Economic growth is under\nthe weather. <\/p>\n\n\n\n
Importantly, RBI has\nnow decided to recognise it as a problem. <\/p>\n\n\n\n
In the second bi-lateral monetary policy review of FY20<\/a>, RBI decided not only to shift its policy stance from neutral to accommodative, but also decided to reduce the policy rate to 5.75% i.e. by 25 basis points. <\/p>\n\n\n\n RBI\u2019s rate cut rationale couldn\u2019t be clearer than this\u2026<\/strong><\/p>\n\n\n\n The Monetary Policy\nCommittee<\/strong> (MPC) notes that growth impulses have weakened significantly as\nreflected in a further widening of the output gap compared to the April 2019\npolicy. A sharp slowdown in investment activity along with a continuing\nmoderation in private consumption growth is a matter of concern. The headline\ninflation trajectory remains below the target mandated to the MPC even after\ntaking into account the expected transmission of the past two policy rate cuts.\nHence, there is scope for the MPC to accommodate growth concerns by supporting\nefforts to boost aggregate demand, and in particular, reinvigorate private\ninvestment activity, while remaining consistent with its flexible inflation\ntargeting mandate. <\/em><\/p>\n\n\n\n Unless, you are a\nmarket- savvy observer, you are probably going to miss the conviction with\nwhich RBI is moving towards lower rates. <\/p>\n\n\n\n Some facts: <\/strong><\/p>\n\n\n\n Since it was a well anticipated move, the rate\ncut and change in the policy stance hasn\u2019t cheered the capital markets. In\nfact, equity markets tanked soon after the announcement. <\/p>\n\n\n\n Was this a shocker?<\/strong><\/p>\n\n\n\n Against an indicative\nBasel III Leverage Ratio of 4.5%, RBI prescribed the minimum Leverage Ratio of\n4% for Domestic Systemically Important Banks (DSIBs) and 3.5% for other banks.<\/p>\n\n\n\n In other words, to\nensure financial stability and adhere to Basel-III standards, RBI has tightened\nthe screws around banks. Now banks will have to either lend less or introduce\nmore capital. <\/p>\n\n\n\n Equity markets weren\u2019t\nhappy with this development and carnage in banking stocks dragged down the\nleading indices. Following RBI\u2019s pro-growth policy stance, India\u2019s 10-year\nbenchmark bond yields dropped to an 18-month low of 6.9%. <\/p>\n\n\n\n On this backdrop, should you expect good times to return to debt\nfunds?<\/strong><\/p>\n\n\n\n Experts believe, now\nthat RBI has adopted an accommodative stance, it may look to lower rates as and\nwhen the current inflation and inflation expectations permit it to do so. As\nyou would know, bond prices and bond yields move in opposite direction. Hence,\nusually under such a scenario investors go gaga over debt funds.<\/p>\n\n\n\n If you are planning to invest aggressively in debt funds, here\u2019s a\nword of caution<\/strong><\/p>\n\n\n\n You shouldn\u2019t ignore the credit quality issues India faces today. Some stressed debtors<\/a> are expected to unsettle India\u2019s financial system for some more time. DHFL\u2019s dramatic credit downgrade to D from AAA about 9 months ago highlights the urgent need for debt mutual fund investors to be cautious. <\/p>\n\n\n\n Although Modi 2.0 has\nassured markets that it will find the resolution for the IL&FS crisis within\nthe next 100 days, you as an investor still need to be wary of the spillover\neffects the IL&FS\u2019 debt fiasco might have already caused. <\/p>\n\n\n\n With the recent rate\ncut, RBI has lowered the policy rates by 75bps over the last six months, and\nnow it expects banks to pass on the benefits to the borrowers. <\/p>\n\n\n\n Transmission of the cumulative reduction of 50 bps in the policy\nrepo rate in February and April 2019 was 21 bps to the weighted average lending\nrate (WALR) on fresh rupee loans. However, the WALR on outstanding rupee loans\nincreased by 4 bps as the past loans continue to be priced at high rates.\nInterest rates on longer tenor money market instruments remained broadly\naligned with the overnight WACR, reflecting near full transmission of the\nreduction in policy rate. <\/em><\/p>\n\n\n\n We are in an awkward situation; wherein borrowing cost for the deserving borrowers is likely to fall steeply. Nonetheless, making any assumption about the future credit quality of the instrument is extremely risky. A year ago, who would have thought IL&FS<\/a> and DHFL<\/a> would default?<\/p>\n\n\n\n Companies and NBFCs\nwith fragile credit profile will have to offer higher coupons to attract\ninvestors. You should be wise enough to avoid them. Companies with poor\nfundamentals may try to raise money to sustain them for the long term before it\ngets too late. <\/p>\n\n\n\n What investors should do?<\/strong><\/p>\n\n\n\n Investing aggressively at the longer end of the yield curve could prove imprudent, although the RBI has taken an accommodative stance. So, long-term debt funds<\/a> (holding longer maturity debt papers) can encounter higher volatility in the foreseeable future. If inflation moves up, it will then limit RBI’s scope of reducing policy rates further. Currently, shorter maturity papers are more attractive. <\/p>\n\n\n\n So, ideally, you’ll be better off if you deploy your hard-earned money in shorter duration debt funds, instead of longer duration funds. But ensure you approach even short-term debt funds with your eyes wide open and paying attention to the portfolio characteristics of the scheme. Stick to mutual funds where the fund manager doesn’t chase returns by taking higher credit risk. Furthermore, it is important to assess your risk appetite<\/a> and investment time horizon before investing in debt funds. <\/p>\n","protected":false},"excerpt":{"rendered":" Economic growth is under the weather. Importantly, RBI has now decided to recognise it as a problem. In the second bi-lateral monetary policy review of FY20, RBI decided not only to shift its policy stance from neutral to accommodative, but also decided to reduce the policy rate to 5.75% i.e. by 25 basis points. RBI\u2019s…<\/p>\n","protected":false},"author":3,"featured_media":414,"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\/413"}],"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=413"}],"version-history":[{"count":2,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/posts\/413\/revisions"}],"predecessor-version":[{"id":416,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/posts\/413\/revisions\/416"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/media\/414"}],"wp:attachment":[{"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/media?parent=413"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/categories?post=413"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/tags?post=413"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}