The stock market may be worried whether the 35 bps repo rate cut is the beginning of the end of the interest rate easing cycle, but its peers on the fixed income side have no such confusion. Debt fund managers see a 40-50 basis point rate cut happening given the economic situation. A further fall in interest rates has a definite bearing on how debt funds will behave here on. Let us see what fund managers are saying about the interest rate situation and their outlook.
Suyash Choudhary, Head – Fixed Income, IDFC Asset Management Company feels that with the clear stance of the current policy objective alongside weak inflation pressures and a probable overestimation of growth, a terminal repo rate of 5% is a possibility. “With liquidity in surplus and banks’ credit growth slowing, term spreads are still attractive and this remains a continued bullish backdrop for quality bonds,” Choudhary added.
Bekxy Kuriakose, Head – Fixed Income, Principal Mutual Fund feels that RBI’s MPC action today is significant as the key rates were cut by 35 bps (repo at 5.40% and reverse repo at 5.15%) indicating that RBI is willing to see rate changes in less than 25 bps steps. “While broad market and we were expecting 25 bps, the 35 bps cut with a vote for 4-2 in favour indicates RBI taking cognisance of clarion call by government and industry for bigger rate cuts in backdrop of limitation by fiscal policy to step up and for monetary policy to do the heavy lifting to address the domestic and global growth slowdown,” she said.
Post policy gilt prices have seen correction as rate cut had been more or less factored in the rally which has lasted for couple of months now. Short term corporate bonds have seen about 5 bps downward movement. Long term corporate bonds are at similar levels as pre policy. “Going forward we expect gilt yields to remain range bound in the overall environment of ample banking system liquidity, subdued inflation and recent global weakness and fall in oil prices. Money market yields should also remain stable with downward bias,” the Principal MF debt fund expert maintained.
Given that many NBFC, HFC cater to the segment which is not serviced by the banks, the revival of these companies is crucial for the economy to grow at a robust pace. RBI and the government needs to support transmission of lower rates to these companies. “We expect GDP growth to miss RBI projection and grow around 6.5 %. This will necessitate cut of 40 to 50 basis points more in Repo rates along with providing sufficient liquidity in the banking system,’ says Murthy Nagarajan, Head-Fixed Income, Tata Mutual Fund.
For Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products, Kotak Mahindra Asset Management Company, the RBI’s accommodation in stance continues. The sluggish global economy, the fact that world over central bankers are easing rates, and of course our economy also faces growth headwinds were among the key reasons that can be attributed to the rate cut. There seems to be a fervour to maintain comfortable liquidity in the banking system, which should be an additional support factor for bond yields, apart from cut in benchmark rates, she pointed out. Going forward, the quantum and timing of rate actions (read cut as we are in accommodative stance) would be largely data-dependent, Iyer added.
Counter-view: End of rate cut cycle
There are some exceptions to the 40-50 bps rate cut story. Pankaj Pathak, Fund Manager – Fixed Income, Quantum Mutual Fund is of the view that given the inflation trajectory remains benign the RBI will continue to use monetary policy to boost growth. However, it seems that the RBI is not that worried about the growth as is the general market, he argues. “The Governor reference to “50 bps cut would be an excessive” has raised uncertainty over the future rate cuts. We do not see a long rate cutting cycle from here on. There could be an additional 25 bps cut but that would not be enough to sustain this bond market rally. The best of bond market rally is now behind us and from here on investors should lower their return expectation from bond funds,” Pathak added.
Typically, bond funds are likely to do well when interest rates decline. Short-term debt, and money market funds are less vulnerable to the impact of interest rate volatility. However, do note that buy-and-hold investors in long-term bond funds may be able to ride out the roller coaster ride of interest rate fluctuations.