Monetary Policy - Rate cut to have beneficial impact on fixed income funds

Dhawal Dalal, Executive Vice President & Head - Fixed Income - DSP BlackRock Investment Managers Pvt Ltd

"Bond market participants were pleasantly surprised with a 50 basis-point reduction in the Repo Rate in today's Credit Policy. This rate cut has been delivered against the backdrop of a prospective Fed interest rate hike, recent weakness in EM equities and bonds, weakening of EM FX and stable food prices.

A higher-than-expected rate cut is aimed at reducing short-term borrowing costs and spurring investment-led activities in the second-half of the fiscal year. We expect the yield curve to steepen further as short-term yields ( up to 3Y) are likely to trend lower more than long-term yields (3Y+). The RBI has maintained an accommodative bias after the policy. We expect the RBI to maintain status in the near term.

The RBI has also announced a revamped policy for FPI exposure limits in government bonds & SDL. The new policy has linked the FPI exposure limit to 5% of the outstanding stock in the government bond market. This is to be achieved over the next three years in a gradual manner. We believe that this clarity in policy will be appreciated by foreign investors and may generate steady and sustained bidding interest for government bonds.

Today's rate cut will likely have a beneficial impact on fixed income funds, as yields of fixed income assets will decline in a gradual manner. We suggest that investors focus on income funds with a maturity of between 2 to 7 years, as these funds are expected to do well in the medium-term on a risk-adjusted basis."

Source : Equity Bulls

Keywords