A 25-basis point cut in repo rate to 7.25 per cent in today’s Monetary Policy review, totals to a front-loaded 75 basis point cut thus far in 2015. Further action, as the Governor of the Reserve Bank of India (RBI) stated, would be ‘data contingent’.
The 7.72% 2025 gilt remained almost flat at 7.66 per cent, suggesting that the market was not thrilled, nor was it reacting negatively to the marginal upping of the inflation forecast to 6 per cent by January 2016.
It is evident that the RBI is fearing a risk of inflation arising from the following factors:
– Below normal south-west monsoon forecast by the Indian Monsoon Department, having an impact on food inflation
– Any further firming of crude prices that can fuel inflation and demand for the dollar
– Volatility in external environment – both political and economic
While the RBI has stated that any further rate cuts will be data contingent, its desire to maintain real rate (interest rate in excess of inflation) at 1.5-2 per cent may mean that the RBI has cut rates more than it would ideally like to (given that it expects a 6 per cent inflation by January 2016).
However, one needs to look at a slightly longer period inflation target of 4 per cent target by early 2018. Even at an average of 5 per cent (between 4 per cent and 6 per cent), we believe that there is leeway for further cuts, albeit not immediately. That means, opportunities are still alive in the yield curve, inflation not playing spoilsport.
What’s in it for investors?
The current rate cut cannot be expected to bring about an immediate rally in the market. Between February and now, long-term debt yields have crept up marginally despite three rate cuts of 25 basis points each. It is noteworthy that the depreciating rupee against the dollar, firming crude prices, and foreign debt market (especially Germany) yields firming up have all kept the local yields from easing down.
For investors, this means that the opportunity in the yield curve is only consolidating and remains there. In other words, an opportunity for rally remains. However, this would require an easing of yields driven by macro numbers such as inflation and a normal monsoon.
Investors should continue to hold income accrual / dynamic bond funds, but not expect any short-term returns from these funds for now. Short-term rates can be expected to continue to ease unless there is a liquidity issue, or inflation firms up. To this extent, the opportunity in medium to long term debt funds remains better than short-term funds at present. Besides, the fact that deposit rates have eased and may further reduce also means that one has to scout for investment opportunities outside of bank deposits.
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Hi Vidya,
I have a few fixed deposits and I was thinking to shift them to ultra short term bond funds, since the tax on the interest would finally not leave me with any real return.
With current rate cuts, do you think its a good idea? Please remember my plan was not to play with dynamic funds or the gilt ones. I simply want to choose an ultra short term fund
thanks,
subha
Hello Sir, Ultra short-term funds are not a substitute for long-term FD. They can be compared only with 1 year or less FD. In that sense, yes, ultra short-term funds are superior and liquid alternatives to FD. thanks, Vidya
Hi,
As the bank fixed deposit rates are also getting reduced,so is it time to invest lumpsum amount in a highly rate debt (income/gilt) for a period of around 3 years ??
Hello Rahul – we advocate income/dynamic bond funds with at least a 3-year time frame. We do not recommend gilt funds for retail investors as they need an active entry and exit strategy. thanks, Vidya
Hello Vidya ,
Can you recommend a good debt fund for long term SIP ? I was looking at UTI Dynamic Bond Fund for SIP of Rs 2000 pm for period of 10 Years.
Being conservative investor I have prepared a SIP portfolio of long term investment ~ 10 years , Do you think the listed Fund is good for SIP for Conservative investors
HDFC Multiple Yield Fund 2005
ICICI Prudential Balanced Advantage Fund – Regular Plan
ICICI Child Care Study Plan
UTI Dynamic Bond Fund
Thank You
Hello Joseph, Portfolio advice/review is best given through our internal ‘advisor appointment’ feature (you will find it if you click help in your FundsIndia account). The blog is more of a discussion forum. I shall ask one of our advisors to get in touch with you over mail/phone (your convenience) and also brief them about my views on this.
For a 10-year time frame, though, I would urge your to take a relook of adding some equity funds, since that is where real wealth is built. You can discuss your requirement in detail with our advisor and then assess whether your goal can be reached with mere debt.
thanks,
Vidya
Thank You Vidya , I got a call from Funds India Advisor and spoke with them.
Can you predict the effect of RBI’s new base rate calculation policy on fix deposit rates in 2016 , 17 & further.
Sir, The base rate change will force banks to cut rates – of lending and deposits. BY how much, we will not be able to.
Can you predict the effect of RBI’s new base rate calculation policy on fix deposit rates in 2016 , 17 & further.
Sir, The base rate change will force banks to cut rates – of lending and deposits. BY how much, we will not be able to.
Hi,
As the bank fixed deposit rates are also getting reduced,so is it time to invest lumpsum amount in a highly rate debt (income/gilt) for a period of around 3 years ??
Hello Rahul – we advocate income/dynamic bond funds with at least a 3-year time frame. We do not recommend gilt funds for retail investors as they need an active entry and exit strategy. thanks, Vidya
Hi Vidya,
I have a few fixed deposits and I was thinking to shift them to ultra short term bond funds, since the tax on the interest would finally not leave me with any real return.
With current rate cuts, do you think its a good idea? Please remember my plan was not to play with dynamic funds or the gilt ones. I simply want to choose an ultra short term fund
thanks,
subha
Hello Sir, Ultra short-term funds are not a substitute for long-term FD. They can be compared only with 1 year or less FD. In that sense, yes, ultra short-term funds are superior and liquid alternatives to FD. thanks, Vidya
Hello Vidya ,
Can you recommend a good debt fund for long term SIP ? I was looking at UTI Dynamic Bond Fund for SIP of Rs 2000 pm for period of 10 Years.
Being conservative investor I have prepared a SIP portfolio of long term investment ~ 10 years , Do you think the listed Fund is good for SIP for Conservative investors
HDFC Multiple Yield Fund 2005
ICICI Prudential Balanced Advantage Fund – Regular Plan
ICICI Child Care Study Plan
UTI Dynamic Bond Fund
Thank You
Hello Joseph, Portfolio advice/review is best given through our internal ‘advisor appointment’ feature (you will find it if you click help in your FundsIndia account). The blog is more of a discussion forum. I shall ask one of our advisors to get in touch with you over mail/phone (your convenience) and also brief them about my views on this.
For a 10-year time frame, though, I would urge your to take a relook of adding some equity funds, since that is where real wealth is built. You can discuss your requirement in detail with our advisor and then assess whether your goal can be reached with mere debt.
thanks,
Vidya
Thank You Vidya , I got a call from Funds India Advisor and spoke with them.