The Reserve Bank of India’s decision on Wednesday to cut the repo rate by 25 basis points is good news for the mutual fund industry, as bond yields start to rise.
As the interest rates in government bonds that debt mutual funds invest in are inversely proportional to their yields, a fall in interest rates (or the repo rate) leads to a rise in prices of existing bonds, and a proportionate rise in the value of debt assets under management. At the end of January, the MF industry had ₹5.2 lakh crore of funds — 44 per cent of total assets — in income schemes and another ₹25,792 crore in balanced funds, which invest partly in equity and debt.
Vidya Bala, Head, Mutual Fund Research, Fundsindia.com, said, “As far as the debt markets are concerned, the previous rate cut has given a clear southward trend to yield movements. While debt markets may have reacted a bit to the slightly delayed fiscal target, the current rate cut is likely to ensure that pressure on yields are eased.
“Debt investors should continue to stay invested in medium- to long-term debt funds (income/dynamic bond funds). There also still remains enough opportunity for investors wanting to take exposure at this stage with a two-three year view,” since this is just the beginning of a series of rate cuts.
Murthy Nagarajan, Head — Fixed Income, Quantum MF, said the mutual fund industry knew a rate cut was coming, though the announcement fell short of expectations. “After the 25 basis points cut, yields on government bonds rose by 5-7 bps against an expectation of a 10-15 bps rise.”
R Sivakumar, Head — Fixed Income, Axis MF, said the rate cut is positive for the industry since NAVs will begin to move up, though the timing of the next cut cannot be predicted. Quantum AMC believes that “potentially, the repo rate can go down to 7 per cent by the end of the year, if oil prices remain below $75 a barrel and the rupee remains within the 60-64 band against the dollar.”
Vidya Bala added: “The Budget measures together with rate cuts can be expected to ease the funding situation for companies in the medium-term. In such a scenario, corporate bonds could well see a re-rating. This means that over the next 18-24 months, there might be a dual opportunity in the debt space — capital appreciation from easing yields and credit opportunity from improved corporate fortunes.”