Short-term debt Funds take center stage amidst global economic challenges as the Reserve Bank of India (RBI) holds a steady repo rate of 6.5 percent. With growing concerns over rising bond yields in the US and escalating crude oil prices, investors anxiously await the October 6 monetary policy review. In this scenario, astute investors are contemplating the strategic allocation of funds to navigate these dynamic market conditions
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Despite the RBI’s commitment to curbing inflation to the targeted 4 percent, the central bank has chosen to uphold the current monetary policy stance. The prevailing allure of bond yields presents a favorable opportunity for allocating funds to fixed-income instruments.
The RBI’s monetary policy committee (MPC) not only kept interest rates unchanged but also maintained the growth outlook, projecting a real GDP growth of 6.5 percent for FY2023-24. In the face of challenges such as soaring crude oil prices and domestic economic uncertainties, the MPC stood firm on the inflation outlook, projecting it at 5.4 percent for FY2023-2024.
Governor Shaktikanta Das emphasized the inflation target of 4 percent, with a permissible range of 2-6 percent. This implies that the anticipated interest rate cuts may be delayed.
Market expert Madhavi Arora notes that the current policy narrative is anchored more on inflation uncertainty and liquidity management than on global uncertainties. She suggests that global financial conditions may introduce further volatility, making it crucial for investors to strategize accordingly.
While the RBI prioritizes inflation targeting, market participants do not anticipate additional rate hikes. Chief Economist Suman Chowdhury believes that the MPC is likely to pause on interest rates, with a potential rate cut not materializing before the first quarter of FY25.
In the current scenario of attractive bond yields, financial experts recommend capitalizing on short- to medium-term duration funds. Vikram Dalal of Synergee Capital Services advises against expecting interest rate reductions in FY2023-24 and suggests focusing on short-duration funds. Short-duration funds, with an average portfolio yield to maturity of 7.36 percent, have delivered returns of 6.73 percent in the past year.
Deepak Panjwani, head of debt markets at GEPL Capital, recommends exploring G-Secs maturing in five years, leveraging the inverted yields. Constant maturity schemes tracking the Nifty 5-year benchmark G-Sec have rewarded investors with 7.1 percent returns in the last year.
For those considering fixed deposits, investments maturing in one to three years offer attractive interest rates. Panjwani advises against chasing yields to avoid higher credit risk and suggests looking into tax-free bonds for individuals in high-income tax brackets.
Investors eyeing long-duration schemes may need patience, waiting for indications of a shift in the RBI stance. Shifting from short-duration to long-duration funds should be considered only when there is a clear shift in the central bank’s accommodation stance.
In summary, amidst global uncertainties, strategic allocation to fixed-income instruments, particularly short-duration funds and carefully chosen fixed deposits, aligns with the current economic landscape. Stay informed, evaluate risks, and make informed investment decisions tailored to your financial goals.