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Top debt fund managers react to RBI policy

RBI kept the policy rates unchanged in the bi-monthly MPC meet today. Debt mutual fund managers say the move is in line with the market expectations.

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Last Updated: Feb 07, 2020, 09.47 AM IST
Here's what top debt fund managers had to say about the RBI keeping its policy rates unchanged. The banking regulator kept the repo rate unchanged at 5.15% to maintain the dynamics between inflation and revival of growth.

Mahendra Jajoo, head-fixed income, Mirae Asset:
The markets expected RBI to continue with a pause this time. An accommodative stance keeps expectations of more rate cuts alive. However, we shouldn’t expect as many rate cuts from RBI as we saw in 2019. This pause is in line with what the markets expected. But, I don’t see this changing anything in the market at this point. In spite of the rate cuts that we saw in the last year, the market yields have not come down. Now with so much more happening in the system, the transmission mechanism will become more challenging.

Read more: RBI policy: debt mutual fund investors should brace for volatility, stick to 'safer' funds

Bekxy Kuriakose, Head - Fixed Income, Principal Mutual Fund
“As expected the RBI MPC kept key repo and reverse repo rates unchanged and retained stance at “accommodative” with a 6-0 vote. Inflation forecast for H1:2020-21 has been revised upwards by nearly 140 bps (earlier was 4.0-3.8) and now (5.4-5.5). The real GDP growth forecast on the other hand has been revised downwards to 5.5% - 6.00% in H1:2020-21 from 5.9%-6.3% earlier.

The most significant statement in the policy was that policy recognizes that “ there is policy space available for future rate action” and that “persevere with the accommodative stance as long as necessary to revive growth, while ensuring that inflation remains within the target”. This would be recognized by market as a dovish stance.

In the Statement on developmental and regulatory policies, the most important announcement was Long Term Repo Operations for improving monetary transmission. As expected RBI is now increasingly focusing on improving monetary transmission especially wrt bank credit to productive sectors. In the press conference later, the governor indicated that these LTROs of 1 yr and 3 yr maturity wirth Rs 1 lakh crores would be available at the repo rate. This is a bold measure and should definitely help banks to kickstart credit growth in these tenors and help to reduce their cost/improve margins. This measure has led to a sharper rally in the short end of the gilt yield curve post policy where yields have fallen in the 2-4 yr segment by 10 to 15 bps.

Overall policy is positive for debt markets with the dovish stance and LTROs introduced. In the near term lack of fresh supply, expectations of continued Operation Twist would support short to medium gilt yields and corporate bond yields. With ample banking system liquidity money market yields would remain benign.”

Arvind Chari, Head Fixed Income , Quantum Advisors:
The Monetary Policy Committee (MPC) decision to leave rates unchanged and retain the accommodative stance was discounted by the market. But the RBI governor has warned unequivocally, that the market should not discount the RBI; The RBI has many tools to be able to address the growth slowdown.

This should be seen in the background on the RBI not being able to cut the repo rate given the short term CPI inflation trajectory being well above its target of 4%. We have noted earlier that the introduction of ‘Operation Twist’ was one such tool to try and influence the bond market and the yield curve despite not being able to cut the Repo rate.

We had also linked the RBIs stance to remain ‘accomodative as long as required’ – to the famous comment by Mario Draghi, the European Central Bank (ECB) Chairman of ‘whatever it takes’.

Today, the RBI has emulated the ECB action by introducing “Long Term Repo” (LTRO). The RBI has announced 1year and 3 year LTRO at the policy repo rate, which is a big move to durably address the monetary transmission phenomenon. This new liquidity infusion will be over and above the existing excessive liquidity situation of INR 2- 3 trillion.

Although, LTROs are beneficial for short term bond yields and (1-3 year ) lending rates, but might put an end to Operation Twist, and the bond market is reflecting that with the fall in short term government bond yields of almost 10-15 bps and the longer end (10 year and above) almost flat after the decision.

Kumaresh Ramakrishnan, CIO-Fixed Income, PGIM India MF
The RBI kept policy rates unchanged while reiterating its accommodative stance at today’s meeting. Even as it acknowledges an uncertain inflation outlook, the policy clearly attempts to push growth for the present.

Through a CRR dispensation on incremental retail loans given to auto, residential housing and msme until July 31, 2020, the policy aims to nudge banks to expand credit. Also a one-time restructuring relief on overdue msme loans and realty loans is proposed which should help prevent any further asset quality slide.

RBI expects growth for FY 2020 to pick up to 6% on the back of a rebound in rural consumption, easing global trade, better monetary transmission and personal income tax reliefs offered in the budget. The short term yields are expected to marginally soften post policy, while the long term yields are likely to remain stable. This in turn should favor the short and medium term funds which invest predominantly in these securities.

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