RBI Monetary Policy

The Monetary Policy Committee of the RBI decided to keep the policy repo rate unchanged at 6.5%. The decision to keep rate unchanged was unanimous. Consequently, the standing deposit facility (SDF) rate stands unchanged at 6.25% and the marginal standing facility (MSF) rate and the Bank Rate unchanged at 6.75%. The MPC kept the stance unchanged at withdrawal of accommodation.

The G-sec yield curve has flattened considerably in the recent past and with today’s announcement the yield curve may normalize with a fall in yields at the shorter end of the curve supported by adequate liquidity. The 10-year G-sec, in the short-term is expected to continue to trade in a tight range of 7.10% to 7.30% in absence of any adverse event.  

• At present, the short-mid end of the yield curve (upto 3 to 5-year segment) provides better risk adjusted opportunities as low term spreads doesn’t compensate adequately for the duration risk at the current juncture.

• Corporate bond spreads have compressed meaningfully amid lack of supply in the bond market. Multiple factors hint towards widening of corporate bond spread and hence deployment in tranches can be considered

• The current credit spreads for sub-AAA rated securities are below long-term average and may not offer attractive reward for risk.

One should continue to consider debt as a part of overall asset allocation mix as it helps to fundamentally diversify the portfolio. This can also be achieved by considering select hybrid mutual funds (equity savings and balanced advantage funds) which qualifies for equity taxation at the same time offers some stability by exposure to debt securities.