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Last Updated : Oct 05, 2018 07:22 PM IST | Source: Lucky Palace Download

RBI does not hike interest rates, but stick to shorter maturity bond funds

Longer maturity bonds or bond funds may be volatile for some more time. | Lucky Palace Download

Moneycontrol Contributor @moneycontrolcom

Joydeep Sen | LPE88 Free Credit

The RBI Monetary Policy Committee (MPC) presented the fourth bi-monthly monetary policy statement for 2018-19 today. By now you are aware that policy rates have been maintained, that is, repo rate remains at 6.5 percent. The bigger takeaway is that the MPC has changed stance from ‘neutral’ to ‘calibrated tightening’. The normal implication of the term neutral is that the central bank would not tinker with policy rates, unless there is something exceptional, requiring policy rate to be hiked or reduced. However, even within the neutral stance, the MPC cut the policy rate in August 2017 and hiked in June and August 2018. Whether the situation was exceptional during these times is debatable.

That the stance has been changed to ‘calibrated tightening’ in a way lends clarity on RBI’s approach to policy rate formulation, that is, given the challenges of a weak rupee, high crude oil prices, high current account deficit, the inclination would be towards a rate hike. However, on the other hand, it has opened up the window for guess-work as the inflation projection has been reduced. Inflation projection for the second half of FY19, that is, October 2018 to March 2019 has been revised downward to 3.9 percent - 4.5 percent from 4.8 percent projected in the August Review. For Q1 of FY20, that is, April to June 2019, it is revised downward to 4.8 percent from 5 percent of August. Hence, effectively, market will interpret data prints like inflation and communication from the RBI in various forums to gauge the approach to rate formulation going forward.

The market movement has been a little favourable; government bond yields have eased somewhat after the policy announcement. The reason for the favourable market movement is that since the RBI had hiked rates twice even within the neutral rate stance, and sounding alarmist on inflation, it was factored in to an extent. It is also an indication of immediate relief that at least for today, the apprehension of a rate hike is off the table.

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Joydeep Sen
Independent Financial Advisor and Author

In the run-up to today’s policy review, yield levels had run up significantly as a rate hike was almost certainly priced in, going by consensus estimates. It is debatable whether an interest rate defence of the currency would work as we had seen in 2013. The RBI hiked rates steeply in July 2013 but foreign portfolio flows did not come in, till the special scheme for NRIs was launched in September 2013. However, given the all-time weak rupee and high crude prices, market apprehended a rate hike today from the RBI.

View on Market | LPE88 Free Credit

The market view has become somewhat uncertain now. On one hand inflation, as per RBI’s own projections, looks benign as discussed above whereas, on the other hand, the central bank would look to hike rates as and when appropriate. The next policy review announcement is scheduled for December 5, 2018. Crude oil, rupee, the impact of MSP hikes and kharif crop output on inflation would become relevant variables in the run-up to December 5, 2018. That is, the market may be volatile in the near term, trying to gauge RBI’s approach on policy rates.

Takeaway for investors | LPE88 Free Credit

Longer maturity bonds or bond funds may be volatile for some more time due to the reasons discussed above. As we have been recommending for some time, it is better to stick to the shorter end of the yield curve, that is, up to 3 or 4-year maturity. The reasons are: (a) volatility would be lower at the shorter end of the yield curve and (b) there is enough value at the shorter end. Yields on corporate bonds have moved up, subsequent to G-Sec yields moving up and default by a marquee company. For an investor entering now, yield levels are attractive. There is no compelling reason for investors to take duration risk, that is, invest in longer maturity funds when shorter maturity funds are offering 'value'. Investors should stick to short-term bond funds or shorter maturity schemes.

At a broader level, there is no systemic risk or contagion risk emanating from the default by one entity as the government has stepped in. Banking system liquidity is an issue, but the RBI has indicated OMO purchases of securities, that is, infusion of liquidity into the banking system and is expected to continue with OMO purchases going forward. Net-net, situation remains conducive for debt investments at the shorter end of the yield curve.

The writer is a founder of wiseinvestor.in | LPE88 Free Credit
First Published on Oct 5, 2018 07:21 pm

tags #Bonds #Business #Economy #Fixed Income #India #investing #MF Experts #personal finance | Free Credit Casino no deposit malaysia 2018

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