They say when the Reserve Bank of India sneezes, stock markets catch a cold. Similarly, when the repo rates are hiked, even by 25 basis points, one has to consider the ramifications of that announcement in the short-term and over the long-term, so as to figure out how to manage investments going forward. Is this the beginning of uncertainty or the end of it?
Lakshmi Iyer, Chief Investment Officer (Debt) & Head – Products, Kotak Mutual Fund, pointed out that RBI hiked the repo rate to 8% from 7.75% contrary to consensus view. The forward guidance however has been a tad tamer where the RBI has indicated that if the disinflationary process evolves according to this baseline projection, further policy tightening in the near term is not anticipated at this juncture
1 Disinflationary process
"The policy measure taken seems to set the path for disinflationary process thereby reducing the need for further rate hikes in the near term. This should augur well for the markets which has in a way got some more clarity on the likely future course of action. We expect the bond yields to consolidate at the current levels," she opines.
2 Indicators recovered
Vidya Bala, Head Mutual Funds Research, FundsIndia.com, opined that markets were a bit shaken but not stirred, by a 25 basis-point repo rate hike by the RBI, perhaps postponed from about a month ago. While the 10-year gilt, the rupee and the Nifty all fell immediately after the policy, all of these indicators recovered, reading positively into the policy guidance that stated ‘further policy tightening is not expected at this juncture’. The 10-year gilt stood at 8.71% pre-policy statement but rose to 8.8% post policy. It later eased a bit to 8.74-8.76% levels.
Early part of January 2014 saw 10-year gilts easing from 8.85% levels to 8.7 levels, leading to a short rally in long and medium-term gilts funds as well as income funds. Beginning this month, debt funds rallied 1.0-2.7% as a result of gilt yields coming off. With the current rate hike, debt markets may, once again, become more complacent, awaiting further cues, locally and in international markets, she feels.
The current rate hike together with the tight liquidity condition prevailing since mid-December, provides scope for investors to lock in to attractive short-term rates. Higher recourse to the MSF pipeline by banks, term repos conducted by the RBI and more recent open market purchases, all go to suggest that liquidity conditions remain tight. Also, historically higher demand for liquidity closer to the fiscal year end is likely to keep short-term rates elevated, Vidya envisages.
3 Debt markets
According to Yadnesh Chavan, Head of Fixed Income, Mirae Asset Global Asset Investment Management, in the current scenario debt markets are expected to remain volatile given the FED tapering and pressure on emerging markets currency. So it is advisable to retail investors to be invested into short term bond funds with average maturity of 6-12 months. After recent RBI policy the yields on 1 year CDs have spiked by 25-30 bps, we believe retail investors can look at 1 year FMPs which is offering excellent returns at minimal interest rates risk.
4 Serious concern
Motilal Oswal,CMD, Motilal Oswal Financial Services, points out that a harder goal of bringing down CPI replaces the existing focus on WPI and further a lower tolerance limit of 4% is proposed in place of the current 5% level. This would set the course for a far more deflationary policy over the medium term, a concern far more serious from the immediate setback of a rate hike. RBI’s new Governor, an enthusiastic participant for Mumbai Marathon, now seems content to prepare for a lone walkathon
5 Twelve months
Looking forward, Kunal Shah, Fund Manager - Debt, Kotak Mahindra Old Mutual Life Insurance Limited, underlines that RBI has indicated that at current level of repo rate they are comfortable to guide the system that as per their forecast of inflation for next 12 months monetary stance will remain unchanged, RBI also indicated that if inflation drops below their expected path they may even ease in future. For bond markets this will be positive news as uncertainty on extent of hikes will be removed and if inflation does indeed fall sharply expectations on rate cuts will emerge. We expect bond yields will not be in a hurry to drift in either direction, he says.