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Here's how top mutual fund managers reacted to RBI rate cut

The Reserve Bank of India's (RBI) monetary policy committee trimmed key policy rate by 75 basis points to 4.40 per cent.

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Last Updated: Mar 27, 2020, 03.46 PM IST
The Reserve Bank of India's (RBI) monetary policy committee trimmed key policy rate by 75 basis points to 4.40 per cent. Here's how top mutual fund managers reacted to Reserve Bank of India's move:

A. Balasubramanian, MD&CEO, Aditya Birla Sun Life AMC:
"TLTRO facility will help in removing the pressure in short term rate. All investment grade bonds are covered this means all bonds above BBB credit can avail this facility and more participation will come in short term rate. Reduction in reverse repo means Banks will have to cut rates further and will help in transmission of rates. Overall cost of borrowing for individuals and companies can drop sharply. Allowing delay in interest payment or principle repayment will ease the pressure on Banks and their NPA and consequently rating action.

Mutual fund debt schemes volatility should be behind us and would become attractive for investments given the drop in rates and provision of TLTRO. These kind of facilities will help stabilise bond market fluctuations. In the same way for equity, trasmission of rates may happen at faster phase however demand for credit will depend upon incremental growth in the economy. Investors should consider Mutual fund fixed income schemes (Low Duration Fund, Banking & PSU Debt Fund, Corporate Bond Fund) to invest".

Kumaresh Ramakrishnan, CIO Fixed Income, PGIM India Mutual Fund:
RBI today came out with a slew of well planned and targeted measures aimed at soothing the financial and credit markets and streamlining liquidity flow.

The MPC met a week before schedule and took key measures including a 75 bps cut in repo (through a 4-2 majority decision), 90 bps cut in reverse repo, slashing the CRR by 100 bps and announcing targeted long term repo operations of 1 lakh crores for corporate bonds besides raising MSF liquidity lines for banks by an additional 1 pc of their deposits.

Cumulatively these measures should release INR 3.75 cr into the system which is already surplus with liquidity. These steps will lead to a decline in lending rates, declogging credit flow at least to the mid and higher rated entities for now and keep the money markets well lubricated.

Post the announcement, the short end has outperformed, with the money market rates down by over 200 bps while mid and longer end bonds are down by 125-150 bps. G secs reacted initially but gave up gains on fears of expected expansion to the Govt balance sheet and ability of the market to absorb the incremental supply.

We expect the curve to steepen in the coming days with the front end we’ll supported by a surfeit of liquidity while the long end bearing the impact of fiscal expansion.

Overall, a comprehensive package for now and coming in the back of govt announcement yesterday, should help to tide over short term uncertainties.

Arvind Chari - Head - Fixed Income & Alternatives, Quantum Advisors :
The breadth of the measures announced today will have a significant impact on the bond markets, especially on corporate bonds, money markets and eventually on bank credit. The reverse repo rate now at 4% (cut by 90 bps or 0.9%) becomes the effective overnight rate and all market yields, be it the overnight rate, the money market rates, corporate bond and government bonds will use the reverse repo rate as base pricing.

The cut in Cash Reserve Ratio or CRR should boost bank liquidity and increase bank margins but should also lead to drop in lending rates. The real out of the box move though was the Targeted Long Term Repo Operations (T-LTRO), whereby banks will be forced to buy upto 3 year corporate bonds. We had seen, in the last two weeks, a very sharp increase in market yields of even high rated PSU corporate bonds indicative of market dislocation and risk. This T-LTRO will help getting back liquidity into the corporate bond markets and will also lead to a fall in short term bond yields of AAA corporate.

We continue to advise investors in debt funds to choose funds which focus on keeping credit risks low and have liquid portfolios. India entered COVID-19 pandemic with a weak economic background and the impact of COVID-19 on companies and the economy is likely to be severe depending on how long the lock-down continues.

The overall situation remains uncertain and despite these overwhelming measures by the RBI, we expect markets to remain volatile. As an investor, if you are uncomfortable with market volatility in these times, we would even advise you to choose a safe bank deposit to park your money.

R.Sivakumar, Head - Fixed Income, Axis AMC:
As widely expected, and outlined in our earlier notes, there was undue stress in the debt markets which led to spikes in yields over the last month. This has now been corrected by the RBI. We continue to retain our positioning across all debt products and continue to favor high quality short term strategies at this juncture. Repo cut will have an immediate and significant impact on the market, especially commercial paper and corporate bonds. Rates have seen normalization of 100-250 bps today. G-Secs have also reacted with the benchmark 10 year falling below 6.1%. • Moratoriums should not have a major impact. However, this will disproportionately help Cash flow affected businesses to get relief, as targeted.

Also Read

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Will RBI rate cut bring cheer to debt mutual fund investors?

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