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Below are Views On RBI Policy Reaction by Pankaj Pathak - Fund Manager - Fixed Income, Quantum Mutual Fund

A Prudent Policy:

We found the MPC’s decision and the RBIs actions prudent. The RBI seems confident of the economic recovery. This should lead to a slow and gradual normalization of monetary policy.

The move to hike CRR back to 4% now and the introduction of variable reverse repo in January is indicative of the RBIs stance of gradually managing the excess liquidity infused in 2020 to fight COVID.

Although we do not see any immediate rate hikes, but over the course of the year, if growth recovery sustains, we wont be surprised  to see the RBI move the overnight rates from the Reverse Repo Rate of 3.35% to the Repo Rate of 4.0%.

Bond Markets are getting adjusted to this reality that the RBI will also tolerate higher bond yields than what it did last year. As we wrote post budget, that bond yields and interest rates in general are headed higher.

However, the RBI will try and calibrate the rising yields and will tactically use Open market Operations to smooth out the market volatility.

Returns on overnight and liquid funds may improve. Long Bond funds may have already seen the best of the times.

Keep your investment duration short.. Short term fixed deposits, short term funds. For those who can withstand short term volatility in returns, dynamic bond funds can be considered

The move to allow retails investors to directly participate in government securities seems to be a good one. However, we continue to believe that safe debt mutual funds, etfs and fixed deposits remain better options for retail investors

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