Hike rates

After the Fed, RBI could hike rates; what impact will this have on your equity, debt mutual funds?

The Federal Reserve raised interest rates by 75 basis points (100 basis points = 1%) and announced even more aggressive hikes than investors had expected. According to fund managers in India, the RBI may be feeling the pressure of this big rise. Fund managers believe that RBI can raise rates by 40 to 50 basis points in the policy ahead. The Fed rate hike impacted global equity markets as well as bond markets. How will this impact your mutual funds?

Fund managers say global equity markets, including Indian markets, will remain volatile for now, until the rate hike cycle continues globally.

“Central banks are taking an approach to fight inflation and don’t care about growth at this point. That’s good in a way. Global stocks are down because in the short term there is concern the peak of rate hikes and the impact on interest costs, consumer demand, etc. Almost all commodity prices are now in check, with the exception of energy. 6-9 months from now we will be through with this rate cycle. We may also be looking at a cut cycle across the board. However, until then, investors should expect bouts of volatility in the equity market. says Rajeev Thakkar, Associate Director and CIO, PPFAS Mutual Fund.



Thakkar says that even though India is better positioned compared to many other countries in terms of inflation, the impact of capital outflows from India could worry the RBI. He also said investors should see this volatility as an opportunity.

“Our inflation rate is somewhat under control, our economy is better placed. Any significant drop in stock prices should be viewed at this time as an opportunity to allocate more. But if your goal is 2-3 years from now, avoid equity funds for now. It’s a phase and investors need to stick to their asset allocation,” says Rajeev Thakkar.

On the fixed income side, bond yields fell as global growth slowed and commodity prices tumbled. Indian bond yields have been falling since mid-June 2022. The 10-year government bond yield peaked at 7.6% in June 2022. It fell to 7.45% at the end of June, 7.32% at the end of July and 7.24% at the end of August and fell to a low of 7.07% in the second week of September 2022. It has given up some of the gains of the last few days and is currently trading around 7.22 % like today.

Mutual fund managers like Quantum Mutual Fund’s Pankaj Pathak believe India’s rate cycle is nearing an end. “The market is already expecting the repo rate to peak around 6% by the end of the year and stay there for some time. However, the RBI could maintain its hawkish tone beyond 2022 if the he external monetary environment for the Fed and other central banks remains hostile.We maintain our view that the worst of the bond market sell-off is now behind us, although we may not see a reversal any time soon. Mid to long-term bond yields are likely to trade in a narrow range over the next 3-6 months,” says Pankaj Pathak.

According to Pathak, the 3-5 year segment remains the best choice as a core portfolio allocation for mutual fund investors. “The long end of the yield curve is vulnerable to a negative supply-demand shock. The interest rate on short-term Treasury bills has jumped about 190 basis points in the last 6 months. With further rate hikes to come, rates on short-term Treasury bills are expected to rise. This suggests higher potential returns from investments in liquid, short-term money market funds in the future,” says Pathak.