The six-member monetary policy committee (MPC), headed by RBI governor Shakikanta Das, kept repo rate untouched at 4 per cent; and reverse repo rate at 3.35 per cent. Here's how top mutual fund managers reacted to Reserve Bank of India's move:
Avnish JainHead of Fixed Income, Canara Robeco Asset Management Company
“The monetary policy committee (MPC) maintained status quo on rates in August policy, as inflation surprised on upside and the MPC gave due weightage on its mandate on medium term inflation target. While the MPC expects the growth to contract in FY2021, the Governor noted that there was good transmission on past policy cuts and liquidity operations in terms of sharp fall in rates for money market and corporate bonds, with NBFC also able to take advantage of the low rate scenario and hence a pause at this juncture is justified. The MPC expects the inflation to fall in the 2HFY2021. The Governor noted that there was policy space for further easing but must be used judiciously indicating the pace of rate cuts as well quantum of cuts are likely to be lower in the future. In terms of non monetary actions, RBI provided for restructuring of some lender loans (hit by COVID pandemic) with many safeguards.
Market yields rose on rate status quo as well as no RBI action on further liquidity measures to support market with the 10Y rising by ~5 bps. Market was not expecting any rate cut and hence the sell-off was limited. Market yields may inch up a little in near term. However RBI has done ad-hoc OMO purchase / “twist” operations whenever yields have gone up and hence market participants would be wary of the same. Markets may remain in a narrow trading zone, as future policy action is not ruled out. We expect 10Y to remain within 5.75-5.95% range.
Murthy Nagarajan, Head-Fixed Income, Tata Mutual Fund
RBI as expected has kept the repo and reverse repo rates unchanged. RBI measures to equate bank investments in mutual fund to their direct investment for capital adequacy purpose, should see good amount of flows in the mutual fund industry and stabilize bond yields. Mutual fund normally sell in quarter ends to meet redemption request of banks. However, no measures in terms of increasing Held to Maturity Limits or a OMO calendar is a negative for the bond market. Normally, when the ten year yields have come around 6 % levels, RBI has intervened through OMO or through operation twist. The old ten year is trading at 5.95 %, it does not look like the market should fall further from these levels, given the tendency of RBI to intervene at these levels.
RBI has said it will maintain its accommodative monetary stance. They also expect this year GDP to be negative. CPI inflation trajectory is 3.5 %, for this reasongovernor stated scope for rate cut exist in the economy but it has to be used judiciously to get maximum benefit. RBI is also in favour of continuing with easy liquidity conditions. Investors should look at investing in short term bond funds and banking and PSU funds, which predominantly invests in short and medium term papers to get higher accrual and some capital appreciation, when rate cuts happens.
Lakshmi Iyer, CIO - debt & head - products, Kotak AMC
Status quo was on expected lines. Today’s inaction in no way suggests a U-turn in interest rate trajectory. The MPC members have been mindful of the recent spike in CPI inflation, hence the inaction seems valid. Growth worries remaining, the accommodative bias suggests scope for further easing as inflation recedes in the second half of Fy21.
We expect benign rate scenario to remain conducive for bonds.
Mahendra Jajoo, CIO, Mirae, Fixed income
The RBI has held rates steady in line with market expectations. We believe that interest rates are likely to remain low and trend in a narrow range for the time being. However, as the battle with Covid-19 continues, it is important to get assurance from the RBI that it has further space for policy rate cuts and it will use it judiciously as and when the situation warrants, and we think that there is a possibility of rates going down further. The RBI has indicated that its stance remains accommodative, and that it stands ready to act as and when required, as it has done with its announcement of one-time restructuring of loans for corporates who were otherwise functioning well, change in priority sector norms and change in gold loans LTV norms.
Kumaresh Ramakrishnan, CIO-Fixed Income, PGIM India Mutual Fund
In a unanimous move, RBI decided to maintain status quo on rates after 2 successive policy cuts in March and May’20. RBI reiterated its accommodative stance, to support the twin objectives of supporting transmission of past rate actions and in helping growth rebound from the severe Covid shock. RBI also referred to the need to retain some room to be used at a suitable time in future.
On development issues, banks demand for a one-time restructuring of assets was allowed, subject to not being overdue beyond 30 days assets and classified as ‘Standard’ as on March 1, 2020. Stringent conditions and a monitoring framework is to be set up by a committee headed by KV Kamath, for screening assets for inclusion and subsequent monitoring.
Even as they enjoy an unchanged classification, banks will need to set aside a 10% provision to ensure that their capital position is not compromised and only worthy assets are included.
Action for markets should now shift back to Open market operations, to soak the huge issuance volumes pending for the remainder of the year. Combination of liquidity and OMOs should support the front end and long end of the curve in a narrow band. Given this background, we continue to prefer products which buy the short end (2-5 years), while remaining tactical on the longer end.
Amit Tripathi, CIO - Fixed Income Investments, Nippon India Mutual Fund
The status quo reflects near term macro uncertainty, while the accommodative stance reflects the need to support a weak growth impulse once headline inflation stabilizes. The current liquidity stance continues, and so will the unconventional support to the term structure through twist /open-market operation.
A medium-term trajectory of lowering inflation impulses and a weak demand environment will keep the RBI accommodative and hence keeps us constructive and positive on rates. the attractiveness of the term premium also adds to this positive view.
We continue to favor risk in terms of term spreads vis a vis credit spreads, for the most part of this calendar year, as our core view. specific issuers aside, the general clarity on corporate and retail balance sheets remains uncertain.
We would recommend continuing with core allocation of 60-70% short term and 30-40% duration but along with the macro uncertainty, the structural market moves will be punctuated with interim volatility. Hence don’t get into any duration trade with a less than 12-18 month horizon." to be watchful of it, at a lower band of 10400 one should commit some money into equity.
Avnish JainHead of Fixed Income, Canara Robeco Asset Management Company
“The monetary policy committee (MPC) maintained status quo on rates in August policy, as inflation surprised on upside and the MPC gave due weightage on its mandate on medium term inflation target. While the MPC expects the growth to contract in FY2021, the Governor noted that there was good transmission on past policy cuts and liquidity operations in terms of sharp fall in rates for money market and corporate bonds, with NBFC also able to take advantage of the low rate scenario and hence a pause at this juncture is justified. The MPC expects the inflation to fall in the 2HFY2021. The Governor noted that there was policy space for further easing but must be used judiciously indicating the pace of rate cuts as well quantum of cuts are likely to be lower in the future. In terms of non monetary actions, RBI provided for restructuring of some lender loans (hit by COVID pandemic) with many safeguards.
Market yields rose on rate status quo as well as no RBI action on further liquidity measures to support market with the 10Y rising by ~5 bps. Market was not expecting any rate cut and hence the sell-off was limited. Market yields may inch up a little in near term. However RBI has done ad-hoc OMO purchase / “twist” operations whenever yields have gone up and hence market participants would be wary of the same. Markets may remain in a narrow trading zone, as future policy action is not ruled out. We expect 10Y to remain within 5.75-5.95% range.
Murthy Nagarajan, Head-Fixed Income, Tata Mutual Fund
RBI as expected has kept the repo and reverse repo rates unchanged. RBI measures to equate bank investments in mutual fund to their direct investment for capital adequacy purpose, should see good amount of flows in the mutual fund industry and stabilize bond yields. Mutual fund normally sell in quarter ends to meet redemption request of banks. However, no measures in terms of increasing Held to Maturity Limits or a OMO calendar is a negative for the bond market. Normally, when the ten year yields have come around 6 % levels, RBI has intervened through OMO or through operation twist. The old ten year is trading at 5.95 %, it does not look like the market should fall further from these levels, given the tendency of RBI to intervene at these levels.
RBI has said it will maintain its accommodative monetary stance. They also expect this year GDP to be negative. CPI inflation trajectory is 3.5 %, for this reasongovernor stated scope for rate cut exist in the economy but it has to be used judiciously to get maximum benefit. RBI is also in favour of continuing with easy liquidity conditions. Investors should look at investing in short term bond funds and banking and PSU funds, which predominantly invests in short and medium term papers to get higher accrual and some capital appreciation, when rate cuts happens.
Lakshmi Iyer, CIO - debt & head - products, Kotak AMC
Status quo was on expected lines. Today’s inaction in no way suggests a U-turn in interest rate trajectory. The MPC members have been mindful of the recent spike in CPI inflation, hence the inaction seems valid. Growth worries remaining, the accommodative bias suggests scope for further easing as inflation recedes in the second half of Fy21.
We expect benign rate scenario to remain conducive for bonds.
Mahendra Jajoo, CIO, Mirae, Fixed income
The RBI has held rates steady in line with market expectations. We believe that interest rates are likely to remain low and trend in a narrow range for the time being. However, as the battle with Covid-19 continues, it is important to get assurance from the RBI that it has further space for policy rate cuts and it will use it judiciously as and when the situation warrants, and we think that there is a possibility of rates going down further. The RBI has indicated that its stance remains accommodative, and that it stands ready to act as and when required, as it has done with its announcement of one-time restructuring of loans for corporates who were otherwise functioning well, change in priority sector norms and change in gold loans LTV norms.
Kumaresh Ramakrishnan, CIO-Fixed Income, PGIM India Mutual Fund
In a unanimous move, RBI decided to maintain status quo on rates after 2 successive policy cuts in March and May’20. RBI reiterated its accommodative stance, to support the twin objectives of supporting transmission of past rate actions and in helping growth rebound from the severe Covid shock. RBI also referred to the need to retain some room to be used at a suitable time in future.
On development issues, banks demand for a one-time restructuring of assets was allowed, subject to not being overdue beyond 30 days assets and classified as ‘Standard’ as on March 1, 2020. Stringent conditions and a monitoring framework is to be set up by a committee headed by KV Kamath, for screening assets for inclusion and subsequent monitoring.
Even as they enjoy an unchanged classification, banks will need to set aside a 10% provision to ensure that their capital position is not compromised and only worthy assets are included.
Action for markets should now shift back to Open market operations, to soak the huge issuance volumes pending for the remainder of the year. Combination of liquidity and OMOs should support the front end and long end of the curve in a narrow band. Given this background, we continue to prefer products which buy the short end (2-5 years), while remaining tactical on the longer end.
Amit Tripathi, CIO - Fixed Income Investments, Nippon India Mutual Fund
The status quo reflects near term macro uncertainty, while the accommodative stance reflects the need to support a weak growth impulse once headline inflation stabilizes. The current liquidity stance continues, and so will the unconventional support to the term structure through twist /open-market operation.
A medium-term trajectory of lowering inflation impulses and a weak demand environment will keep the RBI accommodative and hence keeps us constructive and positive on rates. the attractiveness of the term premium also adds to this positive view.
We continue to favor risk in terms of term spreads vis a vis credit spreads, for the most part of this calendar year, as our core view. specific issuers aside, the general clarity on corporate and retail balance sheets remains uncertain.
We would recommend continuing with core allocation of 60-70% short term and 30-40% duration but along with the macro uncertainty, the structural market moves will be punctuated with interim volatility. Hence don’t get into any duration trade with a less than 12-18 month horizon." to be watchful of it, at a lower band of 10400 one should commit some money into equity.
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