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Debt fund managers decode RBI’s 50bps rate hike


The Reserve Bank of India hiked the repo rate by 50 basis points in today’s MPC meet. It seems, higher interest rates are likely to stay for some time. Here’s what top debt fund managers think about today’s policy move:

Puneet Pal, Head-Fixed Income, PGIM India Mutual Fund

The MPC Policy was on expected lines as the repo rate was increased by 50 bps which the market was expecting, though inflation forecast for FY23 is higher than market expectation at 6.70%. We expect that RBI will continue to front load rate hikes with another 50 bps hike in repo rate in the August Policy. We would recommend that investors increase their investments in actively managed short duration products while selectively looking at dynamic bond funds as per their risk appetite.

Murthy Nagarajan, Head – Fixed Income, Tata Mutual Fund

RBI hiked the repo rates by 50 basis points but kept CRR rates unchanged in its monetary policy. The repo rate stands at 4.90 %, Standing Deposit Facility (SDF) at 4.65 % and Marginal Standing Facility ( MSF ) at 5.15 % . RBI Increased its CPI projections for the current year to 6.7 % from 5.7 % projected in its May 4 monetary policy. RBI Governor re iterated to bring down inflation closer to the target and fostering macroeconomic stability. The MPC noted inflation is likely to remain above the upper tolerance band of 6 percent through the first three quarters of 2022-23 .RBI has changed its monetary policy stance to gradual and orderly withdrawal of extraordinary accommodation instituted during the pandemic and dropped its accommodative monetary policy stance. RBI maintained its growth forecast of 7.2 % for the current financial year. RBI Governor also stated it is committed to conduct the government borrowing programme in a non-disruptive manner and is closely watching the yields in the bond markets.

The markets have rallied by 10 to 15 basis points in the short end of the yield curve and 5 to 8 basis points in the long end of the yield curve. No CRR hike, short covering by market participants as they feared auction cancellations if they bid at higher yields in the primary auctions, led to this rally . However, forecast of CPI inflation for the current year assumes Average Crude oil prices at 105 per barrel versus 120 dollars per barrel prevailing now. RBI governor has stated 75 % of the increase in CPI forecast is due to food items. Global developments on food and commodities prices is expected to play a key role in determining CPI inflation. We expect the ten-year bond yields to trade in the band of 7.40 %- 7.60 % in the coming months.

Pankaj Pathak, Fund Manager-Fixed Income, Quantum AMC:

This 50-basis-points repo rate hike is broadly in line with the market expectation. The fact that the RBI left the Cash Reserve Ratio (CRR) unchanged and guided to move rates in a calibrated manner has lowered the uncertainty premium on bond valuations. Bond yields came down by 5-7 basis points after the announcement.

The RBI is now squarely focused on bringing down inflation. Taking into account the introduction of the SDF rate in the April monetary policy, the RBI has raised the effective overnight rate by 130 basis points over the last two months. This clearly shows a sense of urgency within the RBI to withdraw the ultra-easy monetary policy.

We should expect the RBI to continue with the rate hikes in the remaining MPC meetings in 2022. We expect the RBI to hike the repo rate to near 6% by early 2023.

The Bond yield curve is already pricing for a repo rate of 6% by early next year. Thus, the bond market may not be too sensitive to RBI’s rate hikes going forward. However, high global monetary policy uncertainty, rising crude oil prices, and unfavourable demand-supply dynamics will continue to put upward pressure on medium to long-term bond yields.

Mahendra Jajoo, CIO, Fixed Income, Mirae Asset Investment Managers:

RBI hikes repo rate by 50bps but no change in CRR was announced. Further suggestion that the yields are being watched closely and that appropriate steps will be taken for a smooth conduct of the market borrowing program provided some relief to the market which was already factoring in a hike in policy rates. Accordingly, in immediate reaction to policy, benchmark 10Y govt bond yield eased by about 5bps.

Inflation projections for FY 23 are revised upwards to 6.7% while growth projections are retained at 7.2%. With crude prices around USD 120/bl vs policy assumption of USD 105/bl and the well known cascading impact of it on the wider economy, inflation may turn out still higher. Expectation would remain for more rate hikes in forthcoming policies.

Yields at long end of the curve are expected to remain range bound while the short term rates may inch up further in coming months .



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