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Posted On Wednesday, Dec 07, 2022
● Policy Repo rate hiked by 35 basis to 6.25% from 5.90%.
● Accordingly, the SDF rate increased to 6.00% and the MSF rate increased to 6.50%
● Policy stance maintained as “withdrawal of accommodation” to ensure inflation remains within the target going forward.
● MPC was divided with 5-1 votes in favor of the rate hike and 4-2 vote for the stance.
● Extended the dispensation of enhanced HTM limit of 23% of NDTL to March 31, 2024. The HTM limits would be restored from 23% to 19.5% in a phased manner starting from the quarter ending June 30, 2024.
Quantum Fixed Income Team’s View
The Repo rate hike of 35 basis points was broadly in line with the market expectation. However, a continuation of the stance as “withdrawal of accommodation” indicates that the rate hiking cycle in India is by no means over. We would expect at least another 25 basis points of a rate hike in February next year before we get any closer to the terminal rate.
The RBI seems to be reasonably comfortable with the growth trend and projects further improvement in the growth outlook. While it highlighted the elevated and sticky core inflation as the main risk to the economic outlook. This suggests that RBI will continue with its hawkish tone until core inflation comes down significantly on a durable basis.
The bond market will be disappointed with the hawkish commentary from the RBI. We might see some selling in the bond market in the coming days. However, given the high level of absolute yields at medium to long-term bonds, we expect the upside to remain capped. We expect the 10-year government bond yield to continue to trade between 7.2% to 7.5%.
Given that credit growth is expected to remain robust while deposit growth is lagging, we do not see any material change in demand for bonds from banks due to the extension of HTM dispensation.
Given the fact that a sizable rate hike has already been delivered and the starting yields on short to medium-duration bonds are between 7.0%-7.5%, bond funds are likely to do better over the coming 2-3 years. Investors with a 2-3 years investment horizon and some appetite for intermittent volatility, can continue to add to dynamic bond funds in a staggered manner.
Rate hikes and continued reduction in durable liquidity surplus are positive for short-term debt fund categories like the liquid fund. We would expect further improvement in the return potential of these categories as interest accrual on short-term debt instruments has risen meaningfully. Investors with shorter holding periods and low-risk appetite should stick to Liquid funds.
Disclaimer, Statutory Details & Risk Factors:
The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.
Mutual fund investments are subject to market risks read all scheme related documents carefully.
Please visit – www.QuantumAMC.com to read scheme specific risk factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the schemes objective will be achieved and the NAV of the scheme(s) may go up and down depending upon the factors and forces affecting securities market. Investment in mutual fund units involves investment risk such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the sponsor / AMC / Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited. The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.
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