What should be your debt mutual fund strategy after the surprise RBI rate cut?

The Reserve Bank of India has joined the battle to contain the damage done to the economy by the Coronavirus pandemic by aggressively slashing policy rates earlier today. Does this warrant any changes to your debt mutual fund investment strategy?

The apex bank reduced the repo rate by 75 basis points and reverse repo rate by 90 basis points. “This decision and its advancement has been warranted by the destructive force of the coronavirus. It is intended to: (a) mitigate the negative effects of the virus; (b) revive growth; and above all, (c) preserve financial stability,” said RBI.

“The rate cut comes as a surprise and a pleasant one for the bond market. The RBI has made it clear that it will do everything to tide over the crisis. That is a big statement coming from the central bank. The RBI governor specifically spoke about transmission in the corporate bond market, which was highly needed,” says Mahendra Jajoo, Head-fixed income, Mirae Asset.

Jajoo also said that we need to focus less on the rate cut and more on the commentary. “RBI has said that all steps will be taken to ensure that there is liquidity and enough support for the markets. This will keep the bond market positive,” says Mahendra Jajoo.

Lakshmi Iyer, CIO-debt and co-head – product, Kotak Mutual Fund, expects the spread in the corporate bond yields to have an impact after today’s RBI guidelines.

“The repo rate has fallen to the lowest ever. It had hit the lowest point in 2009 during the global financial crisis. I think today’s move was a bazooka for the bond market, specifically corporate bond market where the transmission has been really low. I am expecting the width in spreads to come down, which is a huge positive for the market,” says Lakshmi Iyer.

“I think we might see some spike in the shorter term corporate bond funds. However, the risk-reward is still in favour of short duration fund and corporate bond funds. I think investors should stick to these categories,” says Lakshmi Iyer.

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