Time to invest in long-term debt funds, say experts as RBI keeps interest rates steady

RBI’s stance in its monetary policy announced on December 8, was on expected lines.

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), on December 8, decided to leave the repo rate unchanged at 6.5 percent for the fifth time in a row. Experts say that this is good news for debt funds. As and when interest rates start to go down - which many experts say would begin in the middle of 2024- debt funds’ net asset value (NAV) would go up.

Interest rates and prices of debt securities move in opposite directions. A fall in interest rates pushes up the prices of debt securities and thereby, the NAVs of debt funds.

A status quo, yet again

RBI’s stance in its monetary policy, announced on December 8, was on expected lines. While retail inflation has cooled off below the 6 percent tolerance limit, the MPC hasn’t achieved its medium-term target of 4 percent. Over the past few months, Consumer Price Index (CPI) based headline inflation has moderated to 4.9 percent in October from 7.4 percent in July.

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“Monetary policy must continue to be actively disinflationary to ensure fuller transmission and anchoring of inflation expectations. The rate action so far is still working its way into the economy. Hence, the MPC decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth,” RBI Governor Shaktikanta Das said in his Monetary Policy Statement.

Rate cut still months away

Indranil Pan, Chief Economist at Yes Bank believes that inflation continues to be an issue for RBI.

“It continues to refuse to come down towards the 4 percent target and the earliest that it may do so, as per the RBI’s projections is in second quarter of the next financial year. Thus, it may be safe to say, and keeping in mind the credibility of the central banker, there is unlikely to be any chance of a rate cut till that time, unless of course something dramatically changes,” said Pan.

At the same time, some experts believe that the case for rate cuts may be improving as the macro-economic pitch has improved from the last policy.

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“Some segments of the market were expecting RBI to accelerate (change the stance to neutral), however, it chose to play defensive and be in ‘wait-and-watch’ mode, kept the rates unchanged, and maintained the withdrawal of accommodation stance. We believe RBI will start accelerating (change the stance to neutral) from April 2024 policy,” said Deepak Agrawal, Chief Investment Officer-Debt, Kotak Mahindra Asset Management Company.

Anurag Mittal, Head of Fixed Income at UTI AMC expects rate cuts to start in the second half of calendar year 2024, which would be preceded by a change in forward guidance and stance on liquidity.

How to align your debt strategy?

Deepak Panjwani, Head-Debt Markets, GEPL Capital believes that the rates have peaked. “Also since the liquidity is tight, RBI will not bring OMO (Open market operations) sales to the market,” he said.

Panjwani strongly recommends getting into the five to 15-year bucket of debt funds. “This is because five and 10-year yields are barely having a spread of 2-3 basis points and the longer-end papers are at the spread of 25 bps to the 10-year yield. We recommend adding the position on higher yield and sticking with the portfolio for a year to reap the benefits,” he said.

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Given that the interest rates are expected to stay in a similar range for the next five to six months, Vikram Dalal, Founder and Managing Director, Synergee Capital Services suggests a similar strategy.

“If someone wants to start taking a position probably in 10-15 papers, in a piecemeal way, they can start taking a position. So, once interest rates start to come down in five-six months, as projected, there can be an appreciation. Probably, short-term maturity bonds will be a better option at this juncture, then once some clarity comes up, investors can always go for the longer tenure. If somebody is ready to wait for six months and start building up the portfolios, they can start investing into 10-15-year tenure,” said Dalal.