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    Debt mutual fund managers react to RBI policy


    The repo rate now stands at 5.15 per cent, the lowest since March 2010.

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    The Monetary Policy Committee of the RBI has cut the repo rate by 25 bps in its fourth bi-monthly policy review. The repo rate now stands at 5.15 per cent, the lowest since March 2010. This was the fifth cut in a row, taking cumulative repo cuts starting February 2019 to 135bps. The MPC also decided to continue with an accommodative stance. Here's what the debt mutual fund managers have to say about it.

    Avnish Jain, Head - Fixed Income, Canara Robeco AMC
    Markets sold off post policy, as markets had already discounted a 25 bps rate cut. Some market participants were expecting a steeper rate cut of 40 bps (post an unconventional 35 bps cut in Aug’19 policy), but their hopes were belied. Further the Governor himself voted for 25 bps rate cut. The market is well aware of fiscal risks emanating from steep corporate tax rate cuts and drop in GST tax collections. Despite the bonanza of Rs 1.72 lakh crore in form of RBI dividend, the general consensus is of slippage of 0.5-0.7 per cent in the fiscal deficit. While the government has not increased the borrowing amount for 2HFY2020, there is indication that they would review the situation in Dec’19. For that reason, the current borrowing calendar finishes in Jan’20, leaving Feb/Mar’20 for the extra borrowing required. This uncertainty is likely to keep markets on tender-hooks.

    Inflation in 2nd half is also likely to creep towards 4 per cent (on back of higher food prices as well as oil price volatility), which may pressure bond markets. With liquidity remaining in excess, hopes of open market purchases have further dwindled. We expect 10Y (new) to remain in range of 6.40-6.60 per cent in near term with upward bias.
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    Murthy Nagarajan, Head-Fixed Income, Tata Mutual Fund
    RBI revised its GDP growth forecast for the current year from 6.9 per cent to 6.1 per cent. It also maintained the first quarter of 2020 CPI inflation forecast to 3.6 per cent. The debt market was disappointed with the rate cut of 25 basis points in repo and reverse repo rates. Purchase Manager Index (PMI) data in developed market has gone below 50 which indicates contraction in economic activity. As the monsoon has been good and oil prices are below 60 dollars per barrel. Growth impulse in the domestic economy continues to be weak as credit market continues to be broken, corporate bond and G-sec spread continues to widen. There is little chance of CPI inflation going up and sustaining above 4 per cent due to these reasons. RBI has maintained it will continue with its accommodative monetary policy as long as CPI inflation remains below 4 per cent levels. We feel RBI may cut rates in the coming months by another 50 basis points as both domestic and international growth is weak and inflation expectations globally continues to be lower.

    Mahendra Jajoo, Head-Fixed Income, Mirae Asset Global Investments
    MPC cut key policy rates by 25 bps in line with market expectations. RBI largely retained inflation projections for next year and revised downward growth projections. In view of that, further rates cuts may be expected in forthcoming policy reviews. While money market rates eased in response, bond yields inched up slightly as traders remain apprehensive of larger than currently scheduled borrowings by government. Market will now look forward to any possible OMO purchase operations to get comfort on absorption of additional supplies if any. We expect over all bond yields to remain range bound with easing bias.

    Pankaj Pathak, Fund Manager –Fixed Income, Quantum Mutual Fund
    This policy decision is broadly in line with the market expectations though I find 25 bps cut to be inadequate given the sharp downward revision in growth from 6.9 per cent to 6.1 per cent. On the positive side the RBI has acknowledged that the continuing slowdown warrants intensified efforts thus kept the door open for further reduction in policy rates. All in all I find this policy statement reasonably dovish and expect further monetary easing in the near future.

    The Bond market is little disappointed as there was some hope of deeper rate cut in this policy itself. But I feel it’s a transitory move and bond yields will go down from current levels as market prices for more rate cuts and OMOs.

    Lakshmi Iyer, CIO (Debt) & Head Products, Kotak Mahindra AMC
    The RBI MPC voted for 25 bps repo rate cut. It also remained committed to maintaining accommodative stance that aids growth-revival to the extent needed. The tone seems tilted towards a softening bias. With the intent to maintain adequate liquidity in the banking system, bond yields could remain well anchored. This is conducive especially for short end of the yield curve. Global factors will assume centre stage now, which will determine near term movements in the yield.

    D heeraj Singh, Head of Investments & Fund Manager – Fixed Income, Taurus AMC
    Both, bond and equity markets may be slightly disappointed with the slightly lower than expected rate cut of 0.25 per cent. However, the dovish statement accompanying the policy resolution which keeps the door open for future rate reductions should act as some sort of a solace. Also, RBI placing importance on quick monetary policy transmission is also an important indication of the possible measures that the central bank may take in the near future.

    Kumaresh Ramakrishnan, CIO-Fixed Income, PGIM India Mutual Fund
    The policy reiterated the ‘accommodative stance’, while emphasizing that the easy monetary policy would continue for “as long as was necessary to revive growth”. RBI slashed the FY 20 GDP target from 6.9 per cent to 6.1 per cent. Signaling that policy cuts were not over, the Policy referred to “adequate monetary space still being available to address the growth needs."

    The extremely dovish commentary together with the assurance to maintain “adequate liquidity” to aid effective monetary transmission should in our view help short and medium term yields rally over time. This in turn should favour the short and medium term funds which invest predominantly in these securities.

    Bekxy Kuriakose, Head - Fixed Income, Principal Mutual Fund
    5 members voted in favour of 25 bps and 1 member for 40 bps. Accommodative stance also has been retained. The MPC continues to accord primacy to growth in the backdrop of the recent sharp decline as evidenced by the April to June quarter real GDP growth at 5 per cent. RBI has cut their own GDP forecast for FY20 from 6.9 per cent to 6.1 per cent, while more or less maintain their inflation forecasts. There is no commentary on the recent tax cuts or their expected impact on the government’s fiscal position.

    Gilt yields rose mildly and prices fell post announcement as the cut was on expected lines and RBI MPC did not do any aggressive cuts. Banking system liquidity remains ample. In this backdrop, as far as gilt yields are concerned, supply will be the main factor moving prices going forward. We expect money market yields to remain stable with a downward bias.

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