Below is the views on DEBT Outlook by Mr. Murthy Nagarajan Head – Fixed Income Quantum Liquid Fund & Quantum Dynamic Bond Fund
The RBI‟s Monetary Policy Committee (MPC), which decides interest rates, voted unanimously to keep the Repo rate unchanged at 6.25%. This was the third meeting of the newly constituted MPC, and the third 6-0 vote by the members.
We had expected the RBI to cut the Repo rate by 25 bps to 6.0% based on our view that inflation will remain well below the RBI‟s immediate target of 5.0%. The budget announced by the government was not populist and non-inflationary, and that GDP growth will be lower than estimated. Our projection of the rate of inflation and GDP growth was spot-on. However, we were wrong about the MPC‟s assessment of the data. Not only did the MPC keep the rates unchanged, but it has also changed its monetary policy stance from accommodative to neutral. (*)
This technically means they do not see scope for any immediate rate cuts and even if they do, the bar for that rate cut is set very high.
At the press conference, Dr. Viral Acharya, the new Dy. Governor (in-charge of monetary policy), mentioned global oil, commodity prices and the strength of the US dollar as potential risks to the inflation outlook, thus warranting a change in the policy stance from accommodative to neutral. The fact that the MPC has altered its stance despite lowering its own inflation and growth projection (from the October and December review), indicates their serious intent to achieve the 4.0% inflation target over the medium term.
The statement was fairly affirmative about it too: “The Committee remains committed to bringing headline inflation closer to 4.0% on a durable basis and in a calibrated manner”. This change in stance and the commitment to secure the 4.0% target suggests to us that we might have actually reached the end of the current rate-cutting cycle and that the RBI will remain in a long pause at 6.25%.
The rate pause and the stance change have also sent a strong signal to the bond market on the market yield expectations. We do not expect bond yields to fall, and in fact the 25–30 bps sell-off seen after the policy announcement is indicative of the fact that the best times in the bond markets are behind us.
The bond markets have gone on a significant run since August 2013 with bond funds returning double digits. But investors would do well now to lower their return expectations from bond funds.
Capital gains may not be the driver of Indian bond returns. Also, if the RBI‟s warnings about global inflation come to fruition anytime in the near future, the bond market outlook will move to rate hikes instead of rate cuts further depressing returns from bond funds. As the RBI signaled the end of the rate cycle, investors in bond funds may consider it a signal of the end of the superlative returns they have earned in the last 3 years.
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