Debt funds get RBI booster; medium, long-term schemes to gain most

Mumbai: The Reserve Bank of India’s (RBI) much needed liquidity injection and rate cuts provide some relief to debt funds which were facing tough times due to foreign institutional investors’ unabated selling pressure.

RBI finally bit the bullet on Friday and responded to the coronavirus-induced crisis with a whopping 75 basis points cut in the repo rate, bringing it down to 4.4 per cent, its lowest ever.

The central bank also announced targeted LTROs (TLTRO) at monetary policy review and said it will help in reducing the yields on corporate bonds which have been reeling under pressure in recent times amid low volumes.

The RBI said it will conduct auctions of targeted term repos of up to three years’ tenor of appropriate sizes for a total amount of up to Rs 1 lakh crore at a floating rate linked to the policy repo rate.

Liquidity availed under the scheme by banks has to be deployed in investment-grade corporate bonds, commercial paper, and non-convertible debentures over and above the outstanding level of their investments in these bonds as on March 27, 2020, it said. These also have to be held to maturity.

Nimesh Shah, managing director and CEO of ICICI Prudential Mutual Fund said the TLTRO worth Rs 1 trillion is aimed at soothing the bond market which over the last one month had witnessed a spike in yields.

“This measure will aid in enhancing liquidity in corporate bond markets and consequently will lead to easing in short-term bond yields of high-rated corporate bond papers,” Shah said.

He continues to remain positive on the overall fixed income space and believes the up to 5-year segment offers relatively better risk-reward benefit.

“We are also positive on the accrual segment, as it provides opportunity to invest when the yields and spreads are at elevated levels,” he added.

Along with all the liquidity measures and rate cuts, MPC has widened the LAF (liquidity adjustment facility) corridor, discouraging banks to park funds with RBI as they want them to avoid risk aversion.

According to Dwijendra Srivastava, CIO-Fixed Income, Sundaram Mutual Fund, the shorter end of the curve will realign to the new repo rate, or even reverse repo rate since the market is flush with even more liquidity.

“Right now, the maximum benefit will happen to 3-year funds. Slowly it will become overpriced assuming we get out of the Covid-19 crisis in a timely manner and the curve will become steeper,” he added.

Currently, medium-term funds will benefit the most, he said adding that going ahead, long and medium duration funds will benefit as well.

Others shared the view.

Lakshmi Iyer, CIO (Debt) & Head of Products, Kotak Mutual Fund, said the RBI has intended to infuse liquidity not only into the banking system but also into the corporate bond markets.

Iyer pointed out that TLTRO is a step in that direction, and is likely to see spread compression, especially in high-grade corporate bonds.

“Given the comfortable liquidity in the banking system, we expect the reverse repo rate to be the operating rate for sometime. Investors with north of 3-12 month horizon could look at ultra-short, low duration funds,” she added.


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