Debt markets welcomed the triple rate cut announced by the Reserve Bank of India. The announcement pushed bond yields lower. The direct result was a surge in income and gilt fund net asset values (NAVs).

The RBI's move to lower rates on three fronts by 25 basis points each  cash reserve ratio to 4.75%, daily repo rate to 5.50% and bank rate to 6.25%. Since bond markets had not expected a bank rate cut, the move was welcomed by the markets. The RBI's move to cut rates on three fronts was largely unexpected and it reinforced RBI's commitment towards a softer interest rate regime, ensuring adequate liquidity for credit growth and introducing flexibility in the interest rate structure over the medium term.

Gilt Funds: The credit policy kicker

Gilt (Long Term) Funds	NAV (Rs)	1-Wk	1-Mth	6-Mth	1-Yr	3-Yr	Incep.
TEMPLETON GSEC G	18.2	0.7%	2.0%	6.4%	21.3%	20.1%	19.5%
BIRLA GILT LT G	17.2	0.6%	1.8%	6.2%	21.2%	19.5%	19.5%
K GILT INV G	17.9	0.6%	1.7%	5.5%	18.8%	17.4%	16.3%
ZURICH I SOV GILT PT G	14.7	0.5%	1.5%	4.8%	18.4%	NA	15.5%
K GILT INV D	10.7	0.6%	1.7%	5.5%	17.4%	15.5%	14.7%

(NAVs as on October 29. Growth over 1-Yr is compounded)

As a result of the positive news, bonds rallied. The benchmark ten-year bond traded below the 7%-yeild mark, before creeping back. In fact, the RBI's announcement served to bring down yields across the entire maturity spectrum by 5-15 basis points. This resulted in a surge in income/gilt fund NAVs. (If you would like to receive daily income/gilt fund NAV alerts in your mailbox, please click here

Income Funds: On a surge

Income (Long Term) Funds	NAV (Rs)	1-Wk	1-Mth	6-Mth	1-Yr	3-Yr	5-Yr	Incep.
ZURICH I HIGH INT G	20.2	0.4%	1.4%	6.7%	15.1%	14.1%	12.7%	13.4%
BIRLA INC B	24.6	0.3%	1.4%	6.5%	15.0%	13.9%	13.4%	14.6%
TEMPLETON INC. BLD G	20.3	0.3%	1.5%	6.4%	14.9%	14.4%	13.8%	14.1%
HDFC INCOME G	13.7	0.4%	1.4%	6.4%	14.8%	NA	NA	15.2%
IDBI-PRIN INC G	13.5	0.3%	1.3%	6.3%	14.6%	NA	NA	15.9%
TEMPLETON INC G	20.8	0.3%	1.3%	6.1%	14.2%	13.8%	13.3%	13.8%

(NAVs as on October 29. Growth over 1-Yr is compounded)

However, investors who plan to capitalise on RBI's credit policy by entering into income/gilt funds right now, may have missed the bus, at least to some extent. Those were already invested in income/gilt funds before the RBI's announcement are the ones who have benefited the most.

 

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