Amber signals warn debt fund investors not to go too fast or too slowly at the RBI MPC Meeting
Since the RBI MPC meeting decided to leave the repo rate steady for the time being, experts say there isn't a clear indication that interest rates would start to decline soon because inflation is still being closely watched.
The Monetary Policy Committee of the Reserve Bank of India voted to maintain the current policy rates. However, inflation is still persistent at the present rate and may take some time to decline. As a result, fixed-income investors are in a challenging position. Here is the procedure for investing in debt funds that experts recommend.
Why are things the same?
Numerous experts had predicted that the MPC meeting would not make any changes to the policy rates.
The focus is still on inflation targeting, according to RBI governor Shaktikanta Das, whose projection for CPI inflation in FY2023–24 is 5.1%. This is higher than the RBI's goal of 4 percent (within a range of +/- 2 percent). Additionally, the central bank reaffirmed that the pace of economic expansion remained steady. It predicted that real GDP growth would be 6.5% in 2023–2024 and 7.2% in 2022–2023. At a time when there is robust domestic growth and poor global cues in the shape of recessionary fears, the RBI must target inflation.
The India Meteorological Department (IMD) has predicted a normal south-west monsoon, which bodes well for kharif crops. However, to evaluate the candidates for agricultural production, it will be necessary to closely monitor the monsoon's spatial and temporal distribution, according to the monetary policy statement.
While the majority of industry experts concur with the RBI's economic growth estimates, there is disagreement among them regarding the inflation projections. The labour market is still tight, and the risk of a spiralling wage-inflation rate still exists, so even though inflation is currently reducing, it may increase in the future. After pausing, Australia and Canada boosted their rates. According to Sandeep Bagla, CEO of Trust Mutual Fund, "We are not yet out of the woods."
The rate of the monsoon and the price of commodities worldwide must be taken into consideration when interpreting inflation statistics. One of the main monitorables is crude oil. The price of crude oil is being dragged low by predictions of a recession, but it may also rise as a result of companies' voluntary production reduction.
According to Ritika Chhabra, Quant Macro Analyst at Prabhudas Lilladher PMS, "The RBI maintained its opinion unchanged to 'withdrawal of support' as it keeps its focus on prices, citing delay in monsoon, El Nino impact, and political instability as upside risks to inflation." However, she projects inflation for FY2023–24 to be 4.9 percent rather than the RBI's forecast of 5.1 percent, as the base effect improves and imported inflation declines.
The RBI's decisions will be influenced by the policy decisions made by other central banks, particularly the US Federal Reserve.
adverse effects on fixed-income investments
Following the decision to maintain the current level, bond rates are still in a constrained range with an upward bias. The yield on the benchmark 10-year bond was quoted at 7.02 percent on Thursday, up from 6.98 percent on Wednesday. This shows that the MPC meeting's outcome was as anticipated by the market. The rate move today may not have a significant effect on the debt funds.
According to Value Research, long-duration investments saw an average return increase of 4.72 percent over the three months that ended on June 7, 2023 as long-term bonds rose. In the past year, liquid funds have returned 6.15 percent due to rising portfolio yields.
What ought you to do?
Tempting fixed deposit interest rates are available. Most debt fund categories' yield-to-maturity ratios have also increased. The chance to lock in interest rates should be attractive here for investors. Co-founder and chief investment strategist of JRL Money, Vijai Mantri, recommends investors against chasing high interest rates because doing so could put them at risk for bad credit. "Investors looking to safeguard their cash can consider participating in small savings plans.
Investors can consider arbitrage funds with a one-year time horizon in order to achieve profits that are tax-efficient, he says.
To maximise your return on investment from debt funds, align your holding term with their tenure. Liquid funds, for instance, make sense for someone trying to park money for a few months, whereas a short-duration fund is a better fit for someone looking to invest for three years. Avoid investing in long-term funds with the intention of making a quick buck in the near future. There will be diminished returns if the yields increase.
"If money the economy are regular, the status quo policy and prospects of a long pause favour a decline in bond yields. According to Joseph Thomas, Head of Research at Emkay Wealth, the best posture for debt portfolios is to be in the two- to three-year maturity profile using products like a company bond funds including banking & PSU debt funds.
Before making an investment, make sure to review the credit quality and expenditure ratio of the debt fund portfolios.
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