The Reserve Bank of India has taken the market by surprise by keeping the policy rates unchanged. According to debt mutual fund managers and advisors, mutual fund investors should continue to stick to short duration schemes.

In its policy review, the RBI has kept repo rate at 6.5 per cent and reverse repo rate at 6.25 per cent. The monetary policy committee also decided to remain consistent with the stance of tightening of monetary policy.

In the monetary policy statement released by RBI, the central bank said: “The decision of the MPC is consistent with the stance of calibrated tightening of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.”

The committee also cited global activity as the trigger for the decision on rates. “Since the last MPC meeting in August 2018, global economic activity has remained resilient in spite of ongoing trade tensions, but is becoming uneven and the outlook is clouded by several uncertainties,” the policy statement said.

“It does come as a surprise for the market which was expecting a hike. But the change is the stance of calibrated tightening. My view is that RBI is telling the market that they are not going to control exchange rates with interest rates. If there was a 50 bps increase today, it would have been clear that they are protecting the currency and then that is a spiral if the currency falls further,” says Arvind Chari, Head of Fixed Income & Alternatives at Quantum Mutual Fund.

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“I think RBI’s decision was driven by the subdued inflation numbers and food inflation. The second-half inflation projections have been lowered by RBI. This had been the primary reason for the status quo. The stance is on tightening now which means that the doors are open for more rate hikes,” says Kumaresh Ramakrishnan, Head of fixed income at DHFL Pramerica Mutual Fund.

A rate hike is always a bad news for debt mutual fund investors. With yields going up in the last one year, long-term debt funds have been badly hit. Mutual fund managers have been asking debt investors to stay invested in short-duration debt funds. “We communicated this last year that the best of the bond market is over. Investors need to understand that bond funds are not fixed deposits, returns are not linear. They should lower their returns expectation. For retail investors we have been communicating that be in liquid funds. There is still uncertainty, so we expect bond yields to go up further,” says Chari.

“Stay invested in the shorter end of duration; liquid, short-duration and ultra short-duration funds can be looked at,” advises Ramakrishnan.

However, fund managers believe that there is a chance of more rate hikes in this financial year. “Many things remain unclear but, we expect a hike of another 50 bps in this financial year. That will take the rates to 7 per cent,” says Arvind Chari.



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