The surprise repo rate cut of 25 basis points (100 basis points = 1%) by the Reserve Bank of India is a great news for debt investors. According to debt fund managers, investors in long duration debt schemes are likely to pocket handsome returns in the coming months, as these schemes are expected to benefit from the likely rate cuts by RBI in the coming months. Those who have missed the bus also can consider investing in long-term debt funds as the current yields offer an attractive investment opportunity to investors, say fund managers.
"The rate cut was obviously on the back of a visibly lower inflation data. But we believe we will have to wait for the budget to see the next round of cuts," says Lakshmi Iyer, head of fixed income, Kotak Mahindra Mutual Fund. "But it is a welcome step as the debt market will be supported till the budget. If the fiscal numbers are supporting, the market will breach 7.65% meaningfully," she adds.
The 10-year benchmark government security touched 7.65% today after the RBI surprised the market with a rate cut, but most fixed income analyst believe that the yield may hover around 7.70-7.75% in the near-term as the market has already factored in the rate cut. Most market participants were expecting the central bank to cut rate in the later part of the first quarter.
Murthy Nagarajan, head of fixed income, Quantum Mutual Fund, believes that the RBI is likely to cut rates by another 50 to 100 basis points during the current year. "Oil prices are likely to remain lower for sometime. Even commodity prices are likely to be lower because of the weak demand. We believe that the RBI will further reduce rates by 75 basis points in the next year," he says.
Nagarajan forecast 10-year benchmark yield to around 7% in the next year. The fall in yield is always great news for investors in long duration debt funds as these funds benefit the most in a falling interest rate environment.
Both Iyer and Nagarajan ask investors in long duration funds to stay put. "The long duration story would play out further this year," says Lakshmi Iyer, who also believe that investors can consider fresh investment in long term debt funds at this juncture. "We believe investors should invest in long duration funds as these funds can offer very high returns when the RBI starts easing rates further," says Nagarajan.
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