Top debt mutual fund managers react to RBI’s 50-bps repo rate hike

The Reserve Bank of India raised the key policy rate, the repo rate, by half a percentage in its policy review on Friday. The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.

“These decisions are in consonance with the objective of achieving the medium term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth,” the RBI statement said.

Here’s how top debt fund managers reacted to the policy:

Akhil Mittal, Senior Fund Manager-Fixed Income, Tata Mutual Fund:

Taking inflation head-on, RBI has raised rates by 50 bps, in line with our expectations. While showing faith in growth, MPC gave higher priority to address inflation, maintain financial stability in growing global financial volatility, and ensure policy does not lag behind. In doing so, RBI has shown its resolve towards meeting medium term inflation targets and ensuring stability to support medium to long run growth for the economy. The endeavour to get real rates in positive territory, as mentioned earlier by RBI, gets closer with this move and we expect another 50-bps rate hike by MPC over next couple of MPC meetings before the pause.

As we are much better relatively in terms of growth and inflation, we might not have to tighten as aggressively as western countries and hence might not need to turn around policy direction sooner, which reduces policy uncertainty. RBI has chosen to be cautious now and leave policy space for future support to growth.

Mahendra Jajoo, CIO, Fixed Income, Mirae Asset Investment Managers:

MPC hiked key repo rate by 50 bps, slightly higher than broader market expectation of a 35 bps hike, while retaining the inflation projection for FY 23 at 6.70%. Over the last few days, debt markets had begun to price in a slightly encouraging guidance, given the recent sharp correction in global commodity prices including the all-important crude oil prices and the steep fall in global bond yields from recent highs. However, a larger than consensus hike is possibly aimed at messaging that it may be too early to let the guard down and the need to remain cautious against any reversal in these trends.

The revised Repo rate , notwithstanding the 50 bps hike today, at 5.40% is till more than 100 bps away from FY23 inflation projection of 6.70% and 40 bp from that of Q4FY23. As such, further rate hikes are to be expected in coming policies. However, the recent improvement in macro environment would suggest that notwithstanding the immediate disappointment in bond markets where the yields inched up somewhat, long term rates will likely remain range bound. Short term rates may continue to realign upwards in line with higher policy rates.

Puneet Pal, Head-Fixed Income, PGIM India MF:

RBI retains focus on macro stability and inflation by hiking the policy repo rate by 50 bps, which is higher than the market expectation of a 35 bps hike. We expect moderation in rate hikes going forward and expect the policy repo rate to be at 6.00% – 6.25% by April 2023. We recommend that investors can increase their investments in actively managed short duration products, while selectively looking at dynamic bond funds as per their risk appetite.

Sandeep Bagla, CEO, Trust Mutual Fund:
While the RBI has not changed its GDP/inflation projections or its stance, it increased repo rates by 50 bps as CPI has been above RBI comfort level for months. RBI also wants to make sure that inflationary expectations are not entrenched. Yields went up by 15 bps on the 10 year segment. It is difficult to predict, especially about the future. We at TRUST MF, do not feel that it is the end of the rate hiking cycle. There are strong and stubborn inflationary impulses in the form of commodity prices and wage pressures which will go away with time and aggressive hikes. Rate hikes could be spread out such that there is minimal impact on debt funds‘s performance. Outlook for funds maturing up to 3 years is quite good, but the longer end funds could remain volatile for some time.

Rajiv Shastri, Director and CEO,NJ Mutual Fund:
The hike was a bit sharper than we expected, but in keeping with the RBI wanting to stay ahead of the curve as far as inflation is concerned. We believe that this will allow the RBI some room to pause if the recent moderation in commodity prices was to sustain. With the monsoon going well and global food shipments resuming, food inflation is expected to moderate as well. All of this portends well for the Indian Markets.

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