The RBI made a surprise repo rate cut of 50 basis points through its September 29 Monetary Policy Statement, taking the repo rate to 6.75%. While the reaction in the stock market seemed a bit sedate, initially, bonds yields reacted positively, falling 0.14 to 7.58% (10-year 7.72% gilt) soon after the announcement.
Call it a festival season bonus or that Santa Claus is in town early (as the media said), the RBI governor’s response was “My name is Raghuram Rajan. And I do what I do”.
And he did what he usually does – surprising the markets yet another time; as the rate cut was higher than analyst consensus estimate of 25 basis points.
The RBI’s policy actions mean the following:
– The RBI has explicitly stated that it is frontloading its policy actions. It hopes that investment (investment activity in the economy) will likely respond to certainty about the extent of monetary stimulus in the pipeline, the low transmission notwithstanding. This raises the bar for the next rate cut in the next 3-6 months as the ball is in the court of government and private companies to revive investment or evince interest at least.
– That the RBI has chosen to be nimble in its policy approach is evident from its surprise rate cuts as well as with its regular revisit of inflation targets. With the low base effect in inflation waning by late 2016, food inflation risks not entirely abating and constant changes in the global environment, the RBI could well hold or delay any further policy moves. That essentially means that the game in the bond market may be a long drawn one.
– But it does appear that the game is not over (albeit long drawn) if one considers the 5-5.5% inflation range we are at today (and expected to be under 5% by January 2017) and a desirable real rate (as often suggested by RBI) of at least 1.5%. That means repo rate should be roughly at 6.5% and 1-year treasury yields at 6.75%-7%. That in turn means more rate easing could be due later; provided the bulk of RBI’s conditions (inflation, deficit, global environment, commodity price) for such accommodation are met.
What it means to investors
The current rate cut is clearly a boost to the debt market. A rally caused by easing yields could lead to capital appreciation in gilts as well as corporate bonds. That means medium to long-term debt funds could gain further, even though many of them touched double-digit 1-year returns already.
For retail investors, we continue to recommend income accrual and dynamic bond funds that hold a combination of gilts as well as quality corporate bond instruments.
RBI’s willingness to accommodate, based on further data, suggests that there could be room for more rally in debt. That means gains may accumulate over a longer period than at one shot.
For the stock market, a 75-basis point rate cut until June resulted in just around a 35-basis point transmission in terms of lowering borrowing costs. The 125-basis point cut, in all, certainly leaves much more scope, in part at least, for borrowing costs of companies to ease. If this happens, improved margins, both from lower input cost and interest cost could bring cheer to companies with debt in their books. We do not expect such rate cut to immediately translate into investment activity since the capacity utilisation (in manufacturing) is said to be around 70-72%, leaving scope for improved utilisation than addition to capacities.
Besides the rate cut, a few key announcements that could have implications on credit growth, on revival in housing and construction and steady foreign investments include:
– Bringing down the ceiling on SLR securities in the held to maturity (HTM) category as well as bringing down ceiling on HTM instruments from January 2016 till March 2017, in quarterly intervals. The SLR cuts will effectively mean banks will steadily have more money in hand and hopefully the same shall be used to lend. The cut in HTM would mean banks have to mark to market more securities they hold.
– Reducing the risk weights for low cost housing, lower than the current 50%; aimed at hopefully bringing down cost of home loans and encouraging banks to lend more for low cost housing
– Provide a more predictable environment for foreign portfolio investments (FPI) in debt markets by fixing the limit in rupee terms and also increase the limit of investment, in phases, to 5% in balance as of March 2018; besides a separate limit for state development loans. This would open up another Rs 1200 billion and Rs 500 billion in central and state government securities. This measure can be expected to keep the foreign flows into debt market robust but at the same time avoid froth.
- Discontinuation of the Systematic Investment Plan (SIP) of the Designated Schemes of MOMF
- Change in Maximum Subscription Amount of Aditya Birla Sun Life Medium Term Plan
Wealth Conversations – December 2024
Are Arbitrage Funds right for you?- Introduction Of Daily, Weekly Frequency In Sip And Changes In Default Sip Date And Minimum Investment Amount For The Groww Mutual Funds
03.10.15
Resp Vidya Bala Madam ,
Sub : Its first time to invest in MFs etc -new acct and planning please
Sir, I am 53 age, have a son aged 22 years Bcom and my wife is 49( earns about 5k-8k pm ),.
I had to take VRS suddenly due to paralysis a year ago.
We have accident, life and medi insurance of 10, 2 and 5 lakh each.
Have adequate 1.5-2 year deposits in bank as per std of living. Each of us have PPF acct with yearly amt of abt 3K -5k since 3 years.
I get my monthly pension of appx 30k. I have two flats -no debt at all.
I have no guarantee of myself as i am losing my confidence.
I have direct equity investt of about 12 lakh large+mid+small cap
in ratio of 55:25:20. in leading stocks only viewed every two months
I want to move out appropriately from direct equity and RD to MF, ETFs, and Sector each pharma, banking ( total 6 -8 ) open ended flexible funds from this month with flexible SIPs etc appx with Minimum SIP to start with -My time frame 10-15 years. ( to add on when mkt falls very heavily in the shortest time possible )
I wish to start jointly with my son and mrs the following with both of them , to avoid future problems – please guide
I have never invested in MFs. I feel the MF etc mkt is now very much matured and revolutionized. Besides I feel you are THE BEST GURU for me now as I feel I will have distinct advantages, hence I request you to kindly guide us through please.
How should and which funds should I go for it ? Where can I open tthe acct/s etc pl ?.
Hope I receive your maximum cooperation to derail my worries –
at the earliest …. i will be indebted to your orgn and you forever …
Thanks and with utmost kind Regards
I remain
mm shende 9 7 6 6 108 133
Hello Sir,
Thank you for writing to us. Mutual funds can be ideal vehicles for long term goals with limited review and maintainence and optimal long term returns. If you have an account with FundsIndia, you will of course be able to transact paperless, online, buy and sell with a click, have a single login for maintaining the entire investments of your family and more importantly have access to free quality advice from our team of advisors on an ongoing basis – not just for investing but reviewing your portfolio as well. Choosing the asset allocation, the funds that fit you are dependent of your time frame, risk profile, surplus and age. All this needs some initial inputs from you. As the blog in a public forum, we do nto offer individual recommendations here. Once you activate your FundsIndia account, you will be able put to an advisor who will understand your needs first and then give appropriate options fitting them. If you need help with opening an account, I could ask our team to get in touch. Post which, an advisor will help you sort your needs.
Thanks,
Vidya
03.10.15
Resp Vidya Bala Madam ,
Sub : Its first time to invest in MFs etc -new acct and planning please
Sir, I am 53 age, have a son aged 22 years Bcom and my wife is 49( earns about 5k-8k pm ),.
I had to take VRS suddenly due to paralysis a year ago.
We have accident, life and medi insurance of 10, 2 and 5 lakh each.
Have adequate 1.5-2 year deposits in bank as per std of living. Each of us have PPF acct with yearly amt of abt 3K -5k since 3 years.
I get my monthly pension of appx 30k. I have two flats -no debt at all.
I have no guarantee of myself as i am losing my confidence.
I have direct equity investt of about 12 lakh large+mid+small cap
in ratio of 55:25:20. in leading stocks only viewed every two months
I want to move out appropriately from direct equity and RD to MF, ETFs, and Sector each pharma, banking ( total 6 -8 ) open ended flexible funds from this month with flexible SIPs etc appx with Minimum SIP to start with -My time frame 10-15 years. ( to add on when mkt falls very heavily in the shortest time possible )
I wish to start jointly with my son and mrs the following with both of them , to avoid future problems – please guide
I have never invested in MFs. I feel the MF etc mkt is now very much matured and revolutionized. Besides I feel you are THE BEST GURU for me now as I feel I will have distinct advantages, hence I request you to kindly guide us through please.
How should and which funds should I go for it ? Where can I open tthe acct/s etc pl ?.
Hope I receive your maximum cooperation to derail my worries –
at the earliest …. i will be indebted to your orgn and you forever …
Thanks and with utmost kind Regards
I remain
mm shende 9 7 6 6 108 133
Hello Sir,
Thank you for writing to us. Mutual funds can be ideal vehicles for long term goals with limited review and maintainence and optimal long term returns. If you have an account with FundsIndia, you will of course be able to transact paperless, online, buy and sell with a click, have a single login for maintaining the entire investments of your family and more importantly have access to free quality advice from our team of advisors on an ongoing basis – not just for investing but reviewing your portfolio as well. Choosing the asset allocation, the funds that fit you are dependent of your time frame, risk profile, surplus and age. All this needs some initial inputs from you. As the blog in a public forum, we do nto offer individual recommendations here. Once you activate your FundsIndia account, you will be able put to an advisor who will understand your needs first and then give appropriate options fitting them. If you need help with opening an account, I could ask our team to get in touch. Post which, an advisor will help you sort your needs.
Thanks,
Vidya
Resp madam / Sir -Ref my post 03.10.15
my email id mmsmf4598389@gmail.com
thanks and regards
Resp madam / Sir -Ref my post 03.10.15
my email id mmsmf4598389@gmail.com
thanks and regards