With the imposition of partial lockdown-like restrictions to contain the COVID-19 spread in the country, the downside risk on growth recovery has intensified. Mutual fund managers expect the Reserve Bank of India's (RBI) Governor Shaktikanta Das to keep the policy rates unchanged in the upcoming monetary policy review. The central bank will announce its bi-monthly monetary policy on Friday. It has kept key policy rates unchanged in the last five policy meets.
"We do not expect any major change in the monetary policy or RBI's posturing about future course in this policy. The second wave of covid-19 has raised uncertainty around the future economic outlook and pushed the potential policy normalisation further into the future. We believe the RBI has already exhausted the monetary policy option to support growth and more easing won't be forthcoming as inflation is gaining momentum," says Pankaj Pathak - Fund Manager - Fixed Income, Quantum Mutual Fund.
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Currently, the key repo rate and reverse repo rate stand at 4 per cent and 3.35 per cent, respectively.
As per fund managers, RBI has a tough task at hand in the upcoming credit policy, navigating between galloping commodity prices, which raise inflationary expectations - and the unpredictable impact of lockdowns on employment, production, and general welfare in the real economy.
"Easy liquidity conditions and low policy rates have not led to widespread growth in credit offtake, which is languishing at multi-year lows," says Sandeep Bagla, CEO, TRUST AMC. "The market should continue to have faith in RBI's ability to contain inflation credibly for the policy to succeed," he adds.
As per Pathak, the RBI may revise its GDP growth forecast lower. From bond market's perspective, he says, the focus will be on the announcement of the G-SAP programme. The G-SAP 1.0 will expire in June 2021. "Market will look out for continuation of the G-SAP programme to support the bond markets. We do not expect any major change in interest rates, however quantum and schedule of GSAP could drive yields over short term," says Pathak.
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RBI, in its April policy, introduced G-SAP 1.0, a secondary market G-Sec acquisition programme. Under the G-SAP, the RBI will purchase government securities worth Rs 1 lakh crore in Q1FY22. It had purchased bonds worth around Rs 3.13 lakh crore from the secondary market in FY21. However, it was carried out in an ad-hoc manner with the market awaiting RBI's open market operation (OMO) purchase announcements with bated breath on a weekly basis.
Debt fund managers advise investors to keep their return expectations low. They say the best bond market rally is behind us. "Potential capital gains from long bond funds will be muted, money market yields, fixed deposit rates will remain low," says Pathak.
He asks conservative investors to stick to very short maturity debt categories like a liquid fund. Investors with a longer holding period and an appetite to tolerate volatility could consider dynamic bond funds.
Bagla of TRUST AMC recommends fixed-income investments in structured high-quality bond portfolios up to 3-year maturity in the current interest rate scenario.