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    Debt mutual fund managers react to RBI policy

    Synopsis

    The Reserve Bank of India surprised the industry participants by maintaining a status quo on policy rates in today's monetary policy.

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    The Reserve Bank of India surprised the industry participants by maintaining a status quo on policy rates in today's monetary policy. It changed its stance from ‘neutral’ to ‘calibrated tightening’. The banking regulator retained repo rate at 6.5 per cent and the reverse repo rate at 6.25 per cent. Here's how the debt mutual fund managers reacted to it.

    Lakshmi Iyer, CIO (Debt) & Head of Products, Kotak AMC
    The MPC chose to stay on hold despite consensus view of a rate hike. The CPI targets were also lowered given the recent soft innings displayed on the inflation front. There has been an intent demonstrated to maintain liquidity in the banking system. However, we have seen a policy stance change from neutral to calibrated hikes signalling that rate cuts now are behind us. The lingering concerns seem to be around crude oil prices, global interest rates and the ongoing global developments on the trade front. Given the status quo, we expect short term rates to ease while long term yields may trade range bound. The macro needs monitoring and INR and crude oil prices could be leading the way for markets going forward.

    Murthy Nagarajan, Head-Fixed Income, Tata Mutual Fund
    RBI Governor has maintained the repo rate at 6.5 % with the tightening bias. They have also lowered the CPI inflation target for March 2019 to 3.9 %to 4.5 % and first quarter 2019 target is now at 4.8 % vs 5 % projected in the previous policy. RBI seems to be in a wait and watch policy as the CPI inflation target has been revised down by 20 basis points and growth is expected to slow down in the coming quarters. RBI has taken this call as they expect growth decelerating forward due to global uncertainty led by trade wars and higher oil prices”.

    Bekxy Kuriakose, Head – Fixed Income, Principal Mutual Fund
    In a surprise to market participants, RBI decided to keep key rates unchanged. However the stance has been changed from neutral to ‘calibrated tightening’. Both the decisions were voted by MPC 5-1 in favour.

    Given the lower than expected recent inflation outturns, RBI has reduced their inflation projection forecast for Q2:2018-19, H2 and Q1:2019-20. On the other hand growth projection has been broadly kept the same although RBI has noted the strong economic activity in various sectors including manufacturing and agriculture and recent GDP releases as well. Given this it is a bit unexpected that RBI decided to move to calibrated tightening, even more so as RBI notes that there has been already a tightening of domestic liquidity conditions which has led to higher yields across the curve in the market.

    Post RBI announcement, gilt prices staged a sharp rally some of which can be attributed to short covering and market having remained light on positions in the run up to policy and the no change coming as a positive surprise (as some sections of the market were even expecting a 50 bps rate hike). Short end money market yields also came off by 20-30 bps.

    Today’s policy outcome and the earlier announced liquidity measures by RBI should keep short term rates benign, although NBFC CP and bond spreads may continue to remain elevated. RBI Deputy Governor Viral Acharya also expressed concerns on NBFCs funding their loan growth through short term CPs.

    In the Statement on Developmental and Regulatory Policies, RBI is proposing a novel route to encourage FPI investments in debt market, called VRR (Voluntary Retention Route). This can incrementally be positive as and when it comes out. For now FPI sales in Debt market (YTD Rs 52,000 cr already) remains a significant concern.

    Killol Pandya – Head, Fixed Income, Essel Mutual Fund
    Overall, from the market perspective, this policy may be considered to be one which may have short term positive impact (since most of the participants were expecting at least some hike) but the policy exhibits moderately hawkish undertones with a medium to long term perspective.

    We have been espousing a case for maintaining lower duration and believe this policy, while giving some short-term relief to bond markets, does not merit a change in the rates outlook for now. While we do not rule out trading opportunities, we are also not expecting an incremental change in our investment strategy or interest rate outlook on the basis of this policy. We reiterate our case for investors opting for accrual based products for now and using trading opportunities to generate additional gains.
    The Economic Times

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