Investors in fixed income should brace for volatility. It is extremely important to stay the intended investment tenor to help ride out such moves in bond yields.
RBI | Representative Image.
The Reserve Bank of India (RBI) maintained status quo key rates—repo rate at 4 percent and reverse repo rate at 3.35 percent. The monetary policy committee (MPC) also decided to continue with the accommodative stance as long as it was necessary (at least during the current financial year and into the next year) to revive growth and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target.
On the inflation front, too, we did not get to see any negative surprises as food prices remain soft, though core inflation remains sticky.
While the RBI did say that cash reserve ratio (CRR) normalisation would open up space for a variety of instruments, markets were looking for explicit guidance on the open market operations (OMOs)/Operation Twists (OTs). Since there was no a la carte serving done by the RBI, the bond markets sold off (6.16 percent 10-year IGB as compared to 6.09 percent levels at previous day close).
How to approach fixed income investing now?
We are of the view that the liquidity situation will remain accommodative and no major disruptions are likely. Surplus liquidity in the system would ensure the short-end rates remain near the reverse repo rates. Bond markets are visibly disappointed by the RBI not alluding to OMOs explicitly. Hence, OMOs/OT will determine movements in longer tenor yields going forward. After all, ‘bade bade deshon mein aisi choti choti choti baaten hoti rehti hai!’
In line with the RBI guidance, policy rates are likely to stay on hold in FY22. The central bank would likely stay accommodative, with a focus on growth normalisation and use of unconventional tools to improve policy transmission.
In a positive development for G-Sec demand lever, the RBI has allowed retail investors to directly invest in gilt. While it is a great move attempted to broaden the demand base, the actual appetite will be key to watch over the medium to long term. Foreign portfolio investors have net sold fixed income in India in CY 2020 and even CY 2021 to date. If carry is the trade that continues to be a dominant theme for fixed income, we could see some flows from foreign shores into fixed income. A stable rupee could also be a catalyst for the same.
Investors in fixed income should brace for volatility. It is extremely important to stay the intended investment tenor to help ride out such moves in bond yields.
Disclosure: Views are personal and do not reflect the views of Kotak Mahindra Asset Management Company Limited.
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Lakshmi Iyer is the CIO – Debt & Head – Products at Kotak Mahindra Asset Management Company.
