Kolkata: The Reserve Bank of India’s aggressive and somewhat unexpected 50-basis point Repo Rate cut on June 6 and 100-basis point cut since February this year and the infusion of about Rs 2.5 crore of additional liquidity in the market in the last months of this calendar year are likely to have a significant impact on the mutual fund markets, especially debt mutual funds. Mutual fund managers predicted a decline in the yield curve as the twin measures of Repo Rate cut and CRR (cash reserve ratio) cut can lead to this end.
Almost all analysts (with the exception of the SBI Research cell, were confident that the central bank will settle for a rate cut but most thought it will be in the region of 25 basis points, while RBI surprised the market with a 50-point trimming. Of bigger surprise was perhaps the slashing of the CRR — to be brought down from 4% to 3% — which will inject significant liquidity in the market.
Boost to the bond market?
Analysts pointed out that the rate cut and liquidity signalled a combination which is conducive to the bond market. Incidentally, Axis Mutual Fund said the surplus liquidity will be a favourable factor for the short end of the curve. The curve can start steepening in the next six months and 10-year bond yields can be between 6% and 6.4%. Incidentally, the “short end” of a bond yield curve refers to the section of the curve that represents bonds bearing shorter maturities — one year or less. Bonds with shorter maturity period are usually more sensitive to interest rate changes. (The yield curve plots yields of bonds with different maturities and is a tool to understand market expectations about future interest rates.)
Nilanjan Dey, director Wishlist Capital, said, “It is the cut in the cash reserve ratio that can channelise investment in short-term debt funds, since more funds will be available. The Repo rate cut might not directly help in this regard.” He also recommended that investors could be using this opportunity to have a relook at debt funds in their portfolio. “Debt funds have a bearing on allocation to debt as a share of the overall allocation in the portfolio and one can think of rebalancing by raising allocation to debt,” he said.
Debt funds in recent months
The highest inflows of Rs 2.19 lakh crore in debt funds took place in April. It was marked by robust demand for liquid funds and these witnessed investment of about Rs 1.19 lakh crore. High inflows also took place in overnight funds to the tune of Rs 23,900 crore. According to AMFI data, money market funds attracted Rs 31,507 crore and ultra-short duration funds attracted Rs 26,734 crore.
The direction of the flow in March was, however, just the opposite. About Rs 2.03 lakh crore went out of debt funds — Rs 1.33 lakh crore went out of liquid funds, Rs 30,016 crore flowed out of overnight funds and Rs 21,301 crore moved out of money market funds.
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While the markets were rather taken aback by the aggressive extent of the Repo rate cut announced by the RBI on June 6, it was the cut of the CRR (Cash Reserve ratio) that could prove to be a positive factor for the short term bonds, analysts pointed out. Personal Finance Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
