Fund managers confident of reduction in repo rate

By: | Published: September 29, 2015 12:23 AM

Ahead of the Reserve Bank of India’s (RBI) announcement of its fourth bi-monthly monetary policy review...

Ahead of the Reserve Bank of India’s (RBI) announcement of its fourth bi-monthly monetary policy review on Tuesday,  fund managers in the mutual fund industry believe that the central bank will cut the key rates. There is broad consensus among debt fund managers that RBI will cut repo rates by 25 basis points.

Since start of the current calendar year, the RBI has slashed repo rates thrice by 25 basis points each to 7.25%. “With inflation under control, I think there might be rate cut of 25 basis points. However, with likely US Fed rate hike in December we might see no more rate cuts in the current financial year,” said Murthy Nagarajan, head, fixed income at Quantum Asset Management Company (AMC).

However, fund managers assert that even after rate cuts for three times, investors can still make money by investing in long-term debt funds. Fund managers are confident that G-Sec yields will go in the range of 7.4-7.7% by the end of current financial year, which can have positive impact on longer duration debt products like gilt funds. The 10-year G-Secs yields on Monday closed at 7.72%.

The prices of fixed income securities are governed by interest rates prevailing in the markets. Interest rates and price of fixed income securities are inversely proportional. The net asset value (NAV) of debt funds is affected by the change in interest rates and if the interest rate falls, bond prices (and therefore fund NAVs ) rise to adjust to 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 during the falling interest rate
scenario.

“Investors can still make money by making duration call, but we would advise them to stay away from taking undue credit call at this point of time,” said Gopal Agrawal, CIO at Mirae Asset Global Investments (India).

However there are concerns of more rate cut going forward due to monsoon deficit and rate hike in the US.

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