Debt mutual fund managers hopeful of a rate cut; suggest duration funds

Debt mutual fund managers are hopeful of a rate cut by Reserve Bank of India (RBI) in the next few months. They believe that a significant fall in inflation rate makes a strong case for a rate cut in 2017.

“The recent data sure makes a room for a rate cut. The Consumer inflation fell to 1.54 per cent in June, which is a good sign, provided these numbers remain consistent,” says Lakshmi Iyer, CIO (Debt), Kotak Mutual Fund. Iyer believes that demonetisation, GST, monsoon and a host of other macro and micro factors might influence RBI's decision to cut rates.

Arvind Subramanian, chief economic adviser, also said that policymakers must ‘reflect’ after data showed consumer inflation at a record low in June. The RBI had changed its stance from accommodative to neutral, in February, this year.


Kumaresh Ramakrishanan, Head - Fixed Income, DHFL Pramerica Mutual Fund also believes that the central bank might cut rates. “The data is sure favourable but whether the RBI will cut rates in the coming MPC meet or not, cannot be anticipated,” says Ramakrishanan. He adds that there is a room for a rate cut but the RBI might want to see if the numbers remain the same in the long-term as well.

How to play the rate cut?

Lakshmi Iyer believes that the investors should remain at the longer end of the curve to play the rate cuts in mutual funds. “Investors can look at the long-term debt funds. Duration products will definitely benefit from a rate cut, whenever it happens,” says Iyer.

On the other, Kumaresh Ramakrishanan says that one cannot be sure whether the rate cut will happen now or later. He also believes that the rate cuts might not be as frequent as we have seen in the past. “I think investors should invest in duration products but long term debt funds might be more volatile. I would suggest investing in mid and short-term funds at this point,” says Ramakrishanan.

However, both of them believe that investors need not rearrange their portfolio now. “Since, we are not clear about how the scenario will pan out in the next couple of months, I don’t think investors need to pull their money out of their funds,” says Lakshmi Iyer. She adds that investors should stay invested in both accrual and duration funds at this point. “Excessive allocation to either accrual or duration is not fine,” says Iyer.