Pankaj Pathak, Fund Manager- Fixed Income, Quantum Mutual Fund :
We may have seen a nascent attempt by the Reserve Bank of India to ‘normalise’ the monetary policy operations.
Over the next six months, we would expect RBI to reduce the excess liquidity in the banking system. Accordingly, we would expect an increase in the reverse repo rate from 3.35% to 3.75%, and as growth stabilises, a subtle move away from the accommodative stance and then to a gradual beginning of rate hikes to narrow the gap between short term rates, currently below 4% and current inflation (~ 5.5%).
The split in the MPC voting from 6-0 to 5-1 on the stance of the monetary policy and the relative confidence in the RBI to announce higher Variable Rate Reverse Repo Auction (VRRR) auctions suggests the thinking within the RBI to begin the process of normalising liquidity and interest rates.
The increase in VRRR should lead to an increase in overnight to short-term rates and this bodes well for liquid and money market funds in comparison to bank savings account rates. As the market prices in a change in the stance, we should expect an increase in bond yields, particularly in the short to medium term segment, but the RBIs G-SAP operations will smoothen the impact. The above 10-year segment of the bond market will also rise, but it has already priced in inflation risks and we do not expect a large increase in yields in that space for now.
There is still very high uncertainty on the future trajectory of interest rates. Thus, for long-term asset allocation in fixed income space, investors should go with dynamic bond funds which has the flexibility to change portfolio positioning depending on market circumstances. However, for any such investment be prepared to hold your investment for a longer horizon and tolerate some volatility in the intermittent period.
The risk to growth can come from an adverse third wave and further worsening consumer demand due to lower incomes.
The larger risk for the bond markets remains oil prices and global commodity prices. The RBI will hope that the government can manage commodity prices through the reduction in import duties.
Mahendra Jajoo, CIO, Mirae Asset :
As expected, MPC kept key policy rates unchanged and retained monetary policy stance. Inflation expectations have been increased by about 50bps while growth projection have been retained unchanged at 9.5%. Policy stance remains committed to supporting growth revival as long as its required. With increase in variable rate reverse repo amounts, one would expect an orderly transition to a normalized monetary policy without any major disruption and that remains the highlight of the policy allowing for a smoother risk management framework for market participants.
Debt funds are expected to continue to benefit from the accommodative policy stance and may be better equipped to deal with any future hike in rates without any major violent phase. Shorter maturity oriented schemes may find better traction under current atmosphere. Money market Funds investing primarily in high credit quality money market instruments of up to 1 year along with other similar category funds may attract more attention from investors
Sandeep Bagla, CEO- TRUST AMC :
RBI policy is hawkish at the margin. RBI has acknowledged the strong growth and negative surprise on inflation front. One of the MPC members has voted for change in accommodative stance. While there is no real change in the policy, bond market participants will take the nuanced change in language seriously. There is a distinct possibility that yields at the longer end, 10 years, will inch up towards 6.50% gradually. Investors should invest in bond funds with lesser than 3 years maturity to minimise interest rate risk.”
Kumaresh Ramakrishnan, CIO – Fixed Income, PGIM India Mutual Fund :
RBI upped its CPI target for the year to 5.7% from 5.1% earlier, acknowledging price pressures emanating both from exogenous supply side shocks such as a pick up in raw material prices (commodities – metals, crude) and higher logistics costs and shortages (chips). It was quick to add that it believed inflation spike to be transitory as the economy goes through an adjustment phase and hence preferred to largely see through these numbers.
RBI proposed some normalisation on liquidity to drain out part of the surplus liquidity which is topping INR 8 trillion. Variable rate reverse repos (VRRR) are proposed to be doubled from the present INR 2 trillion to INR 4 trillion over the next month while keeping the tenor unchanged at 14 days. RBI was quick to add that this should not be construed as tightening as VRR liquidity is part of overall system liquidity and was meant to moderate daily liquidity while compensating banks a litte more through this route.
While we see the policy as “supportive” and the commentary as reasonably dovish, the less than unanimous vote for an accommodative stance, higher VRRR amounts and raising of inflation forecasts, signal some emerging concerns within the Central bank at the margins.
In this backdrop, we would continue focusing on the Banking & PSU, Corporate bond and Dynamic Bond fund categories, post today’s policy.
