RBI policy: What is in it for mutual fund investors?


The Reserve Bank of India may have held key rates in its bi-monthly policy review, but a slew of liquidity measures announced in the policy more than made up for the status-quo in rates. Reflecting the positive sentiment, the 10-year government bond yield, considered the Sensex of bond market, fell by 10 basis points (100 basis points = 1%) after the policy. What does it mean to debt mutual fund investors?

It simply means that it is a positive policy for your investments in both equity and debt mutual funds. However, do not be adventurous. Stay cautious and continue with your investments as per your investment plan.

As for debt funds, you may continue to bet on short-term debt funds, banking & PSU funds, and corporate bond funds for your short to medium needs. Though long-term funds and gilt funds may benefit from the accommodative policy stance, invest in them only if you have a longer investment horizon and stomach for volatility

“RBI maintained the status quo expectation and I believe that’s really positive. markets were looking at something unconventional and untested and I am happy that RBI has done that. RBI decided to look through inflation and announced some really good measures like OMOs, LTRO, SDL OMOs. From a market perspective, it is really good policy,” says Lakshmi Iyer, CIO-debt and head-product, Kotak Mutual Fund.

She points out that the 10-year benchmark government bond yield has already gone down to 5.92%. “I believe that the yields will go down in the near term. With the Rs 20,000 crore OMO, there is a clear intent to bring down the yield curve and flatten it. I believe that bond market optimism will continue to be there for a while,” she adds.

She asks debt mutual fund investors to stay put. “There is no point changing stance with every policy. You can’t time the policy and the market. The growth will take time to come back and we will all have to be patient. I believe if the liquidity remains where it is, the very short-term rates will continue to hug the reverse repo rate. Investors should go for a mix of short to medium term funds with corporate bond funds, “she says.

“A mixture of AAA and non-AAA funds might do well. Now that CLTRO has been announced it is good for the hybrid strategy corporate bond funds.

Announcing the policy measures, RBI Governor Shaktikanta Das said the MPC evaluated domestic and global macroeconomic and financial conditions and voted unanimously to leave the policy repo rate unchanged at 4 per cent.

“It also decided to continue with the accommodative stance of monetary policy as long as necessary – at least during the current financial year and into the next year – to revive growth on a durable basis and mitigate the impact of COVID-19, while ensuring that inflation remains within the target going forward,” he added. The other liquidity measured in the policy is what cheered both the bond and stock markets.

“Market participants should be assured that in keeping with the monetary policy stance announced today, the RBI will maintain comfortable liquidity conditions and will conduct market operations in the form of outright and special open market operations. In response to feedback from market participants, the size of these auctions will be increased to ₹20,000 crore. It is expected that the market participants will respond positively to this initiative,” said the governor.

He also said that to impart liquidity to SDLs and thereby facilitate efficient pricing, it has been decided to conduct open market operations (OMOs) in State Development Loans (SDLs) as a special case during the current financial year. This would improve secondary market activity and rationalize spreads of SDLs over central government securities of comparable maturities.

“This measure, along with the extension of HTM till March 2022, should ease concerns about illiquidity and absorptive capacity for the total government borrowing in the current year,” he said.





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