What RBI's policy stance means for debt mutual fund investors

In its first monetary policy after the Budget 2021, the Reserve Bank of India (RBI) has kept the key repo rate and reverse repo rate unchanged at 4%  and 3.35%, respectively. RBI Governor Shaktikanta Das said, "The MPC voted unanimously to leave the policy repo rate unchanged at 4 per cent. It also decided to continue with the accommodative stance of monetary policy as long as necessary - at least through the current financial year and into the next year - to revive growth on a durable basis and mitigate the impact of COVID-19, while ensuring that inflation remains within the target going forward."

What does it mean for debt mutual fund investors? Where should they invest? We spoke to some debt fund managers. Here's what they said:

Also read: RBI MPC meet: GDP estimated to grow at 10.5% in FY22

What RBI monetary policy means for investors?

In line with evolving macro-environment, RBI policy maintained an "accommodative" stance to support the nascent recovery but hinted at continued normalisation of liquidity. Investors may see higher volatility in the bond markets in near future, believe fund managers.

"This likely indicated a gradual inching up of yields in due course but without disrupting the ongoing economic recovery in any way. Investors with asset allocation approach and long-term investment horizon may like to continue to remain invested but should expect elevated volatility in days ahead," says Mahendra Jajoo, CIO-Fixed Income, Mirae Asset.

The absence of any mention of OMOs, however, disappointed the fund managers. The Finance Minister, in her Budget speech, announced a large borrowing programme of Rs 80,000 crore in the current financial year and promised to keep it elevated in the next financial year. Debt market participants were expecting some announcement on open market operations, amid big borrowing plans announced in the Budget. "Market's expectation for an OMO calendar did not come through which is causing some nervousness in the backdrop of an all-time high borrowing program for the next financial year," says Kumaresh Ramakrishnan, CIO-Fixed Income, PGIM India Mutual Fund.

Also read: MPC meet: RBI lowers retail inflation forecast lowered to 5.2% in Q4FY21

Strategy for debt mutual fund investors

For long-term investors with an asset allocation approach, a better option might just be to stick to a disciplined approach rather than worrying too much about market volatility. Debt fund managers believe the long bonds have already seen the best of their times. They advise investors to stick to shorter duration funds.

"Returns on overnight and liquid funds may improve. Keep your investment duration short -- short term fixed deposits, short term funds. For those who can withstand short-term volatility in returns, dynamic bond funds can be considered, says Pankaj Pathak - Fund Manager - Fixed Income, Quantum Mutual Fund.

"Long-term investors should look at banking PSU debt funds and/or corporate bond funds and short term investors may look at low duration funds," says Mahendra Jajoo.

Retail investors can now invest in G-Secs

Fund managers say the announcement to allow retail investors to invest in government bonds is a revolutionary measure. "Providing retail investors a direct option to invest in government securities is a good development from a long-term perspective," says Lakshmi Iyer, CIO - Debt & Head - Products, Kotak Mahindra AMC.

Jajoo believes it may just be the beginning of a viable substitute for small savings schemes at market rates. "However, much like sovereign gold bonds, the likely pick-up pace will be slower," he adds.

Also read: Liquidity stance continues to remain accommodative: RBI