The window for investors to maximise their gains from debt funds gets narrower by the day, as the Reserve Bank of India (RBI) on April 5 left the key repo rate unchanged at 6.5 percent for the seventh time in a row.
If you haven’t yet invested in debt funds or are sitting on the fence, right now may be a good to lock in high yields, experts said.
The RBI while maintaining its stance on policy rates also stuck with withdrawal of accommodation stance.
The growth and inflation projections for the financial year have been upheld at 7 percent and 4.5 percent, respectively, despite the stronger-than-expected advance gross domestic product (GDP) estimates of 7.6 percent for FY24. The voting stance also remains consistent at 5-1.
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“This (RBI’s policy stance) is good for the broader industry at this time, as it adds stability and predictability. For retail investors, this is a good time to invest in fixed-income products and they can continue to enjoy and lock in high yields now across various products such as government bonds, corporate bonds, and fixed deposit (FD) instruments,” said Saurav Ghosh, Co-Founder, Jiraaf, an online bond platform.
Impact on yields
According to experts, unchanged growth-inflation projections for the fiscal year and minor quarterly revisions are a good signal, as it indicate that the economic situation is panning out as envisaged.
“The MPC remains cognizant of food-related upside risks to inflation trajectory. We see a cautious pause be the case till September 2024,” said Achala Jethmalani, Economist, RBL Bank.
Post the policy announcement, India’s 10-year benchmark bond yield was trading at around 7.113 level, up 0.27 percent.
Also read | RBI maintains status quo, keeps repo rate at 6.5%, in line with market expectations
Tata Mutual Fund doesn’t see much impact on markets, though it expects the yield curve to tick up a bit from the current virtually flat curve.
“The 10-year yield is expected to trade in the band of 7-7.15 percent levels as rate cut expectations are pushed to the second half of this financial year,” said Murthy Nagarajan, Head-Fixed Income, Tata Asset Management.
Sandeep Yadav, Head-Fixed Income, DSP MF, is of the opinion that the monetary policy was quite uneventful.
“In such a scenario, we believe that the Indian bonds markets will be tracking global markets for a while. Thus the US treasury yields and oil should remain near-term drivers. For the longer term, we expect the favourable demand-supply dynamics to bring yields lower,” Yadav said.
However, in the near term, Puneet Pal, Head-Fixed Income, PGIM India Mutual Fund, said bond yields can come under some pressure due to high crude oil prices and geopolitical uncertainty.
Also read | RBI Monetary Policy | RBI holds repo rate at 6.5%: No impact on home loan EMIs
Meanwhile, as per Nimesh Chandan, Chief Investment Officer, Bajaj Finserv AMC, the longer-end yields are expected to be well-bid as FPI flows are expected to continue ahead of the start of indices-related passive flows in June 2024.
What should investors do?
Parijat Agrawal, Head-Fixed Income, Union Mutual Fund, said the RBI is expected to keep liquidity neutral, so that further transmission of higher rates can continue. “There is the possibility of modification of Liquidity Coverage Ratio (LCR) framework going forward, which may augur well for bonds,” Agrawal said.
Liquidity Coverage Ratio (LCR) is a financial metric that measures a bank's ability to meet short-term liquidity requirements.
Experts said liquidity in the system has come in the positive zone with a surplus of Rs 1 lakh crore due to government spending. Passive foreign institutional investor (FII) debt flows of $20-25 billion are expected from June following India’s inclusion in the JP Morgan Bond Index. These flows are expected to lead to more demand for government securities.
“Given easy liquidity conditions and expected fall in government bond yields, investors may consider investing in short-term corporate bonds funds, if the time horizon is six months and above due to potential higher accrual in this category. Investors may consider allocating 10-20 percent of their portfolio into government securities to take advantage of a fall in yields in the coming months,” Tata Mutual Fund’s Nagarajan said.
Also read | RBI MPC: Prepaid payment instruments to be permitted to use third-party UPI apps for making payments
Prashant Pimple, CEO, Baroda BNP Paribas, said after the April 5 status quo, investors can continue to enhance duration across debt schemes in view of softer rates and stable liquidity conditions going ahead.
Long duration funds offer a bond portfolio of greater than seven years. These funds are getting investors’ attention because long-term bonds may see capital appreciation if the rates fall.
“Globally also we anticipate a softer rate scenario with stable inflation and rangebound commodity prices. In the current interest rate scenario, we think both long-term as well as short-term investors have better opportunities as the yield curve is flat and is expected to steepen as conditions such as inflation and growth materialise over a period of time. Long term investors can consider funds with suitable duration in short-term bond funds, dynamic bond funds and Gilt categories and short-term investors typically with near-term liquidity requirements can look to consider funds like liquid, ultra short term and low duration” said Pimple.
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