As many of you may be aware, yesterday the Reserve Bank of India (RBI) reduced the repo rate by 25 basis points (bps) in line with what the markets expected. With economic growth rate depicting a descending move and WPI inflation along with non-food manufacturing inflation providing some relief, the central bank attempted to address to growth risk to some extent.
How policy rates were reduced in FY12-13
|
Magnitude of reduction |
| April 2012 |
50 bps |
| January 2013 |
25 bps |
| March 2013 |
25 bps |
| Total |
100 bps |
(Source: RBI, PersonalFN Research)
If we observe the table above, in the fiscal year 2012-13 the RBI has reduced policy rates thrice, making a total reduction of 100 bps thus far. So given a fall in policy rates, many of you may be wondering whether gilt funds is best investment option in present times.
Well, if we take a closer look at what has been enunciated by the RBI in the last two guidance from respective monetary policies (i.e. 3rd quarter review of Monetary Policy 2012-13 (held on January 29, 2013) and yesterday’s 4th quarter mid-review of Monetary Policy 2012-13), one will observe that on inflation, RBI’s view is alike; that it would remain range-bound around the current levels going into 2013-14 in view of sectoral demand-supply imbalances, the on-going corrections in administered prices and their second-round effects. Moreover with elevated food prices, including pressures stemming from Minimum Support Price (MSP) increases, the wedge between wholesale and retail inflation is projected to have adverse implications for inflation expectations. The central bank has also highlighted that risk emanating from Current Account Deficit (CAD) remains significant. And thus assessing these aspects, it has now said that although the policy stance emphasizes addressing the growth risks, the headroom for further monetary easing remains quite limited.
So, there is a change in guidance. And now to address to growth risk the RBI has lobbed the ball in Government’s court by saying that the Government has to play a critical role in accelerating investments for which it has to:
Thus the onus of reviving investment sentiments in the country has been put on the Government, with the RBI making it clear that a competitive interest rate is necessary for this, but not sufficient.
Hence we are of the view that, headroom for further monetary easing remains quite limited and one may not see much gain in gilt funds. The Government borrowing worth Rs 3.49 lakh crore during April 2013 to September 2013, would lead to excessive supply of Government paper, thereby limit the fall in yield and consequentially limiting the gains. Moreover, how the country would manage the twin deficit problem and the political drama, would also decide the course of yields in this segment. At present while taking exposure to debt mutual fund schemes and fixed income instruments, one should clearly know their investment time horizon, and invest appropriately in respective category of debt mutual fund schemes, but stay away from gilt funds, and refrain from speculating.
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