The RBI in its first bi-monthly monetary policy review of FY2017-18 kept the repo rate unchanged at 6.25%, and re-iterated the neutral monetary stance taken in its previous policy in February 2017.
Experts say the reason behind no repo rate cut can be that banks are already having surplus funds after the demonetisation phase and also analysing the inflation trend, one can observe that in January and February ’17 inflation was around 3.17% and 3.65%, respectively. Although inflation has gone up a bit, but it is still at a lower level than it was eight months before in July 2016.
“Inflation is currently at relatively low levels and RBI has re-iterated its commitment to keeping it closer to 4% over the medium to long term. Accordingly, investors should focus on maintaining a suitable asset allocation comprising equities, fixed income and gold, based on one’s risk appetite and investment horizon to beat inflation over the long term,” says Dhaval Kapadia, CFA, Director, Portfolio Specialist, Morningstar Investment Adviser India.
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He added further, “In our view, if inflation were to rise and remain in a range of 4.5% to 5% over the next 6 to 12 months, as projected by the RBI, it may consider various monetary policy measures including tightening liquidity further and raising rates to bring inflation to its target level of 4%. On the other hand, if inflation were to remain below at 4% levels over the next 3 to 6 months, the RBI may not reduce rates immediately unless it expects a significant deterioration in growth prospects, making repo rate cut more unlikely”.
Why should one invest in equity-related schemes?
Although policy rates have least impact on equity investments, but observing the market trend recently, from the last few months it has been noticed that market is growing at a good pace. However, one cannot neglect the volatility factor while investing in equities. Therefore, making investments in equity mutual funds for a longer term will be beneficial and one should also have an ideal mix of debt and equity in one’s portfolio. Following the asset allocation strategy from time to time will benefit you in achieving higher returns as per your expectation. However, the investment objective to achieve that returns is not guaranteed.
“The RBI policy announcement has limited impact on the equity markets in the near term. In case inflation rises over the next 6 to 12 months based on RBI’s assessment, expectations of an increase in interest rates by the RBI would concern equity markets. Markets have risen sharply over the last couple of months on the back on strong FPI inflows resulting in valuations moving above fair values. Accordingly, investors should exercise caution while investing in equities and buy on market corrections with a long-term investment horizon,” added Kapadia.
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Impact on yield on 10-year G-sec bonds
Yields on longer dated securities have remained volatile since RBI changed its stance in February, with the 10-year G-Sec moving in the range of 6.5% to 6.90%. The last few weeks have seen substantial FPI inflows into the fixed income markets resulting in a marginal softening in yields.
“Given the above view on RBI policy action, one could consider fresh investments in funds targeting the shorter end of the yield curve like short term funds and select dynamic bond funds. Existing investments in long duration bond funds can be reduced subject to tax & exit load considerations,” added Kapadia.Since the policy rates are unchanged, investors who have invested in in ultra-short term bonds for their particular financial goals maturing within a year should remain invested. Fresh investments can be done in funds like arbitage funds and accrual funds which can gain income from coupon offered through bonds. One can also take exposure in accrual funds as these are tax-efficient funds too.
Since the policy rates are unchanged, investors who have invested in in ultra-short term bonds for their particular financial goals maturing within a year should remain invested. Fresh investments can be done in funds like arbitage funds and accrual funds which can gain income from coupon offered through bonds. One can also take exposure in accrual funds as these are tax-efficient funds too.