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Below is the RBI Policy reaction by Pankaj Pathak, Fund Manager-Fixed Income, Quantum Mutual Fund

For all practical purposes, so much was expected from this policy, but the RBI maintains the status quo in its monetary policy announcement. The Repo rate is unchanged at 4%, the reverse repo rate remains at 3.35% and the monetary policy stance remains accommodative.

The governor though called it gradualism and not wanting to rock the boat.

This is at a time when oil prices, India’s bugbear looks ominous; global demand leading to supply shortages and prices are rising for a variety of items and at a time when ground-level inflation seems higher than reported inflation. We felt the RBI could have at least guided the markets, that rates will be raised in the months to come. The RBIs efforts to suck out and manage the excess liquidity is also minimal and will not have much impact on short term interest rates.

The biggest surprise was the complete removal of G_SAP. In the background of high oil prices and rising US treasury yields, the removal of G-SAP should lead to a rise in long term bond yields.

Investors in long term debt funds should expect higher volatility and lower returns.

In the current juncture, we believe a combination of liquid to money market funds to benefit from the increase in interest rates in the coming months; along with an allocation to short term debt funds and/or dynamic bond funds with low credit risks should remain as the core fixed income allocation. The 3-5 year segment in government bonds appears to be the most attractive and a bulk of our bond portfolio is positioned in that space.

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