{"id":864,"date":"2019-08-09T05:47:03","date_gmt":"2019-08-09T05:47:03","guid":{"rendered":"http:\/\/blog.certifiedfinancialguardian.com\/?p=864"},"modified":"2019-08-09T06:23:06","modified_gmt":"2019-08-09T06:23:06","slug":"how-to-approach-debt-mutual-funds-after-rbis-unusual-35-bps-repo-rate-cut","status":"publish","type":"post","link":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/2019\/08\/09\/how-to-approach-debt-mutual-funds-after-rbis-unusual-35-bps-repo-rate-cut\/","title":{"rendered":"How To Approach Debt Mutual Funds After RBI\u2019s Unusual 35 bps Repo Rate Cut"},"content":{"rendered":"\n

Taking courage from benign CPI inflation\nand lower \u2018core inflation\u2019 readings, the Reserve Bank of India (RBI), in a rare\nmove, cut\npolicy rates by another 35 bps (departing from the normal practice of 25 bps) with\nimmediate effect in its 3rd<\/sup> bi-monthly monetary policy statement for\n2019-20 (held on August 7, 2019). Thus, the policy repo rate is now at 5.40% to\nsupport growth amidst concerns of weak demand. <\/p>\n\n\n\n

Table 1: Series of policy rate\ncuts in 2019 to address growth concerns<\/em><\/strong><\/p>\n\n\n\n

\n Month<\/strong>\n <\/td>\n Repo Policy Rate<\/strong>\n <\/td>\n Policy rate cut  (Basis points)<\/strong>\n <\/td>\n Mon Policy Stance<\/strong>\n <\/td><\/tr>
\n Feb-19\n <\/td>\n 6.25%\n <\/td>\n 25\n <\/td>\n Neutral<\/span>\n <\/td><\/tr>
\n Apr-19\n <\/td>\n 6.00%\n <\/td>\n 25\n <\/td>\n Neutral<\/span>\n <\/td><\/tr>
\n Jun-19\n <\/td>\n 5.75%\n <\/td>\n 25\n <\/td>\n Accommodative<\/span>\n <\/td><\/tr>
\n Aug-19\n <\/td>\n 5.40%\n <\/td>\n 35\n <\/td>\n Accommodative<\/span>\n <\/td><\/tr>
\n Total<\/strong>\n <\/td>\n  <\/strong>\n <\/td>\n 110<\/strong>\n <\/td>\n  \n <\/td><\/tr><\/tbody><\/table><\/center>\n\n\n\n

Data on Aug 7, 2019
(Source: RBI)<\/p>\n\n\n\n

Perhaps, the\nsix-member Monetary Policy Committee (MPC) heard the message from Finance\nMinister, Ms Nirmala Sitharaman loud and clear when she spoke to Economic Times\nearlier in July.<\/p>\n\n\n\n

“I’ll honestly wish (for a) rate cut … and yes, a significant rate cut would do a lot of good for the country. I am conscious that the RBI has taken a very accommodative posture and done nearly… 75 bps (basis points rate cut). We will now have to look at that route with a lot more hope. The industry also feels there is space for it”\u00a0– Ms Sitharaman, speaking to the Economic Times in an interview\u00a0<\/em><\/p>\n\n\n\n

Table 2: How did the MPC vote\nin the 3rd<\/sup> bi-monthly monetary policy statement 2019-20 resolution?<\/em><\/strong><\/p>\n\n\n\n

\n MPC Members<\/strong>\n <\/td>\n Voted to<\/strong>\n <\/td><\/tr>
\n Mr. Shaktikanta Das\n <\/td>\n Reduce by 35 bps\n <\/td><\/tr>
\n Dr. Ravindra H. Dholakia\n <\/td>\n Reduce by 35 bps\n <\/td><\/tr>
\n Dr. Michael Debabrata Patra\n <\/td>\n Reduce by 35 bps\n <\/td><\/tr>
\n Mr. Bibhu Prasad Kanungo\n <\/td>\n Reduce by 35 bps\n <\/td><\/tr>
\n Dr. Chetan Ghate\n <\/td>\n Reduce by 25 bps\n <\/td><\/tr>
\n Dr. Pami Dua\n <\/td>\n Reduce by 25 bps\n <\/td><\/tr><\/tbody><\/table><\/center>\n\n\n\n

(Source: RBI\u2019s 3rd<\/sup> bi-monthly statement for 2019-20)<\/p>\n\n\n\n

As exhibited by the table above, all\nsix-members voted to reduce the policy repo rates. Further, the MPC decided to\nmaintain the \u2018accommodative monetary policy stance\u2019. These decisions were in\nconsonance with the objective of achieving the medium-term target for consumer\nprice index (CPI) inflation of 4.00% within a band of +\/- 2.00% while\nsupporting growth.<\/p>\n\n\n\n

Graph 1: Where is CPI inflation headed according to the RBI?<\/em><\/strong><\/p>\n\n\n\n

\"\"<\/figure><\/div>\n\n\n\n

(Source: RBI\u2019s 3rd<\/sup>\nbi-monthly monetary policy statement for 2019-20)<\/p>\n\n\n\n

Taking into consideration several factors (namely:\nfood inflation; spatial and temporal distribution of monsoon; lower core\ninflation; international crude oil prices; geopolitical tension in Middle-East;\none year ahead inflation expectations of households; and impact of recent\npolicy rate cuts), the RBI has projected CPI inflation at 3.1% for Q2:2019-20\nand 3.5-3.7% for H2:2019-20 (a slight upward revision in the base range from earlier),\nwith risks evenly balanced. For Q1:2020-21, CPI inflation is projected at 3.6%.\n<\/p>\n\n\n\n

The MPC has noted that inflation is currently\nprojected to remain within the target over a 12-month ahead horizon.<\/p>\n\n\n\n

Path to\ninterest rates\u2026<\/em><\/strong><\/p>\n\n\n\n

The benign inflation outlook according to the RBI provides further headroom for policy action (rate cut and accommodative stance) to close the negative output gap while past rate cuts are being gradually transmitted to the real economy. Thus, the \u2018accommodative stance\u2019 is maintained. <\/p>\n\n\n\n

How to\napproach debt mutual funds now?<\/em><\/strong><\/p>\n\n\n\n

\"\"<\/figure><\/div>\n\n\n\n

(Images source: \u00a0pixabay.com; photo credits rubylia<\/a>)<\/p>\n\n\n\n

Although my views have not changed much since the last time I wrote to you on July 29, 2019<\/a>, here are a few more points to devise a sensible investment strategy\u2026<\/p>\n\n\n\n

You see, even as the RBI\u2019s policy statement\nmakes it quite clear that rates may reduce further, in my view, we are almost\nin the last leg of a rate cut cycle. Most of the rally at the longer end of the\nyield curve has already come about since the time RBI started reducing rates. <\/p>\n\n\n\n

Graph 2 :<\/strong> The 10-year benchmark yield has softened since September 2018<\/em><\/strong><\/p>\n\n\n\n

\"\"<\/figure><\/div>\n\n\n\n

Data as on August 7, 2019
(Source: RBI, PersonalFN Research)<\/p>\n\n\n\n

Thus, debt mutual funds with exposure to the\nlonger end of the yield curve, i.e. medium-to-long duration funds,\nlong-duration funds, Gilt Funds, and Dynamic Bond Funds already delivered\ndouble-digit returns in the last one year. Going forward, the gains in these\ncategories may be rather limited or less rewarding. <\/p>\n\n\n\n

In addition, investing aggressively at the\nlonger end may entail high volatility in the foreseeable future. Contrary to\nRBI\u2019s expectations, if CPI inflation moves up beyond its comfort zone or\nmedium-term inflation target of 4.00%, the scope for a further policy rate cut\nfrom RBI reduces. <\/p>\n\n\n\n

Nevertheless, still, if you wish to take the\nrisk and exposure at the longer end of the yield curve, consider dynamic style\nfunds that have the flexibility to move across maturities of debt papers as per\nthe interest rate scenario. <\/p>\n\n\n\n

Ideally, you’ll be better off if you deploy your hard-earned money in shorter duration debt mutual funds. But ensure you\u00a0approach even short-term debt funds with your eyes wide open<\/a>\u00a0and pay attention to the portfolio characteristics and quality of the scheme. <\/p>\n\n\n\n

A fact is, many debt funds across maturity\nprofiles already have exposure to downgraded and toxic debt papers which\nheightens the investment risk. <\/p>\n\n\n\n

So, prefer the safety of principal over\nreturn. Stick to mutual funds where the fund manager doesn’t chase returns by\ntaking higher credit risk. Further, asses your risk appetite and investment\ntime horizon while investing in debt funds. <\/p>\n\n\n\n

While investing in short-term debt funds,\nconsider keeping an investment horizon of at least 2-3 years.<\/p>\n\n\n\n

If you have an investment horizon of 6 to 12\nmonths, ultra-short duration or low duration funds may be suitable. <\/p>\n\n\n\n

And if you have an extreme short-term time horizon (of 3 to 6 months), consider liquid funds<\/a> with high-quality debt papers, which do not have high exposure to Commercial Papers (issued by private entities). Alternatively, if you wish to park in a much safer category, you would be better off investing in overnight funds. <\/p>\n\n\n\n

Remember, investing in debt funds is not risk-free<\/a>.\u00a0 <\/p>\n\n\n\n

If you prefer to keep your capital safe, opt for fixed deposits<\/a>. <\/p>\n\n\n\n

[Read: <\/strong>Factors To Look At While Investing In Bank FDs<\/a>]<\/p>\n\n\n\n

This article first appeared on PersonalFN here.<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Taking courage from benign CPI inflation and lower \u2018core inflation\u2019 readings, the Reserve Bank of India (RBI), in a rare move, cut policy rates by another 35 bps (departing from the normal practice of 25 bps) with immediate effect in its 3rd bi-monthly monetary policy statement for 2019-20 (held on August 7, 2019). Thus, the…<\/p>\n","protected":false},"author":2,"featured_media":868,"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\/864"}],"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\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/comments?post=864"}],"version-history":[{"count":3,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/posts\/864\/revisions"}],"predecessor-version":[{"id":872,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/posts\/864\/revisions\/872"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/media\/868"}],"wp:attachment":[{"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/media?parent=864"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/categories?post=864"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/tags?post=864"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}