/RBI to pause on rate cuts? What should be your debt mutual fund strategy?

RBI to pause on rate cuts? What should be your debt mutual fund strategy?

The monetary policy review by the Reserve Bank of India is scheduled for tomorrow. Most debt mutual fund managers believe that it is going to be a close call in the August MPC meet. These fund managers are equally divided between a pause on the policy rates and a 25-basis-points (100 basis points = 1%) cut tomorrow.

RBI has cut 115 basis points in the repo rate this year to 4%. Some market experts also believe that the real interest rates in bank fixed deposits going down to negative may stop RBI from another rate cut. With inflation still above the 6% mark, the MPC may decide to wait and watch this time, say fund managers.

Pankaj Pathak, debt fund manager, Quantum Mutaul fund, expects the RBI will maintain a status quo on August 6. “On an average Inflation has been above the RBI’s upper threshold of 6% in the last three quarters. Though we believe the headline CPI would come down in the coming 2-3 quarters, it’s recent stickiness above 6% mark could still weigh on the minds of the MPC members in the upcoming meeting,” he says.

Kumaresh Ramakrishnan, Head of Fixed Income, PGIM Mutual Fund, is in the pause camp. “I believe it is a very close call this time. Market is not factoring in a deep cut. We are expecting either a pause this time or at max a small cut of 25 bps,” he says.

Ramakrishanan also believes that the headline inflation has been above the upper limit set by RBI. “Also, the market has seen some recovery in the past two months. So, this is possible for RBI to hold the rates now and use the room later if need be,” he adds.

Pathak believes the future rate cuts will be dependent on `growth inflation dynamics’ and policies adopted by the government to address the growth challenge. He cites the recent government policies of increased taxes on fuel items and intoxicants that have been one of the factors that has kept inflation at elevated levels in the past few months.

“The RBI will also be carefully watching the policies on external trade front particularly in the wake of government’s objective of achieving self-sufficiency. Rising import duties could push up inflation over the medium term,” he says.

Ramakrishan also says there is room for RBI to cut rates in the future. Also, RBI may look at widening the policy corridor by easing reverse repo rate, he says.

“I don’t think that debt market will react to the policy too much unless it is something totally unexpected. Yields have been pretty stable in the past and I think market has factored in a pause or a small cut. Our advice to the mutual fund investors remains the same. Stick to shorter duration, AAA funds. Corporate Bond Funds, Banking and PSU Funds are good options,” says Ramakrishnan.

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