Yadav expects debt yields to rise up further
The Reserve Bank of India (RBI) on 4 May increased the benchmark lending rate by 40 basis points to 4.40% in a bid to contain inflation, which has remained stubbornly above the target zone of 6% for the last three months.
The decision follows an unscheduled meeting of the Monetary Policy Committee (MPC), with all six members unanimously voting for a rate hike while maintaining the accommodative stance, according to media reports in New Delhi.
The financial experts see it as:
“The RBI pivot from excessive dovishness to neutral to cautious was evident in the April 22 review. With an intra meeting policy hike of 40 bps accompanied with an unanticipated CRR hike of 50 bps, the RBI has unequivocally joined the list of central banks taking decisive policy action to keep inflation expectations under check,” said Rajeev Radhakrishnan, CIO-Fixed Income, SBI Mutual Fund.
“With the risk of overshoot of the inflation upper band of 6% for 3 consecutive quarters very much alive, today’s policy actions though unanticipated in an off-meeting schedule is probably quite apt.”
“With the formal initiation of monetary policy tightening, there could be more rate hikes in the offing, alongside durable absorption of systemic liquidity. An immediate hike in June probably may not materialise even as the trajectory remains clear. It is challenging to call out the terminal rate against the current uncertain global backdrop. CRR has also been hiked by 50bps effective 21 May which will immediately suck out Rs.870 billion of liquidity from the banking system.
“10 Year Indian G-sec shot by ~20bps to 7.40% in an immediate response to the policy announcement. Currently, in India we are just where Fed was few months ago and yields may face an upward pressure across the tenor of the curve- though liquidity reduction adds an additional element of adjustment at the shorter end,” said Radhakrishnan.
Marzban Irani, CIO (Debt) LIC MF, remarked, “Today as a sudden announcement, the MPC decided to hike repo rate by 40 bps to 4.40 after withdrawing accommodative stance. At the same time CRR was hiked by 50 bps to 4.50.
“At the longer end 10-year yields touched 7.40 CRR hike will lead to around Rs.80,000 crore outflow from the system and daily deployment will now happen around 4%. Now is the time to start investing in duration funds like bond fund, bpsu and gsec etf. CRR hike will help to grow liquid and upcoming money market fund.”
Sandeep Yadav, Head- Fixed Income, DSP Investment Managers, added “Markets were expecting rate hikes, albeit in June policy. However, what stands out is the alacrity that RBI showed in making the mid policy announcement.
“We expect debt yields to rise up further.”
He called on investors to follow a three-pronged approach:
(i) invest in low duration funds
(ii) invest in smaller tranches in longer duration products like rolldown
(iii) invest in actively managed funds to weather the rate cycles. fiinews.com
