RBI holds policy rates; debt MFs options now

The Reserve Bank of India, in its latest bi-monthly monetary meet, decided to keep the repo rate unchanged at 4%. “Monetary Policy Committee keeps key policy rates unchanged and maintains accommodative stance,” said Shaktikanta Das, the RBI governor. The RBI has kept the policy rates unchanged for the fourth time in a row. Das further added that the MPC has judged that need for the hour is to continue supporting growth. Debt mutual fund investors should stick to shorter duration debt funds, say fund managers. “The MPC unanimously decided to retain all policy rates at status quo while also retaining the liquidity stance as “accommodative”. Further liquidity management and normalisation is now likely to be graded and gradual to prevent any market disruption or impair financial stability. CRR which was to be restored back to 4% from the temporary 3% introduced in March 2020, is now to be done in a 2 phased manner by 50 bps each in March 2021 and May 2021. RBI has reiterated the availability and keenness to use all policy tools to meet liquidity gaps if necessary to allay any yield spike fears,” says Kumaresh Ramakrishnan. So what will be the impact on different debt mutual fund categories. Pankaj Pathak of Quantum Mutual Fund explains that the rally in the long duration bonds might be over. "Returns on overnight and liquid funds may improve. Long Bond funds may have already seen the best of the times. Keep your investment duration short. Short term fixed deposits, short term funds. For those who can withstand short term volatility in returns, dynamic bond funds can be considered," says Pankaj Pathak. Fund managers also believe that the shorter end of the duration funds will remain attractive in the coming time. Many experts have been recommending short duration funds and banking & PSU funds since the last six months, “RBI has delivered on liquidity front by indicating continued ample systemic liquidity & also by delaying the restoring of CRR. However, it fell short on the expectations of providing visibility on its Open Market Purchase operations for longer tenor G-Sec. In the absence of a concrete action from RBI on absorbing record high G-Sec supply, we expect the yield curve to steepen. The short term rates especially in 2 to 4 year segment will remain more attractive from risk-reward perspective on the back of surplus systemic liquidity & favorable demand-supply dynamics,” says Vikas Garg, Head- Fixed Income, Invesco Mutual Fund. Fund managers also believe that steps allowing retail investors to open direct accounts with RBI to buy/invest in govt bonds should help in improving and creating sticky demand over time. “Investors should continue to focus on shorter term products within Banking & PSU and Corporate bond fund categories, post today’s policy and the recent budget,” says Ramakrishnan.

from Economic Times https://bit.ly/3aClTjm
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