The RBI has kept the repo rate unchanged at 6.25 percent for the second straight time and thereby it seems to have changed its policy stance from ‘accommodative’ to ‘neutral’.
The RBI in its report said that the reason for this move is to keep a watch on inflation trends.
“Contrary to the market expectations, we were not expecting policy rate cuts by the RBI for the simple reason that banks are already flush with surplus liquidity due to demonetisation and slow credit off-take,” says Manish Kothari – Head of Mutual Funds, Paisabazaar.com
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Trying to keep things neutral, the RBI governor is projecting a long-term economic growth of the country. Knowingly that banks are flooded with cash and how to make the best use of it, the RBI is taking decisions step by step. The market, however, had shown a negative impact but is likely to move on the higher side in the long term which can give a positive impact on the investments made by investors.
“As much as 30–40% of the Rs 15 lakh cr deposited with the banks post-demonetisation is expected to remain within the system until the end of this financial year. However, the markets have reacted negatively to the RBI’s decision to continue with the current policy rates and change its credit policy stance from accommodative to neutral,” says Kothari.
Impact on debt funds
Looking at positive impact towards debt funds one should take an exposure in accrual funds which mainly earn interest from coupon offered through bonds other than capital appreciation which takes place when interest rate reduces. However, bank FD’s may not provide higher returns in the future due to heavy deposits in bank done during the demonatisation phase.
“As the benchmark 10-year yields have already moved up substantially after the announcement, investors in duration funds would have to bear volatility in the near term. Hence, we will advise debt fund investors to take exposure in short-term/accrual funds. Investors in these funds can expect higher returns if banks transmit even a small fraction of the previous policy rate cuts,” says Kothari.
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Impact on equity funds
The repo rate remaining the same means that a better valuation in the equity market can be seen with a positive impact on inflation. However, in the short run, you may notice high market volatility due to many economic and political factors, but there will be a positive impact in doing investments for long-term horizon as the economy is likely to get a boost due to the cashless move taken by the government.
“Equity investors with a long-term horizon should not worry about the impact of the policy rate cuts or the absence of it. Instead, they should focus more on their asset allocation strategy,” he said.