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Here's what debt fund managers say about the RBI rate pause


The Reserve Bank of India (RBI) has surprised the money market on Thursday. The apex bank held its key policy rate, the repo rate, at 5.15%. The market participants were expecting a 25-basis-points cut. The banking regulator has also maintained the accommodative stance. Some debt mutual fund managers believe there could be more rate cuts, while some believe the pause may continue for a while. Some others are happy that the rates at least will not go up anytime soon. Here’s what debt fund managers had to say about the policy surprise. Read it in their own words:

Bekxy Kuriakose, Head – Fixed Income, Principal Mutual Fund
“RBI MPC surprised market by keeping key rates unchanged even while the stance remains unchanged as “accommodative”. Important to also note that all members of MPC voted in favour of the decision. I would term this policy decision as bold and perhaps a fallout of the “Onion price” effect. However the RBI MPC has noted that food inflation has gone up across several categories not just few and hence their concern is valid. Added to it household inflation expectations have jumped up sharply across 3 month and 12 month period. To some extent spending has remained subdued due to increase in prices, the MPC notes in its policy document thereby acknowledging the complex chain of cause and effect wrt spending and inflation. The RBI MPC also wants the full effect of past rate cuts of 135 bps to play out in terms of transmission to bank lending rates which remains an area of disappointment.

Among the Developmental and Regulatory Policies, much needed guidelines to regulate the functioning of Urban Cooperative Banks will come in finally in the wake of the PMC crisis. This is a welcome step.

Post policy announcement, gilt yields have risen sharply. The ten year benchmark yield is trading at 6.58% compared to 6.46% levels just prior to policy. We remain cautious on account of risk of fiscal slippage and continuous supply of government bonds in the primary market. Ample banking system liquidity will ensure money market rates remain benign inspite of no rate cut. We would advise investors to stick to a balanced asset allocation in debt funds.”

Also read:
RBI policy surprise: Should you change your mutual fund strategy?

Murthy Nagarajan, Head-Fixed Income, Tata Mutual Fund

“RBI kept the repo and reverse repo rates unchanged at 5.15 % and 4.85 %. RBI also revised its GDP growth forecast for the current financial year to 5 % for the current financial year. RBI governor stated they want to see the transmission of previous rate cuts into the economy. They have maintained an accommodative monetary policy stance , RBI governor stated they want monetary policy action to have maximum impact and not waste rate cuts. RBI governor also stated they expected inflation to be very high in the fourth quarter due to hike in telecom tariffs and food inflation being higher due to low base.

The actions and response from RBI Governor seems to suggest there should be no rate cuts in this current financial year. This should led to short term rates stabilizing at the current levels and their could be pressure in the long end of the yield curve, if the government borrows more than what it has budgeted in the current financial year. Next year borrowing is also expected to be above Rs 8 lakh crores, this will keep the bond yields under pressure. Further rate cuts in the next financial year, may come only if GDP growth does not recover above 6% levels.”

Arvind Chari – Head – Fixed Income & Alternatives, Quantum Advisors

The decision of the MPC to remain on hold is indeed a surprise and government bond yields have reacted with a 5-15 bps increase across the curve. An ‘Accommodative Pause’, confusing as it sounds, is what we read this decision as, a pause in the rate cutting cycle to wait and watch for government’s budget actions, the trajectory of food prices and the economic impact of previous rate cuts.

Although the RBI instructs us to ‘look through’ the recent increase in food prices, but the fact that they have paused and increased its CPI projection, makes the scope for further rate cuts impending on headline CPI inflation falling below 4% again, which seems unlikely in the next 3 months.

Commentators were calling for the RBI to adopt US FED like QE and Operation Twist to improve transmission, but the MPC has very clearly chosen to retain its conservative focus.





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