The Reserve Bank of India (RBI) on wednesday i.e. 7th June 2022 raised the key benchmark lending rate (Repo-rate) by 50 basis points (bps) to 4.90% in its June bi-monthly meeting.
The central bank is likely to concentrate on interest rate hikes over these coming months in a relatively short tightening cycle. Retail inflation surged to an eight year high of 7.79 % in April. It has remained above 6-percent since January 2022. As the Russia-Ukraine war has led to globalization of Inflation due to subsequent rise in the crude-oil prices during such challenging times it's necessary to take a hawkish policy stance and target inflation to stabilize the economy.
MPC is focussed on bringing down inflation into the targeted frame.
The RBI estimates the GDP growth rate at 7.2% for 2022-23 to remain unchanged as the policy repo rate now stands at 4.90% still below its pre pandemic level.
Standing Deposit Facility (SDF) and Marginal Standing Facility (MSF) rates have been raised by 50 bps.
On the Inflation front, RBI revised its forecast to 6.7% from the earlier estimate of 5.7% due to the pressure on commodity prices globally, as the war situation intensifies.
Moreover, the orderly completion of the government’s borrowing programme was assured by the RBI along with the absence of any liquidity curbing measure proved to be a sign of relief for the bond markets, with the yield on the 10 yr paper easing to~7.48% from 7.53% previously.
So, what’s the final takeaway and what should investors consider doing with their investments?
It is counterproductive to sell into a panic like this without logic, but if you’re someone looking to buy the fear you may consider getting high-quality Balanced Advantage and Arbitrage funds to reduce the impact on volatility on the portfolio. Long-short strategies are also a good bet for creating value on the upside in the next market cycle as the interest rates are expected to rise next fiscal as per the RBI’s policy updates this month.
Fixed Income markets can be trickier since Central banks around the world are tightening liquidity by raising interest rates. Coupled with the rising commodity prices and global inflation, bond yields may spike significantly resulting in low returns as the bond prices decline resulting in a lower demand for G-secs.
An ideal solution may be to consider Gilt securities maturing over the next 2-4 years since the YTMs here are encouraging due to the uptight of rates. Shorter duration funds will help investors stabilize the interest rate risk which will be a hindrance for the long-term funds.
Investing in floating rate bonds could be good for the long term as due to the peak of the cycle, RBI has moved towards taking a hawkish policy stance.
