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Below is the Quote on Today's Credit Policy Announcement By Akhil Mittal, Senior Fund Manager, Tata Mutual Fund

“With revised inflation projections and current yield curve pricing in steep rate hikes, we think large part of known risks are priced In. Having said that, the upward risks to inflation remain and hence volatility around expected evolution of yield curve is here to stay. Capital markets (debt funds) are currently much better priced as compared to previous 2 years. Infact, capital markets pricing for risk free rate is significantly higher than most Bank FD rates. So, debt funds are expected to provide much better accruals. At same time, given the uncertainty on expected inflation, high fiscal and current account deficit, longer end of curve might continue to remain volatile.

With this view in mind, it would be prudent to invest on shorter duration debt funds as accruals are decent and duration risk is contained. One category that is very well suited for current cycle is floating rate funds. Upward shifting of overnight rates bodes well for floating rate funds. Constituent wise, floating rate bonds may benefit from rate hikes as accruals go up while effective duration remains very low. So high predictability and lower volatility could make floating rate funds as well-suited choice in current times.”

“Though RBI has managed to calm some nerves in G-sec markets by stating their vigil, we believe absence of clear roadmap (for support measures) with persistent huge supply will continue to exert upward pressure on longer end of yield curve. At shorter end, yields are expected to remain range bound with market keeping close eye on liquidity.

We believe significant part of inflation risks are now in the projections and hence terminal repo rate expectations are slightly more aligned. However, with crude remaining above assumed levels and fiscal expected to remain under pressure, longer end of yield curve will likely remain under pressure going ahead. We see 10 year G-Sec trading in 7.35%-7.60% in near term and take further direction from incoming data. Also, market is expecting credible OMO purchase support from RBI to help government borrowing. We believe it will be difficult for RBI to do large scale OMO purchases as it directly adds to high-powered liquidity in the system, as it will add to inflation pressure, which is against the RBI objective. We believe Operation twist (OT) is more likely to be tool that RBI uses to manage G-sec yield curve.”

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