Bonds good option to park money; investors can benefit from RBI rate cuts

Indian equity markets are likely to remain highly volatile in the near term. However, at a time when the overall investment sentiment is subdued, the bond market is likely to be in a relatively better shape.

With concerns of muted economic activities globally as well as in India amidst spread of coronavirus, the Reserve Bank of India (RBI) is expected to cut interest rates, which augur well for long tenure bonds. Interest rates and bond prices are inversely related—meaning if rates fall, bond prices move up and vice-a-versa.

According to Dhawal Dalal, chief investment officer (CIO) at Edelweiss Securities, “Given the higher expectations of a rate cut by the RBI amid likely negative impact of coronavirus on the economic activity, long-term bonds are likely to experience price appreciation.” In fact, the chances of rate cuts by RBI now look more likely given that major central banks globally, such as Federal Reserve, Bank of Japan and Bank of England, among many others, have already announced policy rate cuts as well as substantial liquidity infusion into their respective economies to soften the impact of slower growth.

Compiled by BS Research Bureau

 

Although domestic debt market has also witnessed selling pressure from foreign portfolio investors (FPI) in recent days, which along with rupee depreciation may have hurt bond yields to some extent, there is a silver lining. According to Mahendra Kumar Jajoo, CIO- fixed income, Mirae Asset Mutual Fund, “RBI’s intension to support bond markets should help contain pressure in that market.” For instance, the operation twist earlier, liquidity injection under long-term repo operation (LTRO) or current set of repo auctions announced by the RBI on Friday or US-dollar swaps announced on Thursday should collectively ease bond yields, Jajoo adds.
 

This apart, the short-to-medium tenure bonds, which are less volatile and could deliver better returns than cash or other liquid mutual funds are other options, say experts. “Short duration debt funds with around 1 to 4-year tenure can be a good option for risk averse investors. Yields on these funds are better than yields on very liquid funds or cash,” says R Sivakumar, head of fixed income at Axis Mutual Fund. Yields typically mean expected returns.
 

Overall, bond market is expected to do relatively better in the current tough times. However, investors need to be very selective. For instance, Dalal recommends that BHARAT Bond ETF – April 2023 as well as BHARAT Bond ETF – 2030 both invest only in AAA rated PSU/PFI bonds and therefore provide excellent options for investors in the current situation. While government bonds are also safe, possibility of FPI selling and hence some volatility is not ruled out. At the same time, investors are advised to stay away from credit funds due to high volatility.