{"id":1789,"date":"2020-04-01T10:05:40","date_gmt":"2020-04-01T10:05:40","guid":{"rendered":"https:\/\/blog.certifiedfinancialguardian.com\/?p=1789"},"modified":"2020-04-01T10:05:42","modified_gmt":"2020-04-01T10:05:42","slug":"how-to-approach-debt-mutual-funds-after-rbis-exceptional-rate-cut-to-fight-covid-19","status":"publish","type":"post","link":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/2020\/04\/01\/how-to-approach-debt-mutual-funds-after-rbis-exceptional-rate-cut-to-fight-covid-19\/","title":{"rendered":"How to Approach Debt Mutual Funds after RBI\u2019s Exceptional Rate Cut to Fight COVID-19"},"content":{"rendered":"\n<p>Amid uncertain economic conditions,\nwherein the recovery in global growth entirely depends upon the intensity,\nspread and how long the Coronavirus or COVID-19 outbreak continues, the RBI in\nan exceptional move took all necessary measures. In fact, it has <a href=\"https:\/\/www.personalfn.com\/dwl\/rbi-finally-pulls-out-its-weapons-to-combat-the-coronavirus-pandemic\">pulled out all weapons to\ncombat the impact of the coronavirus lockdown<\/a>.<\/p>\n\n\n\n<p>In the <a href=\"https:\/\/www.rbi.org.in\/Scripts\/BS_PressReleaseDisplay.aspx?prid=49581\">7<sup>th<\/sup> bi-monthly\nmonetary policy statement, 2019-20<\/a>, the\nsix-member Monetary Policy Committee (MPC) resolved: <\/p>\n\n\n\n<ul><li>Reducing the repo policy rate by 75\nbasis point or bps to 4.40% from 5.15% with immediate effect (<em>an aggressive rate cut<\/em>)<\/li><li>The marginal standing facility\n(MSF) rate and the Bank Rate were reduced to 4.65% from 5.40%<\/li><li>The reverse repo rate under the LAF\n(Liquidity Adjustment Facility) was reduced to 4.00%<\/li><li>And the MPC also decided to\ncontinue with \u201caccommodative stance as long as it is necessary\u201d to revive growth\nand mitigate the impact of coronavirus (COVID-19) on the economy while ensuring\nthat inflation remains within the target<\/li><\/ul>\n\n\n\n<p>All six members of the MPC voted in\nfavour of the decision, but two members (Dr. Chetan Ghate and Dr. Pami Dua)\nvoted in favour of 50 bps reduction instead of 75 bps as voted by the rest.<\/p>\n\n\n\n<p>Besides that, measures were taken\nto ensure that liquidity conditions in the system remain comfortable and\nCOVID-19 related liquidity constraints are eased. The Cash Reserve Ratio (CRR)\nof all banks was reduced to 3.00% from 4.00% (expected to release primary\nliquidity of Rs 1.37 lakh crore), plus the minimum daily CRR balance maintenance\nrequirement was reduced from 90% to 80%. <\/p>\n\n\n\n<p>Systematic liquidity surplus under LAF\nstood at Rs 2.86 lakh crore in March (upto March 25, 2020). The RBI actively\nmanaged the liquidity conditions via \u2018operation twist\u2019, long-term repo\nauctions, and Open Market Operations. <\/p>\n\n\n\n<p>These decisions were taken in consonance\nwith the objective of achieving the medium-term target for consumer price index\n(CPI)&nbsp;\u2013 also known retail inflation &#8212; at 4.00% with the flexibility to go\n+\/- 2%.&nbsp; <\/p>\n\n\n\n<p>In February 2020, India recorded the retail\ninflation of 6.6% which was 100 bps lower than that recorded in January 2020. The\n7<sup>th<\/sup> bi-monthly monetary policy mentions that CPI inflation excluding\nfood and fuel eased in February under the weight of softer prices of transport\nand communication, and personal care. Households\u2019 inflation expectations a year\nahead softened by 20 bps in the March 2020 round of the Reserve Bank\u2019s survey. <\/p>\n\n\n\n<p>The RBI is of the view that retail\ninflation has peaked in January, and it is expected to soften in the coming\nmonths owing to falling energy prices in the international market and shocks to\ndemand due to COVID-19 may weaken them going forward.<\/p>\n\n\n\n<p><strong>Path\nto inflation, GDP growth and interest rates\u2026<\/strong><\/p>\n\n\n\n<p>Going forward, according to the RBI, food\nprices may soften even further under the beneficial effects of the record food\ngrains and horticulture production, at least till the onset of the usual summer\nuptick.<\/p>\n\n\n\n<p>Furthermore, the fall in crude should work\ntowards easing both fuel and core inflation pressures, depending on the level\nof the pass-through to retail prices. Aggregate demand would also weaken as a\nconsequence of COVID-19 which, in turn, will reduce core inflation. That said,\nthe central bank, observes that heightened volatility in the financial market\ncould have a bearing on inflation. <\/p>\n\n\n\n<p>Speaking of the GDP growth, the RBI states\nthat the previous estimates of 4.7% GDP growth in Q4FY20 and the full-year FY20\nestimates of 5% have a downside risk arising from the COVID-19 pandemic. The\nvirus outbreak has affected the Private Final Consumption and Gross Fixed\nCapital Formation severely. <\/p>\n\n\n\n<p><strong>How\nthis rate cut will affect debt fund investors?<\/strong><\/p>\n\n\n\n<p>As you would know, bond prices share an inverse\nrelationship with bond yields and interest rates. Hence, RBI\u2019s rate cut is\nlikely to pull down yields and bonds are likely to do reasonably well.\nCurrently, the 10-yr G-sec yield is around 6.15%. <\/p>\n\n\n\n<p>This rate cut is an exceptional measure\ntaken to deal with COVID-19 pandemic-led slowdown. Although inflation is\nexpected to cool off, it is still 260 bps above RBI\u2019s original target. As the\npresent lockdown is also affecting production at manufacturing units, the supply-side\nshocks cannot be ruled out if the 21 days lockdown extends for any reason.<\/p>\n\n\n\n<p>MPC\u2019s commentary is crucial; it says: \u201c<em>The MPC is of the view that macroeconomic\nrisks, both on the demand and supply sides, brought on by the pandemic could be\nsevere. The need of the hour is to do whatever is necessary to shield the\ndomestic economy from the pandemic.\u201d <\/em><\/p>\n\n\n\n<p>That said, overall it appears that the\npresent interest rate cycle has bottomed out. Most of the rally at the longer\nend of the yield curve has already come about since the time RBI started reducing\npolicy rates.<\/p>\n\n\n\n<p><strong>Which\ndebt funds you might consider at this point?<\/strong><\/p>\n\n\n\n<p>Taking into account policy repo rates could\nmove either way &#8212; given the &#8220;accommodative stance as long as it is\nnecessary&#8221; &#8212; is maintained by RBI; allocating a small portion of the debt\nportfolio to a Dynamic Bond Fund may be considered, provided you are willing to\ntake some extra risk. A Dynamic Fund holds the mandate to invest across\nmaturity debt papers. The fund manager assesses where interest rates are headed\nto build the portfolio across the yield curve.<\/p>\n\n\n\n<p>On the other hand, if investors are unwilling to take extra risk, then they would be better off deploying their hard-earned money in shorter duration debt mutual funds. But ensure that even short-term debt funds are approached with eyes wide open &#8212; paying attention to the portfolio characteristics and quality of the scheme. A fact is, many debt mutual funds across maturity profiles are grappling with downgraded and toxic debt papers which heightens the investment risk. \u00a0Also, given that yields have already plunged to a multi-year low, the possibility of credit risk increasing cannot be dismissed. Plus, the lockdown is likely to amplify the credit risk (owing to a slowdown in business).<\/p>\n\n\n\n<p>So, when choosing debt funds, prefer the safety of principal over returns. Stick to <a href=\"https:\/\/www.personalfn.com\/fns\/should-you-consider-starting-sip-in-debt-mutual-funds\">debt mutual funds<\/a> where the fund manager does not chase returns by taking higher credit risk. Further, assess your risk appetite and investment time horizon while investing in debt funds.<\/p>\n\n\n\n<p>Remember,\u00a0<a rel=\"noreferrer noopener\" href=\"https:\/\/www.personalfn.com\/fns\/is-your-investment-in-debt-mutual-fund-at-risk\" target=\"_blank\">investing in debt funds is not risk-free<\/a>.<\/p>\n\n\n\n<p>If you prefer to keep your capital safe,\nprefer <a href=\"https:\/\/www.personalfn.com\/fns\/factors-to-look-at-while-investing-in-bank-fds\">fixed\ndeposits<\/a>. <\/p>\n\n\n\n<p>Happy Investing!<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Amid uncertain economic conditions, wherein the recovery in global growth entirely depends upon the intensity, spread and how long the Coronavirus or COVID-19 outbreak continues, the RBI in an exceptional move took all necessary measures. In fact, it has pulled out all weapons to combat the impact of the coronavirus lockdown. In the 7th bi-monthly&hellip;<\/p>\n","protected":false},"author":3,"featured_media":1790,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"cybocfi_hide_featured_image":""},"categories":[3],"tags":[],"_links":{"self":[{"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/posts\/1789"}],"collection":[{"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/comments?post=1789"}],"version-history":[{"count":1,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/posts\/1789\/revisions"}],"predecessor-version":[{"id":1791,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/posts\/1789\/revisions\/1791"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/media\/1790"}],"wp:attachment":[{"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/media?parent=1789"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/categories?post=1789"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/tags?post=1789"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}