RBI policy: Investors should consider adding more to duration funds

Investors with medium to long-term investment horizons can look at funds having duration of 6-7 years

In its latest monetary policy review, the Reserve Bank of India (RBI) opted to keep the repo rate unchanged and maintained a neutral stance. This decision comes as part of the RBI's broader efforts to address inflationary pressures and ensure financial stability, while also taking into account the geopolitical uncertainties in the global economy.  The debt market has reacted to the RBI’s stance by showing a slight increase in 10-year bond yields, from 7.72% to 7.75%. While this may appear negative initially, investors in fixed income securities should view this as a potential buying opportunity, particularly as yields are expected to stabilize in the short term.

 

 

According to Murthy Nagarajan, Head-Fixed Income, Tata Asset Management, the 10-year bonds are expected to trade in a range of 7.72% to 7.78% over the coming days. With the likelihood of rate cuts in the future as GDP growth trends towards 6%, long-duration bonds could see price appreciation in the medium term. "Investors should consider adding to their duration portfolios to benefit from both high accruals and the expected price movement," he said.

 

Moreover, with the RBI's liquidity measures expected to provide a cushion for the banking system, investors should maintain sufficient liquidity in the short term to take advantage of potential market corrections or opportunities that may arise from a possible global economic recovery or more favorable domestic conditions.

 

" Going ahead, we believe that yields will continue to drift lower on the back of steady and low inflation, and growth slowdown, which we believe can undershoot RBI’s projections and continuation of the monetary easing cycle across the world and investors can use any uptick in yields to increase their Fixed income allocation. Investors with medium to long-term investment horizons can look at funds having duration of 6-7yrs with predominant sovereign holdings as they offer a better risk-reward currently. Investors having an Investment horizon of 6-12 months can look at the money market funds as yields are pretty attractive in the 1yr segment of the curve," said Puneet Pal, Head- Fixed Income, PGIM India Mutual Fund. 

 

"Fixed income investing prefers a stable, almost ‘boring’ environment and that is exactly what has been delivered. Investors to continue using fixed income for effective portfolio construction. A barbell strategy with buying short end corporate bonds with long end g-Sec and bank infra bonds is suggested for benefiting from carry as well as potential capital gains," said Vishal Goenka, Co-Founder of IndiaBonds.com. 

"“The RBI’s decision to maintain the repo rate at 6.5% keeps borrowing costs stable. However, the 50 basis points CRR cut to 4% is a game-changer, injecting ₹1.16 lakh crore of liquidity into the banking system. This move is a boon for debt mutual funds, especially short-duration and liquid funds, as it stabilizes yields and bolsters credit conditions.For the equity markets, increased liquidity is a positive signal for banking stocks. With enhanced lending capacity due to the reduced CRR, banks are positioned to improve profitability, potentially driving bullish sentiment across the financial sector, including NBFCs. Smart investors should capitalize on this scenario by focusing on quality debt funds and closely monitoring the performance of the banking sector for emerging opportunities," said Kirang Gandhi, Personal Financial Mentor.