What mutual fund managers say about RBI policy

he RBI cut repo rate by 25 basis points (100 basis points = 1%) to 6.25 per cent, for the first time after August 2017.

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The RBI cut repo rate by 25 basis points (100 basis points = 1%) to 6.25 per cent, for the first time after August 2017. It also changed its monetary stance to neutral from calibrated tightening. Here’s what the fund managers say.

Pankaj Pathak - Fund Manager - Fixed Income, Quantum Mutual Fund

The RBI has used the available space to reduce the Repo rate by 25 bps while also moving its stance back to Neutral. The thing to note is that the MPC now projects the Oct-Dec’19 CPI at 3.9 per cent. As they get more confident of that number being achieved, there would be a scope for another 25 bps reduction in the Repo rate to 6.0% which would still leave a 2% Real Repo Rate.

This is anyways not going to be a deep rate cut cycle and market bond yields may not react by much given the prospect of high supply of not only government bonds but also from State governments and PSUs. We also see multiple upside risks to the RBIs inflation projection which if materializes will reduce market expectations of any further rate cut.

We also do not see any meaningful reduction in bank lending and deposit rates.

The decision to remove the 20% single issuer limit for corporate bonds is a good move as it had hampered genuine foreign investor flows into Corporate Bonds. We though do not expect large flows immediately as fiscal concerns and political uncertainty will weigh on investor sentiment.

Bekxy Kuriakose, Head – Fixed Income, Principal Mutual Fund

As was widely expected the RBI MPC changed stance from calibrated tightening to neutral unanimously. Key repo and reverse repo rates were reduced by 25 bps by a vote of 4-2. Mr Das the new RBI governor voted in favour while Viral Acharya the hawk voted against. The policy document is revealing in that the reasons for rate cut based on data and reasoning are quite well laid out.

The document talks about the slowdown in global economic activity, also mentions that on domestic front credit flow remains muted and mentions that output gap has opened up modestly. Apart from this the other noteworthy point mentioned- the household inflations expectations survey shows softening for both 3 month and 12 month period. On the various sub heads of CPI inflation a detailed assessment has been made of which few interesting points – inflation in firewood and chips consumed by rural households has collapsed, they also classify the recent unusual pick up in health and education inflation as “one off”, and also that the HRA increase seen has dissipated along expected lines.

Overall the case has been very convincingly laid out for a rate cut in the overall background of moderate growth especially on the trade front with global headwinds. There is no mention of fiscal risks in the entire document. This clearly shows that the firm focus is back on “price stability” based on actual data while supporting “growth”.

Gilt yields have fallen post policy announcement by 3-7 bps across the tenor. While the rate cut is positive for debt markets on an overall basis, market remains concerned about the looming heavy gross supply for FY 20 and balance supply in FY19. We therefore remain cautious and would maintain modest duration and average maturity in our debt schemes.

In its Statement on Developmental and Regulatory Policies, two important announcements have been made which bode positively for credit flow to NBFC sector. First Risk weights would be assigned as per rating of NBFC except for CICs where it would be 100% as per extant guidelines. This may improve credit flow from banking sector to better rated NBFCs. Secondly, guidelines would be issued soon for harmonization of various categories of NBFCs which would reduce complexity and give better operational flexibility.

On FPI front, the April 2018 guidelines on restricting exposure to a single corporate to not more than 20% of their portfolio has been withdrawn based on adverse feedback. This would also be positive for FPI investments in the Corporate Bond market.

Lakshmi Iyer, CIO- debt & head – product, Kotak Mutual Fund

The repo rate cut which was a toss of a coin probability has finally fructified with a 4:2 vote. The inflation forecasts have also been revised lower as also the growth forecast. If inflation trajectory continues to remain benign, it could create space for further monetary easing. Liquidity in the banking system also may not be compromised, though the tools for liquidity management remain open. To that extent, markets may remain unclear wrt quantum of OMOs going forward. Overall, we believe that the curve is likely to steepen and short to medium term spread assets are likely to do well.

Puneet Pal, Deputy Head-Fixed Income, DHFL Pramerica Mutual Fund

The MPC has delivered a Dovish 25 bps rate cut today, lowering the benchmark repo rate to 6.25% from 6.50%. The decision to cut rates today, was a bit of a surprise in terms of the timing. The MPC has reduced its Inflation target by 60 bps for H1:2019-20 to 3.2-3.4 per cent from 3.8-4.2 per cent earlier. The CPI projection for Q3 2019-20 is at 3.9 per cent.

The MPC has taken cognisance of the slowdown in Domestic and Global growth outlook and the continuing benign Inflation outlook . The tone of the Policy is distinctly dovish and we pencil in another rate cut in the next policy meeting in April 2019.

We expect the sovereign yield curve to steepen as today's rate cut and expectations of a further rate cut will support the short end (1-4yr) of the curve while the Bond Demand/Supply dynamics are likely to deteriorate going ahead negating a big move down in Long Term Yields.

We expect the credit spreads to remain elevated as the current risk aversion continues to persist over the next 3-4 months.

Murthy Nagarajan, Head – Fixed Income, Tata Mutual Fund

RBI in its monetary policy, cut the repo and reverse repo rates by 25 basis points. The repo rates now stands at 6.25 per cent and reverse repo rates at 6 per cent. The reason for reducing the repo rates is due CPI inflation being revised downwards by 60 basis points. Consumer Price inflation for the current quarter is expected to be 2.8 per cent, the first half of the next financial year is expected to be 3.2 -3.4 pr cent and the third quarter of next financial year is expected to be 3.9 per cent . As per RBI, CPI inflation going forward is expected to be lower due to excess supply conditions prevailing for several food Items, lower crude prices, Lower electricity prices. RBI survey of household and producer inflation is reflecting significant moderation in inflation expectations. They also expect the inflation pick up, in health and education, to be a one off phenomenon.

The Monetary Policy Committee noted the output gap has opened up moderately as actual output has inched lower than potential. This necessitate the need to strengthen private investment activity and increase private consumption. The GDP growth for the next financial year is projected at 7.4 with risk evenly balanced.

The focus of the union budget is tilted towards consumption which increases the chance of CPI inflation to go up. Given that the combined borrowing of central, state and PSU is around 8 per cent of GDP, we don’t expect Repo rates cuts to be shallow. We expect one more rate cut in the April policy, as CPI inflation near term should be lower due to lower food and crude prices. This should bring the real rates which is the difference between RBI forecast of CPI inflation (3.9 per cent) and repo rates( 6 per cent) to around 200 basis points. Going forward, we expect the short and medium term rates to come down by 25 to 35 basis points and the long end rates to be range bound due to supply pressures . The new ten year is expected to be in the range of 7.20 – 7.50 per cent in the coming months. The corporate bonds spread is expected to widen due to risk aversion and continuous supply of papers.

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