Here’s what prominent debt fund managers say about RBI policy

With today’s rate action, we have seen a cumulative rate reduction of 110 bps, and it is imperative to see this impact percolate to the real sector.

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RBI’s monetary policy committee has reduced policy interest rates by 35 basis points. Four members of the committee voted to reduce policy rates by 35 bps. The policy stance has been maintained as “accommodative”. Here’s what prominent debt fund managers had to say about it:

Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products, Kotak Mahindra Asset Management
The RBI MPC today departed from the conventional rate action of 25 bps and its multiples and announced a 35 bps cut in repo rate. The accommodation in stance continues. The sluggish global economy, the fact that world over central bankers are easing rates, and of course our economy also faces growth headwinds were among the key reasons that can be attributed to the rate cut. There seems to be a fervour to maintain comfortable liquidity in the banking system, which should be an additional support factor for bond yields, apart from cut in benchmark rates.

Going forward, the quantum and timing of rate actions (read cut as we are in accommodative stance) would be largely data dependent. With today’s rate action, we have seen a cumulative rate reduction of 110 bps, and it is imperative to see this impact percolate to the real sector.

Murthy Nagarajan, Head-Fixed Income, Tata Mutual Fund
RBI took the unusual step of reducing the repo rate by 35 basis points. The repo rate now is 5.4 %. They have also reduced the GDP growth forecast to 6.9 % from 7 % levels. The reason for cutting repo rates is increase the output in the economy, as per RBI, the economy is running significant slack due to consumption and investment slowdown.

The global economy is slowing down due to trade wars between US and china, Brexit uncertainty, high debt levels of households and geo political concerns in the middle east. 14 Trillion USD of developed markets bonds are trading in negative territory.

As per RBI , the one year forward CPI inflation is forecast at 3.6 %. Given the current repo rates of 5.4 %, the real rates is around 1.8 % (5.4- 3.6) levels which is on the higher side. As per our view, GDP growth will face significant headwinds due to global uncertainty and high debt of corporates. We feel deeper cuts in policy rates are required to tackle GDP slowdown. The number of defaults of companies has led to trust deficit amongst lenders. We are witnessing mutual funds and banks shying away from lending to NBFC, HFC and other corporates. Given that many NBFC, HFC cater to the segment which is not serviced by the banks, the revival of these companies is crucial for the economy to grow at a robust pace. RBI and the government needs to support transmission of lower rates to these companies. We expect GDP growth to miss RBI projection and grow around 6.5 % . This will necessitate cut of 40 to 50 basis points more in Repo rates along with providing sufficient liquidity in the banking system.

Bekxy Kuriakose, Head – Fixed Income, Principal Mutual Fund
RBI’s MPC action today is significant as the key rates were cut by 35 bps (repo at 5.40% and reverse repo at 5.15%) indicating that RBI is willing to see rate changes in less than 25 bps steps. While broad market and we were expecting 25 bps, the 35 bps cut with a vote for 4-2 in favour indicates RBI taking cognizance of clarion call by government and industry for bigger rate cuts in backdrop of limitation by fiscal policy to step up and for monetary policy to do the heavy lifting to address the domestic and global growth slowdown. Several global central banks including notably the US FoMC have in the last month cut rates and in environment of still benign headline, domestic inflation and recent sharp fall in global crude oil prices this action is not out of place. Real GDP projections have also been revised downwards with FY20 full year forecast reduced by 10 bps.

An important takeaway in backdrop of DHFL crisis is that the RBI governor during the press conference subsequently has indicated that it is important to look at the total outstandings comprehensively when any resolution process is undertaken indicating that RBI is aware of the flaw in the current stressed asset guidelines which covers only banks and NBFCs and excludes other debt capital market investors. Governor indicated that they are having a inter regulator meeting to address same. Perhaps clarity on this matter maybe expected soon.

In the Statement of Developmental and Regulatory Policies, with respect to debt market incremental measures have been announced for enabling credit flow to NBFC sector viz: bank’s exposure to single NBFC has been raised from 15 to 20% of Tier I capital of the bank. Further definition of priority sector lending has been relaxed to enable banks to lend to NBFCs who onlend to such sectors.

Post policy gilt prices have seen correction as rate cut had been more or less factored in the rally which has lasted for couple of months now. Short term corporate bonds have seen about 5 bps downward movement. Long term corporate bonds are at similar levels as pre policy. Going forward we expect gilt yields to remain range bound in the overall environment of ample banking system liquidity, subdued inflation and recent global weakness and fall in oil prices. Money market yields should also remain stable with downward bias.

Pankaj Pathak, Fund Manager , Fixed Income, Quantum Mutual Fund
The reduction in policy repo rate was an expected move though the quantum of 35 bps cut came as a surprise. Given the inflation trajectory remains benign the RBI will continue to use monetary policy to boost growth. However, it seems that the RBI is not that worried about the growth as is the general market.

The Governor reference to “50 bps cut would be an excessive” has raised uncertainty over the future rate cuts. We do not see a long rate cutting cycle from here on. There could be an additional 25 bps cut but that would not be enough to sustain this bond market rally. The best of bond market rally is now behind us and from here on investors should lower their returns expectation from bond funds.

Dheeraj Singh, Head of Investments, Taurus Asset Management
The committee seems to have tried to tread a middle path by cutting rates but by an odd amount of 35 basis points instead of the usual 25 bps or 50 bps. Markets had already factored in 25 bps cut and so a 25 bps cut may not have enthused markets and therefore done little to address growth concerns. The committee however seemed to view a 50 basis point cut as a little excessive especially in view of the fact that rates have been reduced in the recent past, the benefits of which have yet to be passed on to customers by the banking sector.
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