Debt mutual fund investors rejoice; Economic Survey points to more rate cuts

Debt mutual fund investors may be in for a treat. According to mutual fund managers, the Economic Survey point towards more rate cuts in the coming months. And a rate cut is always good news for debt mutual funds, especially long duration schemes and gilt schemes.

“The economic survey has painted a true picture of where the economy is today. Even in the rate cuts that we have seen, only 50 per cent of the transmission has happened. The growth slowdown is for real. We are still growing faster than the rest of the world but we have to accept that there is a slowdown. There have been changes in the stances and numbers in the last one year. The monetary policy has changed from neutral to accommodative. My sense is that the ambiguity is out and there could be more rate cuts,” says Lakshmi Iyer, CIO-debt and co-head product, Kotak Mutual Fund.

The Economic Survey pointed out that the repo rate has increased by 50 bps and decreased by 75 bps in 2018-2019. It also said the monetary stance of the Reserve Bank of India (RBI) also changed thrice in the financial year. These changes led to many ups and down in the debt mutual fund market, especially in schemes following the duration strategy. Softening rates is a good news for longer duration schemes and vice-versa.


We saw the RBI increasing the repo rate between April, 2018 to August, 2018. From August, 2018 to January, 2019, RBI kept the rates unchanged. The monetary stance was changed from ‘neutral’ to ‘calibrated tightening’. This stance was reversed in February, 2019. Recently in June, 2019, the monetary policy stance was changed from ‘neutral’ to ‘accommodative’.

“The Monetary Policy Committee delivered its third consecutive 25 bps rate cut recently. The repo rate has been cut below 6 per cent and the stance has changed to accommodative, has happened only twice in the last 20 years; Once post the Lehman crisis, 2008-2009 and the other post the dot com, global slowdown in 2002-2003 period. As we noted above, it is not a common occurrence in India. We should also note that growth prospects were way lower during those times to justify repo rates well below 6%,” says Arvind Chari, Head –Fixed Income & Alternatives , Quantum Advisors.

The recent cuts in the repo rates have started a rally in the long duration bond funds. The long duration bond funds category is the topper in the return chart in one year with 15.43 per cent average returns. Similarly, gilt funds are also making the most of the recent rate cuts and expectations of more cuts. Gilt fund category is offering around 14 per cent returns in one year. However, in the beginning of the financial year 2018-2019, these schemes were down to 1-2 per cent returns annually.

The Economic Survey points out the reasons for so many changes in the policy rates and stance. “In its sixth bi-monthly monetary policy statement, the MPC noted the pause in the rate hiking cycle by the Fed, expectations of a positive outcome from US-China trade negotiations and downward risks to domestic inflation. Consequently, the MPC decided to change the stance of monetary policy from “calibrated tightening” to “neutral” and reduced the policy repo rate by 25 bps to 6.25 per cent in February 2019,” the survey noted. It also speaks about the changes made in the last policy meet.

“The policy rate was further cut by 25 bps each in the First and the Second Bi-monthly Monetary Policy Statement for 2019-20 in April and June 2019. Moreover, the monetary policy stance was changed to “accommodative” in June 2019,” the survey notes.

“Even if we are going to see the rate cuts after this, the volatility that has been there will continue to be there. If you don't have an investment horizon of more than three years, long duration bond funds is not a great proposition,” says Lakshmi Iyer.