RBI holds policy rates: What should debt mutual fund investors do?

The Reserve Bank of India held its policy rates once again on Friday. The repo rate or rate at which the bank borrows short-term money from RBI stands at 4%. The baking regulator held the rates in its previous policy review in October as well.

Top takeaways from RBI's December monetary policy review
The Reserve Bank of India held its policy rates once again on Friday. The repo rate or rate at which the bank borrows short-term money from RBI stands at 4%. The baking regulator held the rates in its previous policy review in October as well. What does a pause or holding of policy rates mean for debt mutual fund investors? Should they look for cues elsewhere, too?

“The market was broadly expecting a status quo on rates. I was not expecting a change of bias as well. The critical watch points for today's policy were the inflation number, adjustment on the growth side etc. Market was also expecting to see whether RBI will start a graded liquidity withdrawal starting today or not,” said Lakshmi Iyer, CIO- debt and head product, Kotak Mutual Fund.

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The central bank maintained its monetary 'accommodative.’


Mahendra Jajoo, CIO- fixed income, Mirae Asset Mutual Fund, said There was also a lot of discussion on the fact that the money market rates have fallen significantly below the reverse repo rate and the bankers are facing a bit of a challenge because of this fall. “The banks have recommended RBI to either allow mutual funds to participate in the reverse repo market or do something to handle the situation. I didn’t expect the RBI to give any signal of reviewing the stance at the moment,” he said.

Jajoo believes that the only negative right now is that the inflation hasn't come down like people were expecting. “The inflation continues to be up because of food prices. I think overall to strike a balance between inflation and growth, I don't think RBI will do anything like hiking rates at the moment. I was expecting RBI to douse any such speculations of the rate cycle coming to a halt or changing stance, said Jajoo.

The RBI governor hinted that the central bank would closely watch the inflation numbers. As for your investments, both the fund managers ask investors to stick to short duration schemes.
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“Right now the short duration space has rallied quite a lot and investors have gained there. Yield curve is significantly steep right now. We need to atone for these high spreads. The investors who are in the short duration space should stay there. No need to change the strategy right now. As fund managers we will keep an eye on the changes and manage the portfolios accordingly," says Iyer.

Mahendra Jajoo, CIO- fixed income, Mirae Asset, says the market had largely priced in the status quo policy. “There could be some normalisation of the yield curve. Market will remain range bound. Even if some selling happens today, it will not be much. As long as there is excess liquidity in the system, there will be certain corrections,” he said.

Jajoo believes investors are best placed in short term funds and Banking & PSU Funds. “They give you a reasonable protection against sharp rise in rates and also better returns than liquid funds.”
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