Home / Mutual Funds / News /  RBI policy brings cheer to bond market. Where should debt fund investors invest?

Debt fund managers are cheering RBI's announcement in Monetary Policy announcement made on Friday. RBI kept the repo rate, the benchmark at which RBI lends to banks, unchanged at 4%. The reverse repo rate will continue to be 3.35%. "The MPC also decided to continue with the accommodative stance as long as necessary – at least during the current financial year and into the next financial year – to revive growth on a durable basis and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward," said RBI Governor Shaktikanta Das.

"RBI has maintained status quo on rates in line with expectation. The policy continues to maintain its accommodative stance well into the next financial year as well. We view this move as a positive step towards anchoring bond yields and ease further from current levels. While inflation guidance has been increased, there seems to be no urgency to withdraw liquidity prematurely as growth considerations remain equally strong," says Lakshmi Iyer, President and Chief Investment Officer (Debt) & Head Products, Kotak Mahindra AMC.

The bond markets welcomed RBI's move to maintain status quo in its Monetary Policy. Some fund managers believe investors should not expect great performance from the long duration funds. They may still stick to upto medium duration funds.

"Yields are down marginally post policy, as the bond markets welcomed the status quo rate action and unchanged liquidity conditions for now. Lack of incremental monetary policy room, persistent sticky inflation and high absolute borrowing program together with an economic rebound lowers the odds of outperformance at the longer end of the curve," says Kumaresh Ramakrishnan, CIO-Fixed Income, PGIM India Mutual Fund.

10-year G-Sec yield is down by 0.56% at 12:15 p.m. on Friday as RBI announced the monetary policy.

As such we prefer the short end (1-3 year) with products such as the Low Duration, Short Duration and the mid segment (2-5 years) with products such as the Banking & PSU and the Corporate Bond as the categories that can be considered in the current environment, Ramakrishnan adds.

Lakshmi Iyer believes, investors could continue to extend duration on their fixed income portfolio. "We expect the liquidity to support bond yields continue to benefit the yield curve across segments. Volatility may continue intermittently, but one should stick to intended investment horizons," she says.

Some fund managers say investors should lower their return expectations from debt funds as the rate cutting cycle is nearing its end and potential for capital gains are limited. They believe investors in long duration should be wary of inflation risk.

"We expect short term bond yields to drift lower if this liquidity situation persists for longer time. Longer tenor bonds may continue to move sideways with tactical supports from RBI’s OMOs/twists. Given the wide gap between short and long maturity bond yields and a stable interest rate outlook, longer maturity bonds look attractive from accrual stand point. However investors in longer maturity bonds/funds should remain cautious of fiscal and inflation risks over medium term. In this scenario dynamic bond funds can be good option for investors with longer time frame and high risk appetite," says Pankaj Pathak, Fund Manager- Fixed Income, Quantum Mutual Fund.

The central bank has slashed the repo rate by 115 basis points (bps) since late March to cushion the shock from the coronavirus crisis and sweeping lockdowns to check its spread.

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