The Reserve Bank of India’s (RBI) decision to slash the repo rate by 50 basis points (bps) and lower the cash reserve ratio (CRR) by 100 bps in the June policy review is likely to boost returns from short-to-mid-duration debt funds, said experts. In total, the repo rate has been cut by 100 bps since February.
Marzban Irani, CIO of fixed income at LIC Mutual Fund, recommends investing in funds with the tenure ranging from 3 months to 3 years to take advantage of the CRR cut. The CRR cut has surprised the market and is expected to release liquidity of Rs 2.5 lakh crore, he said.
According to Amit Somani, deputy head – fixed income, Tata Asset Management, the liquidity-boosting measure, announced at a time when the condition is favourable, could result in a 25-50-bps reduction in short-term yields.
Siddharth Chaudhary, head – fixed income, Bajaj Finserv AMC, believes that short-to-medium-term bonds are expected to perform well, supported by a substantial liquidity surplus following a 100-bps cut in the CRR. “Core liquidity surplus is now projected to be around Rs 8 lakh crore,” he said. However, as market expectations approach the terminal rate, profit booking is evident in longer-term bonds.”
A report by Axis Mutual Fund has noted that the stance change has dampened the market sentiment as any rate action is now unlikely in the next couple of reviews. It added that the dividend announced by the central bank has already boosted core/durable liquidity. “The huge surplus liquidity in the banking system augurs well for short end of the curve, which, in our view, will get steeper over the next six months.” Axis MF sees yields for 10-year bonds to trade in a range of 6%-6.40%.
In April, debt-oriented funds saw net inflows of Rs 2.19 lakh crore, significantly higher than Rs 24,269.26 crore in equity-oriented schemes.
Krishna Appala, fund manager, Capitalmind PMS, said debt mutual funds have delivered strong returns over the past year, and falling rates may challenge fixed deposit yields going forward.