The second Policy Statement from the Reserve Bank Governor, unlike the first, was on expected lines. Market participants were expecting RBI to cut the Marginal Standing Facility (MSF) and hike in repo rate.
Measures taken in today’s policy meet:
- Marginal Standing Facility (MSF) rate reduced by 25 basis points from 9.0 per cent to 8.75 per cent with immediate effect;
- Policy repo rate under the Liquidity Adjustment Facility (LAF) increased by 25 basis points from 7.5 per cent to 7.75 per cent with immediate effect; and
- Liquidity provided through term repos of 7-day and 14-day tenor increased from 0.25 per cent of net demand and time liabilities (NDTL) of the banking system to 0.5 per cent with immediate effect.
The Reserve Bank governor has unwinded the exceptional liquidity tightening measures taken by the Central Bank in July 2013 and by doing this, the process of re-aligning the interest rate corridor to normal monetary policy operation is now complete. At this juncture, we continue to maintain our positive stance on the shorter end of the curve. A glance through the policy document reveals that inflation continues to be a concern for the RBI Governor and team, which means that rate hikes are the way forward as far as the monetary policy stance is concerned.
Hence our advice to the investors is on these lines:
Investors with idle cash can invest in Ultra-Short Term Funds. The recommended funds in this category include Axis Treasury Advantage Fund, ICICI Prudential Flexible Income Plan and Templeton India Ultra Short Bond Fund.
Investors with a time horizon of 6-12 months can consider Short-Term Debt Funds. Our recommended funds are PineBridge India Short Term Fund, Templeton India Short Term Income Plan, DWS Short Maturity Fund and Reliance Regular Savings Fund Debt Option.
Investors with a time horizon of 12-18 months can consider investing into dynamic bond funds like IDFC Dynamic Bond Fund, SBI Dynamic Bond Fund and UTI Dynamic Bond Fund.
For our existing investors who are holding onto duration funds, our advice is to stay put in the same. The short term volatility is definitely going to be there and investors will have to bear with this for some more time till the Central Bank is comfortable with the inflation dynamics and makes growth the focal point of its monetary policy.
Dr. Renu Pothen
Research Head-Fundsupermart.com India