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What should be your debt fund strategy after RBI policy?

RBI has kept repo rate unchanged in its second bi-monthly monetary policy review. Against this backdrop, what should debt mutual fund investors do?

Updated: Jun 07, 2017, 03.42 PM IST
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The Reserve Bank of India (RBI) has kept repo rate unchanged at 6.25 per cent in its second bi-monthly monetary policy review today. The banking regulator said that the Monetary Policy Committee (MPC) decided to keep the policy rate unchanged with a neutral stance and remain watchful of incoming data. This clearly indicates that RBI would wait for more data before it decides on cutting policy rates. Against this backdrop, what should debt mutual fund investors do?

"The RBI has maintained status quo, but the tone is dovish. RBI is saying that there is no need for a rate cut. It seems, some members of the monetary policy committee wanted a cut," says Murthy Nagarajan, head, fixed income, Tata Mutual Fund. "The primary reason for the dovish tone is the incoming data that has been good. Whether you take oil prices or CPI inflation... all the factors are good," he adds.

Some Debt fund managers believe that the banking regulator didn’t want to change its monetary stance because of the implementation of Goods and Services Tax (GST) scheduled to take place from July 1. “Probably, RBI wanted to hold on the rates till GST to decide whether we need a rate cut,” says Lakshmi Iyer, Chief Investment Officer (Debt) and head of products, Kotak Mutual Fund. “Fundamentally we have seen inflation coming down. There is a high probability that inflation can undershoot expectations,” adds Iyer. A fall in the inflation rate gives RBI room to cut rates. Iyer's advice to investors in the meanwhile: stay put.

A rate cut likely soon?
Murthy Nagarajan believes that we will see a rate cut in the next one or two policy reviews. “If the monsoons are good, the RBI will definitely take a call,” he says. Probably, that is why he is asking investors to hold on to their long-term debt funds. “Investors should stay invested in the long duration funds. We expect at least a 25 to 50 bps rate cut in this year,” adds Nagarajan, who recommends short-term funds for new investors.

“I think RBI wants to wait more for the statement of data and ensure that it is durable. They just want to ensure that they make the right decision,” says Mahendra Kumar Jajoo, head-fixed income, Mirae Asset Management Company. “RBI would see the data and if it moves in the same direction we might see a rate cut in the next policy due in August,” he adds.

Jajoo says investors should remain invested in dynamic bond funds as they can take care of the fluctuating government security prices and also take advantage of the lower rate. “Investors who have already invested in short or long term funds should consider switching to dynamic bond funds. The dynamic bond fund manager has the ability to change the duration depending on how the economic environment is,” he says.

Kumaresh Ramakrishanan, head fixed income, DHFL Pramerica Mutual Fund, says “it is very difficult to say at this point whether there will be a cut in rates or not. “One thing that we will have to look at is the consistency of data. Monsoon and GST will be the key factors to look forward to. A lot will depend of these two factors,” he says.

“Our communication to the investors has been that they should move slightly shorter if they are sitting at a very long end. I will say not completely move out of duration but there should be a slight change. Stay invested but slightly lower your position from the very long-end,” Ramakrishanan says. “Short and medium term is a good place to be at this point because the segment has been doing well. We are not completely in favour of going long-end because that would definitely mean higher volatility.”
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