The 0.25 per cent repo rate hike by the RBI is proving to be a disaster for debt medium-term funds or income funds—in a single day on October 26, the category lost thrice what it had gained in the year as on October 25, 2004 (the day before the rate hike).
In the year-to-date through October 25, 2004, income funds were up 0.08 per cent. However, on October 26, the category lost an average 0.22 per cent thus erasing whatever gain the category had made in 2004. Now, income funds are once again in red this year--down 0.15 per cent as October 26, 2004.
The story for gilt funds is even worse. The category lost 0.44 per cent yesterday (the day repo rate was hiked). The category's 2004 return now stands at minus 1.38 per cent. Short-term debt funds and short-term gilt funds also felt the heat as both categories shed an average 0.03 per cent on October 26, 2004.
Cash funds, on the other hand, remained unscathed by the repo rate hike. They in fact gained 0.01 per cent yesterday (October 26, 2004). This is understandable, as repo rate acts as a floor for the short-term rates and a hike in repo rate increases call rates, which eventually raises the returns for cash funds that invest in the call and money market instruments.
With just two months left in 2004, one thing is now sure that the two categories – income funds and gilt funds – are likely to end the year 2004 in the negative territory for the first time in the Indian debt fund history. Even past ten months hadn't been good for these two categories of funds. Both have delivered negative returns in five of the nine months. Though August and September 2004 saw some recovery as they turned in positive return but the repo rate hike has spoilt the party.
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