Bet on liquid fund as RBI likely to hike rates by 100 bps by March 2023: Arvind Chari of Quantum Advisors

The Monetary Policy Committee (MPC) statement and the comments made by the Reserve Bank of India (RBI) Governor were dovish. The bond markets have already priced in a move away from the accommodative policy in the months to come.

Maybe, it (RBI) felt that some segments of the bond market are over-reacting and hence wanted to temper the actions by maintaining status quo.

However, the RBI should be preparing the markets on the change in policy amid a change in the backdrop.

Arvind Chari – CIO, Quantum Advisors decodes the RBI MPC policy outcome and its impact on bond markets and funds which investors can bet on:

A) Global commodity prices pressures remain.

B) The developed world central bankers are normalising monetary policy.

C) We are no longer in crisis and hence do not need crisis time rates and monetary support.

Growth already seems to have recovered to long-term trend levels. Also, given that the government has assumed the mantle of supporting and reviving growth, the RBI needs to prioritise financial stability and inflation.

The RBI would have been better off guiding on how they would normalise liquidity and interest rates in the coming months.

We do understand that the Indian economic cycle is different and inflation pressures are lower due to contained food price inflation.

Also, there may be an effort by the RBI to try and de-link India from the actions of the developed world central bankers.

The MPC and the RBI also seem to be drawing a lot of comfort from the CPI forecast for FY23 at 4.5% and hence signalling they have enough space and room to continue with accommodative stance and decade-low policy rates.

That CPI estimates seem well below market forecasts and I believe it assumes lower oil prices or lower pass-throughs.

For now, this delay in rate normalisation would mean that bond markets will rejoice for a while. Long-term bond yields are back towards pre-budget levels.  

The outcome of the February policy meeting is even better for the short to medium-term segments as that was more susceptible to any changes in RBI liquidity and interest rates policies.

For the medium to the longer end of the bond markets, it is back to watching oil prices, US treasuries, and the weekly demand/supply situation in the auctions.

We continue to maintain that the RBI will move its policy stance to neutral. It will move the operational policy rate to the Repo rate. And it (RBI) will hike the Repo rate by 100 bps by March 2023.

Liquid funds remain a good way to play this interest rate tightening cycle.

Given the steepness of the yield curve, there are opportunities at some segments of the government bond yield curve.

If you have a time horizon of 3 years+, then a combination of the liquid fund and say a dynamic bond may work well overlocking in at current rates in fixed deposits, provided you gradually increase your allocation to dynamic/long term bond funds on every rise in market yields in the coming year.

(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)