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Should you alter your debt mutual fund strategy ahead of RBI policy?

Will RBI hike rates? Or will it hold rates? Do I need to change my debt mutual fund investment strategy?

, ET Online|
Dec 04, 2018, 10.35 AM IST
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Will RBI hike rates? Or will it hold rates? Do I need to change my debt mutual fund investment strategy? These are some questions that are doing the rounds in the mutual fund circles these days.

The Reserve Bank of India’s monetary policy committee (MPC) is meeting on Wednesday. According to money market participants, the MPC of the central bank will keep the policy rates unchanged amid falling crude prices, lower food inflation and other favourble global cues.

“My idea is that it will be a status quo this time. Last time they were hawkish but I think they will tone down this time and revise the inflation projection. Fed and oil prices, trade war etc, have seen material change and this will impact the policy,” says Mahendra Jajoo, Head - Fixed Income, Mirae Asset. "With all the uncertainty around, things changing so fast, the best case scenario is that the calibrated tightening stance is switched back to neutral which will be positive for the bond markets,” says Mahendra Jajoo, Head - Fixed Income, Mirae Asset.

Crude oil prices have slipped below 60 dollars per barrel after touching a highest of 80 dollars per barrel. The turn of events has been very sudden and will have an impact on the policy, market experts believe. The retail inflation stands at 3.31 per cent which is below the medium-term inflation target of 4 per cent. The Indian rupee has also appreciated versus the dollar in the last one month.

“I think RBI will maintain a status quo. We are not expecting a change in rates as such. But a lot has changed since the last policy, especially on the external front. The fall in crude oil has been dramatic. But there are other risks that remain in the horizon especially on the inflation side. Food inflation is a volatile component. There is also a risk about crude oil not remaining on the preset rates,” says Pankaj Pathak, Head-fixed income, Quantum AMC.

The repo rate stands at 6.50 per cent and the reverse repo rate is at 6.25 per cent. The MPC had hiked repo rate by 25 basis points to 6.50 per cent in its third bi-monthly monetary policy review in August. Experts were expecting one more rate hike in the current financial year, but the hopes of another rate hike seem to be diminishing.

“I was expecting one rate hike but we have been surprised by crude oil and inflation trajectory. Right now, a rate hike seems unlikely in this financial year but we can expect rate hikes in the latter half of 2019,” says Pankaj Pathak.

“I think the next policy will completely depend on how the data is in the next couple of months. To be fair to the policy makers, there has been a complete turn-around in the crude oil situation recently. So, I think we don’t k now how crude, liquidity etc will play out. We will have to wait and watch,” Mahendra Jajoo believes.

Debt mutual fund managers believe that investors should stick to the shorter duration funds. Fund managers have been advising investors to stay away from long duration funds and gilt funds since the beginning of this year. The monetary policy committee of the RBI had voted 5:1 for change of stance to ‘calibrated tightening’ in the October policy meet.

“I think debt investors in India are not mature enough, from whatever we see. They don’t have the understanding and patience to sail through a bear market and make returns. I think we don’t still know where the rates are going to go in the next couple of years. It is better for investors to remain in the short to medium duration funds. That’s the best bet,” says Mahendra Jajoo.

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