The Reserve Bank of India’s (RBI's) Monetary Policy Committee (MPC) has paused its rate-hike cycle by keeping the key lending rate at 6.5 percent. Change in policy rates has an indirect impact on debt mutual funds. The prices of bonds fall when the rates go up as bond yields and prices have an inverse relationship. Hence, a pause on rate hikes is in a way good news for debt mutual funds.
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Mutual fund managers say that the move to pause rates came as a surprise to the bond market. Bond market participants cheered the move. Recent fall in UST yields have also improved sentiment in the bond market. Fund managers say that medium to long duration schemes can be a good bet in this scenario.
“MPC's unanimous decision to pause has been surprising. Bond yields have declined sharply. We expect the yield curve to steepen from here in the medium-term. We prefer 5- to 10-year segment of the yield curve for its liquidity and relative value, “ said Dhawal Dalal, Chief Investment Officer – Fixed Income, Edelweiss Asset Management Limited.
Mutual fund managers say that investors should not expect rates to support debt returns because the pause by RBI can be short lived. RBI Governor has said that, “It is a pause, not a pivot” on rates.
Shaktikanta Das said the repo rate has been kept unchanged on basis of macroeconomic and financial conditions and that the RBI remains focused on withdrawal of accommodation. However, for bond markets, the pause has come as a pleasant surprise.
“Bond markets have witnessed a fall in yields (5-15 bps) across the curve. Going ahead we may see overall yield curve trajectory going downwards albeit slowly, with flattening bias. We expect 10 yr benchmark g-sec trading in 7.10 percent-7.30 percent range near future and then may move towards 7 percent over next 6 months. We expect debt funds to do well as yields move downwards. Longer duration funds generally augur well in such cycles,” said Akhil Mittal, Senior Fund Manager, Fixed Income, Tata Asset Management.
After two years, fund managers have moved from their advice of sticking to shorter duration funds. They believe that the risk-reward ratio has now shifted towards longer duration funds.
(Edited by : Anshul)
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