RBI policy: status-quo for debt mutual fund investors?
The Reserve Bank of India (RBI) on Friday, cut key policy rates by 25 basis points for the fifth time this year.
The RBI has cut the policy repo rate, the rate at which it lends money to banks, by 25 basis points to 5.15 per cent.
"The rate cut of 25 bps is in line with the expectations of the market. It is a positive move since RBI has shown support to the market till the growth revives. However, the debt market is still nervous because of the overhang of borrowings. I believe the market will remain like that for sometime and will expect RBI to come up with open market operations aside of the rate cut," says Mahendra Jajoo, Head - Fixed Income, Mirae Asset. "For debt mutual fund investors, I think the strategy remains the same- stick to short to medium term funds," he adds.
The policy review has come at a time when the money market participants are nervous about how the government is going to bridge the huge revenue gap due to the recently announced corporate tax rate cuts and whether the government may be able to stick to its borrowing plan for the second half of the financial year.
The finance minister Nirmala Sitharaman announced fiscal stimulus of around Rs 1.45 lakh crore, including reduction in corporate tax to 22 per cent from 30 per cent and cutting taxes for new manufacturing companies to 15 per cent, in an effort to boost the sagging economic growth. However, the government's claim of sticking to its gross borrowing target of Rs 2.68 lakh crore for the second half of the financial year has raised serious doubts in the money market.
Reflecting the nervousness in the money market, the benchmark 10-year government bond yield has risen to 6.61 per cent from a low of 6.33 per cent in July.
"As we mentioned earlier post policy note, the extent of rate cuts by the RBI depends on their outlook on the GDP growth estimate. In August, the monetary policy committee (MPC) of the RBI reduced its growth forecast to 6.8 per cent for FY20 from 7 per cent earlier which was indeed disappointing for those expecting large rate cuts due to growth slowdown. The RBI governor had sounded very growth focused; the accommodative policy stance is clearly growth focused but their forecasts do not share the pessimism," says Arvind Chari of Quantum Mutual Fund.
Against this uncertain scenario, most mutual fund managers and advisors are sticking to their original advice since the last year or so: stick to short duration scheme; do not get adventurous and rush to long-term bond funds on hopes of pocketing higher double-digit returns.
"There is not much of uncertainty but I believe that the longer end of bonds might not react very positively. The short term bonds will be in a good space because of liquidity. The RBI remains in the accommodative mode to help the growth and liquidity which is positive for the market. Investors should stick to short duration bond funds," says Lakshmi Iyer, CIO, Fixed Income & Head, Products, Kotak Mutual Fund.