17 Aug 2022
The Reserve Bank of India, in its latest policy meeting earlier this month, has raised interest rates by 50 basis points. The policy rate is now at 5.40%*, and was largely in line with market expectations.
What was not expected though, was the tone of the Indian central bank, as the markets were expecting a slightly dovish undertone, said Lakshmi Iyer, the chief investment officer for debt, and head of products at Kotak Mahindra Mutual Fund.
“The RBI remains non-committal in terms of the future quantum of rate hikes, clearly and rightfully so, because there are too many sum-of-moving parts,” she said, while discussing the outlook for debt for August.
While inflation has softened a tad bit, the RBI continues to focus on containing inflation.
“The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth,” the central bank said in its policy statement for the meeting earlier this month.*
If one were to look at indications from the market, for instance, the 1-year overnight index swap curve, here’s what can be understood –
If one looks at the swap curve levels, they are at the same levels that they were in May, even after rates being hiked by 100 basis points*, Iyer said. This means that not only are rate hikes being discounted, but the incremental rate hikes from here could be muted.
She expects the terminal repo rate to be close to around 5.9% by March 2023, which is 50 basis points higher than the current levels.
Investors could look at a combination of target maturity funds and actively managed funds such as dynamic bond funds and gilt funds, she said, while adding that investors must continue to stagger their investments.
Some money can also be allocated in funds in the one-two year bucket, which will help in taking advantage of short-term rates, which are currently at elevated levels.
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