In its sixth consecutive meeting, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) maintained interest rates, continuing its ‘withdrawal of accommodation’ stance. This decision prompts experts to suggest that now is an opportune moment for investors to consider long-duration bond funds. With bond yields slightly increasing post the MPC meeting, the prevailing expectation of future rate cuts makes it an advantageous time to secure high rates in long-duration fixed-income products. The RBI’s focus on inflation targets and policy transmission justifies its stance, highlighting the incomplete transmission of previous monetary policy actions in the credit market.
Despite a 250 basis points rate hike since May 2022, the complete transmission to lending and deposit rates is yet to be realized. Crisil notes a recent rise in deposit rates and vehicle loan rates, while money market rates have outpaced the repo rate due to tighter systemic liquidity. As the RBI concentrates on liquidity management and macroeconomic stability until March 2024, experts recommend investors explore short-term rates for lucrative opportunities. Puneet Pal, Head of Fixed Income at PGIM India Mutual Fund, anticipates a gradual decline in the benchmark 10-year Bond yield towards 6.50% by Q3 CY2024.
Sovereign bond yields have seen a decline since the December 2023 MPC meeting, offering potential value in the 10-year segment of the yield curve. Experts suggest increasing duration in fixed-income portfolios through sovereign bonds maturing in the 10-year segment, considering historically tight spreads on the long end. Dynamic bond funds are recommended for investors with a 2-3 year horizon, aiming to benefit from falling bond yields. Pankaj Pathak, Fund Manager at Quantum AMC, suggests conservative investors stick with liquid funds for shorter holding periods. Adhil Shetty, CEO of Bankbazaar, advises utilizing interest rate risks for potentially higher returns, acknowledging long-term funds’ higher risk and return possibility compared to steady short-term returns of liquid funds.
Overall, the RBI’s steady rates create an environment for investors to strategically consider long-duration bond funds, taking advantage of prevailing market dynamics.
