Hike rates

Will the RBI raise its rates today? Strategy for debt fund investors

The Reserve Bank of India’s monetary policy committee meets to decide on the future development of interest rates in the country. However, most money market analysts believe the MPC would keep policy rates unchanged tomorrow due to the uncertainties presented by the spread of the omicron virus. Some debt mutual fund managers believe worries about CPI inflation could force the apex bank to raise rates.

Experts believe the CPI is expected to break above the RBI’s 6% upper mark this month and remain above the 6% mark for most of 2022.

“As growth picks up at a steady pace, the MPC can focus on inflation. We expect a relatively hawkish slant from this policy. The RBI could move past the uncertainty surrounding Omicron and continue to standardize its policy, ”said Pankaj Pathak, fixed income fund manager, Quantum Mutual Fund.

According to him, there is a strong possibility of a reverse repo rate hike of 15 to 20 basis points in this policy. “This should be followed by another hike in repo rates in February of next year and hikes in repo rates in the latter part of 2022,” Pathak said.

Previously, the RBI MPC voted unanimously to keep the key pension rate at 4%. In a split vote, he said he would maintain the accommodative position for as long as needed to revive and support growth and mitigate the impact of Covid-19 on the economy while ensuring that inflation remains in the target in the future.

“There is a renewed threat to global growth due to the Omicron variant and the output gap in India still appears to be wide open justifying an accommodative monetary policy. On the other hand, core inflation is high. , the US Fed has become somewhat hawkish, has started tapering – it would be prudent to tell markets how and when the RBI will come out of the extraordinary liquidity of easy rates. An increase in the reverse repo from 3.35% to 3 , 60% cannot be excluded, ”said Sandeep Bagla, CEO of TRUST Mutual Funds.

Bagla believes it will come down to making an economic choice for the RBI. However, Pankaj Pathak believes the rate hike is more or less in line with market expectations and might not be shocking. “The direction of monetary policy is more or less factored into market expectations and the current steep yield curve. The gradual change in market expectations will be determined by the timing of the change in position, the pace of rate hikes and the length of the rate hike cycle or terminal reverse repo rate, ”says Pathak.

Debt mutual fund managers believe that now is not the right time to change the strategies of debt fund investors. They think investors are better off in shorter duration funds. “From an investor’s perspective, we believe that a combination of liquid and money market funds will benefit from rising interest rates over the next few months,” said Pankaj Pathak.