RBI Policy: Top Mutual Fund Managers Respond to RBI Policy

The RBI surprised the market with a status quo on policy rates and the decision to maintain a dovish stance on rates. The central bank kept the repo rate unchanged at 4% for the 10th consecutive time. The repo rate also remained unchanged at 3.35%.

“The MPC has decided to maintain the dovish stance for as long as necessary to ‘sustainably revive and support growth and continue to mitigate the impact of COVID-19 on the economy’. These decisions are in line with the objective of achieving the medium-term consumer price index (CPI) inflation target of 4% within a range of +/- 2%, while supporting growth. , the RBI Governor said. RBI Governor.

Here’s how top mutual fund managers reacted to the policy:

Dhawal Dalal – CIO Fixed Income, Edelweiss MF:
Belying bond market participants’ expectations of the first step towards policy normalization, the RBI MPC surprised market participants and voted unanimously to maintain the status quo on all policy rates.

Overall, the RBI Governor’s speech was quite heartwarming for the bond market and helped soothe frayed nerves among investors. He made all positive and accommodating comments and refrained from sounding negative or hinting at any policy changes down the road. The 10-year IGB benchmark yield fell to ~6.75% after his speech from its pre-policy level of 6.80% in light market positioning.

The RBI Governor’s dovish policy stance has given bond market participants some much-needed respite from the initial FY23 Union budget shock. While higher bond yields are inevitable over the fiscal 23, bond market participants are hoping that RBI’s invisible hand will likely guide the bond market when the going gets tough and make the journey a little more comforting.

That said, we expect yield curves to remain steep in FY23. Steeper yield curves are likely to provide patient investors with sufficient risk-adjusted returns in an environment of falling headline inflation. Investors with a long-term investment horizon should consider investing in passively managed bond ETFs/index funds maturing in 2026 for higher tax-adjusted returns by investing in 3-4 installments by September 30 2022, in our opinion.

Mahendra Jajoo, CIO, Fixed Income, Mirae Asset Investment Managers:

Contrary to general expectations, RBI pleasantly surprised the market by keeping key rates unchanged and maintaining an accommodative policy. Inflation for FY23 is projected at 4.5% versus FY22 inflation at 5.3%. The assessment of a slowdown in inflation over the coming year may have created space to keep rates low for longer, even as major global central banks steer toward accelerated policy normalization. GDP growth for FY23 is expected to come in at 7.8%, slightly below broader market expectations of 8%+, again reflecting the need for continued accommodative policy. Bond markets further improved on the positive momentum that began following the cancellation of auctions over the past two weeks, reflecting guidance from regulators. Yields on benchmark 10-year government bonds fell to 6.72%. With such strong guidance from the RBI, we expect bond yields to remain range-bound going forward, supported by comfortable liquidity and intervention from the RBI as and when deemed appropriate.

Puneet Pal Head-Fixed Income, PGIM India Mutual Fund:
RBI continues to appear dovish by refraining from raising the reverse repo rate as the market widely expected. RBI maintained its dovish stance reiterating that it will maintain the dovish stance for as long as necessary to revive and sustain growth. Although the RBI has refrained from raising the repo rate, the governor mentioned in his statement that the effective repo rate has increased from 3.47% in August 2021 to 3.87% on February 4. 2022.

Market yields were supported by the cancellation of auctions as announced by RBI earlier this week and now this dovish stance by RBI will mean yields will remain broadly flat through March 2022. We expect the curve to remain steep with the shorter end of the curve outperforming the longer end.

Amit Tripathi, CIO – Bond Investments, Nippon India Mutual Fund:

“RBI is not one of the central banks that is affected by Google results for keywords such as ‘Inflation.’ Today’s policy surprise was not the ‘no hike’ decision. “in reverse repo (RR). As stated by RBI, the effective rate of RR is already above 3.85%. The big surprise is the extremely accommodative inflation forecast, which many believe , could be a bet purely based on visible data.

Essentially, if these projections hold, a big “if”, we can almost forget about the sharp increases in repo rates in FY23. The curve will continue to remain steep except in the very short duration (up to 1 year), which has already been re-evaluated in line with the change in effective RR movement.

The longer end (beyond 5 years) will continue to oscillate the dynamics of basic supply and demand on the one hand, and inflation expectations on the other. The risk is a large discrepancy between actual and projected inflation for FY23. The other risk is in the external sector, if the CAD continues to widen in FY23.

For now, markets are fairly priced almost across the curve and barring significant negative events, they may not come under too much pressure in the near term. Additionally, improvements in carry over the past 3 months have made short to intermediate duration funds already more attractive from a risk-return perspective.”

Dolores W. Simon