I believe that the market movement because of this might remain range-bound. The expectation of a cumulative rate hike next time might be there among market participants. The short term bonds might be positively impacted by this,” says Akhil Mittal, Debt fund manager, Tata Mutual Fund.

Governor, Shaktikanta Das, said that the persistence of CPI inflation excluding food and fuel since June 2020 is an area of policy concern in view of input cost pressures that could rapidly be transmitted to retail inflation as demand strengthens. RBI has retained CPI inflation projection at 5.3% in 2021-22.

Debt mutual fund managers say that the policy is more dovish than expected. “RBI Policy this time is more dovish than expected. Focus is clearly on supporting growth. Fears over inflation flare up, global changes in interest rate policy, and high commodity prices have been ignored,” says Sandeep Bagla, CEO, TRUST Mutual Fund.

Debt mutual fund managers believe that this is not a good time to change strategies for debt fund investors. They believe that this policy is good for short end bonds and mutual fund schemes like short term bond funds and roll down funds with current maturity lower than 3 years.

“Investors have been credit risk averse so far. That could continue. Long bonds like 10-year and above will react more to inflationary expectations, commodity prices and global interest rates. The broad strategy should be to avoid major exposure to interest rate risk. The risk reward trade off appears to be in favor of remaining invested in Short Term Funds and roll down funds with lower than 3-year maturity,” says Sandeep Bagla.


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