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RBI Holds; Tightens Stance Friday, Oct 05, 2018

In a surprise move, RBI left the Repo Rate unchanged at 6.5% as against the expectations of increasing it by 25 (0.25%) to 50 (0.5%) bps. We were expecting the RBI to hike the Repo Rate by 25 bps and keep its monetary policy stance as neutral.

The RBI has instead held the rates steady but changed the stance to ‘calibrated tightening’.

With his move, the RBI is likely sending a message to the markets that they won’t use interest rates to defend the depreciating currency and thus have not hiked the interest rates. At the same time to maintain its inflation fighting credibility they have tightened the stance to indicate that if Oil prices increases they will hike the Repo Rate in the coming months. This stance also clearly indicates that the RBI will not be cutting interest rates anytime soon.

In July 2013, post the global episode of ‘taper tantrum’, the RBI had hiked interest rates by 300 bps (3%) to curb speculation on the Indian Rupee, which further depressed sentiment and led to an even sharper sell off in bonds, equities and currencies. With the Indian Rupee, depreciating now , market participants and analysts have been expecting a similar reaction by the RBI in hiking interest rates.

With the RBI now pausing, at a time when the Indian rupee has sold off sharply and markets expectations were riding high on a 50 bps rate hike, the RBI seems to be signaling that they don’t yet see the reason to panic on the external front. The Rupee is depreciating largely due to a rise in oil prices and the RBI has quite a few other means to manage the Rupee. They can sell dollars from their Forex Reserves, open a special window for Oil companies to borrow dollars directly from the RBI, offer higher interest rates on NRI Deposits to get inflows from NRIs...

The other reason for them to not hike interest rates could have also been due to the turmoil in the equity and credit markets. The issue with the default by IL&FS and the steep fall in stock prices of some banks and NBFCs has impacted sentiment in the broader market. The RBI, by hiking interest rates could have further hampered sentiment. As it is, Indian bond yields are already high enough with the 10 year government bond yield at above 8.0% and 3 year AAA PSU bonds near 9.0%. A 50 bps rate hike at this juncture may have led to a further increase in market interest rates.

The RBI having already raised the interest rate by 50 bps in the last 4 months also had the comfort from the slowing inflation. CPI inflation, especially food inflation, continues to shoot below RBIs projections and the previous two pre-emptive hikes does ensure that the RBI Repo rate is ahead of the current inflation trend.

However, given the trajectory of oil prices, if it stays at the current levels or moves up further, we would see the RBI hiking rates in the forthcoming policies. We thus expect the Repo rate to move up to 7.0% from the current level of 6.5% by March 2019.

If the INR continues to depreciate on falling equity markets and higher oil prices, we expect market interest rates to move higher from the current levels.
Also, risks in the system would rise and investment sentiment will fall.

In such a scenario, we would advise investors to remain invested in debt funds which prioritize safety and high liquidity and manage money with prudence by being true to the investment objective of the fund.

Quantum Liquid Fund, prioritizes safety and liquidity over returns and is invested only in less than 91 day maturity instruments issued by Government Securities, Treasury Bill and AAA Rated PSU bonds.

Quantum Dynamic Bond Fund, takes higher interest risks, but does not take any credit risks and is invested only in Government Securities, Treasury Bill and AAA Rated PSU bonds.

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Name of the SchemeThis product is suitable for investors who are seeking*Riskometer
Quantum Dynamic Bond Fund

(An Open Ended Dynamic Debt Scheme Investing Across Duration)
• Regular income over short to medium term and capital appreciation

• Investment in Debt / Money Market Instruments / Government Securities
Quantum Long Term Equity Fund
Investors understand that their principal will be at Moderately Risk
Quantum Liquid Fund

(An Open Ended Liquid Scheme)
• Income over the short term

• Investments in debt / money market instruments
Quantum Long Term Equity Fund
Investors understand that their principal will be at Low Risk
* Investors should consult their financial advisers if in doubt about whether the product is suitable for them.

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The views expressed here in this article are for general information and reading purpose only and do not con stitute 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 f air 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.QuantumMF.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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