Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Money / Personal Finance/  How reverse repo cut impacts debt funds
BackBack

How reverse repo cut impacts debt funds

Short-duration funds and banking and PSU funds, which form the core debt portfolio may gain the most
  • The rate cuts and liquidity boosting measures should lead to a reduction in yields in the shortest end of the curve
  • RBI announced targeted long-term repos or repurchase agreements of up to three years for ₹1 trillion but placed a condition on banks to deploy the money in investment-grade corporate bonds. (Photo: Mint)Premium
    RBI announced targeted long-term repos or repurchase agreements of up to three years for 1 trillion but placed a condition on banks to deploy the money in investment-grade corporate bonds. (Photo: Mint)

    The Reserve Bank of India (RBI) cut policy rates on Friday to ensure adequate liquidity in the system and encourage its transmission. It also announced targeted long-term repos or repurchase agreements of up to three years for 1 trillion but placed a condition on banks to deploy the money in investment-grade corporate bonds, commercial papers, and non-convertible debentures.

    This will lead to a reduction in yields at the shortest end of the curve. As a result, overnight mutual funds, which are meant for immediate liquidity needs and invest in securities with one day to maturity, will see lower returns. “Yields on overnight funds will go to around 4%," said Dwijendra Srivastava, chief investment officer, fixed income, Sundaram Mutual Fund.

    Liquid funds took a hit on their claim to be tax-efficient alternatives to short-term bank deposits last week. “Liquid funds saw volatility and negative returns for around one week, but those with a horizon of more than that would have been compensated by higher yields compared to overnight funds," said Srivastava. Liquid funds continue to be the most suitable to park cash temporarily, he said.

    Short-duration funds and banking and PSU funds, which form the core debt portfolio along with traditional products, may gain the most.

    “Banks will be looking to buy high-quality debt at the short end (up to three years maturity) and funds such as short-duration funds and banking and PSU funds hold this type of debt," said Rajeev Radhakrishnan, head, fixed income, and fund manager, SBI Mutual Fund. “The cut in reverse repo rate means that banks will not earn much by parking money with RBI and will look to buy bonds," he said.

    Those seeking to benefit by investing in longer duration and gilt funds should do so in line with their time horizon and asset allocation. “The current RBI policy does not monetize the fiscal deficit through large-scale purchases of government bonds. This needs to be done as the fiscal deficit expands to support a stimulus. Doing so won’t have a material impact on inflation, given the current demand conditions," said Suyash Chowdhary, head, fixed income, IDFC Asset Management Co., on the likely inflationary impact.

    Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

    Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
    More Less
    Published: 27 Mar 2020, 03:32 PM IST
    Next Story footLogo
    Recommended For You
    Switch to the Mint app for fast and personalized news - Get App