There is a broad consensus among debt fund managers that the RBI will cut the repo rate by another 25 bps at its monetary policy review on June 2.
While inflationary pressures are largely under control, some players are skeptical about rising crude prices even as fears of a weaker monsoon linger.
In this calendar year itself, the RBI has twice cut repo rate by 25 bps to 7.5%. “Though macro indicators like inflation, current account deficit and fiscal deficit look positive, some external factors like a hike in US interest rates and outflows from FPIs in the debt market remain a cause for concern,” said a top fund manager. FPIs sold $1.4 billion of Indian debt in May.
However, fund managers say mutual funds have not seen any major redemption pressure in the last few days.
Dwijendra Srivastava, CIO-debt, Sundaram Asset Management Company, said: “We expect another 25-bps cut from RBI on, or before, the next policy. In the current scenario, we expect the 10-year G-Sec yield to settle anywhere between 7.7% and 7.9% in the next few weeks.”
However, over a 6-8-month horizon, most fund managers expect the yield to hover around 7.25%-7%, which can have a positive impact on longer duration debt products, such as gilt funds. The 10-year G-Sec closed at 7.86% on Tuesday.
Prices of fixed-income securities are governed by interest rates prevailing in the market and are inversely proportional.
The net asset value (NAV) of debt funds is affected by the change in interest rates — if the interest rate falls, bond prices (and, therefore, fund NAVs ) rise to adjust to the new yields and vice versa.
Income and gilt schemes invest in long-term papers of government and corporates and have higher maturity than medium-term bond funds. So, they are best suited for the falling interest rate scenario.
“There was some confusion on the new 10-year bond issue. But now that we have clarity, we will have a new issuance on Friday. We expect the new 10-year bond to be sold in the range of 7.7-7.75% and, if things improve, they could move to the 7.25% level. This will make long-term debt funds attractive at this point of time,” said a fund manager.
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