RBI steps to push long-term yields up; ease short-end curve: MFs
The mid-quarter policy by the Reserve Bank will ease yields in short-end money market instruments, but will push it up in the longer end of the curve like 10-year government securities, say fund managers.
Mumbai: The mid-quarter policy by the Reserve Bank will ease yields in short-end money market instruments, but will push it up in the longer end of the curve like 10-year government securities, say fund managers.
"With the 75 bps reduction in MSF (marginal standing facility) rate, yields on short-term money market instruments are likely to ease. But, the repo rate hike of 25 basis points will push the long-term bond yields up," Head of Fixed Income at Reliance Mutual Fund Amit Tripathi said.
In the mid-term policy review, new Governor Raghuram Rajan on Friday eased liquidity through a reduction in the MSF rate by 0.75 percent to 9.5 percent and eased the minimum daily maintenance of the cash reserve ratio (CRR) to 95 percent from 99 percent.
However, it raised the repo rate by 25 basis points to 7.5 percent in its bid to contain the uptick in inflation.
Tripathi also said long-term bond yields are at attractive levels to encourage FII debt flow depending on the stability of the rupee.
An official from Axis Mutual Fund also echoed similar Sentiment.
"Short-term funds whether liquid funds or ultra short-term funds among others will benefit from the RBI decision to reduce the MSF rate. Also, the RBI statement of further reduction in MSF rate going ahead will benefit these funds as short-term yields follow the MSF rate," Head of Fixed Income at Axis Mutual Fund, R Sivakumar said.
He also said it is a mixed policy announcement with both a rate hike and rate cut in the same document.
Meanwhile, head of mutual funds research of FundsIndia, Vidya Bala is of the opinion that the hike in repo rate would result in sharp rise in 10-year government securities.
The 10-year G-Sec yield has shot up by around 30 bps and is currently hovering around 8.5 percent on the back of apprehension regarding reversal of RBI's monetary easing cycle.
"Post-RBI announcement, the sentiment is less long bond bullish. With the announcement, it is clear that the central bank intends to make repo rate the operative rate than the MSF rate as and when possible. We feel yields on short- term money market instruments to ease and the longer end of the curve to rise," Head of Fixed Income at Sundaram Mutual Dwijendra Srivastava said.