Gilt funds lose steam after RBI pause on rate cut triggers yield spike

The strong rally seen by gilt funds might come under pressure, following the surprise move by the Reserve Bank of India (RBI) to bring a halt to its policy rate-cut moves to give a fillip to economic growth.

Gilt and other government security funds, on Thursday, saw their net asset values (NAVs) decline between 0.6 and 1.1 per cent after the RBI’s pause on rate cuts triggered a spike in G-Sec yields. The yield on 10-year government bond rose 11 basis points, which was the sharpest since September 20.

Market experts say that investors will need to temper their return expectations from this category. “If you look back at one year before this, nobody was expecting this kind of returns. It doesn't look like that kind of return will be replicated in the current year,” said Mahendra Jajoo, head-fixed income, Mirae Asset Management Company (AMC).

He said the outlook has become tentative after recent moves by the RBI, even though the central bank has indicated further cuts if the situation improves and inflation comes down.

In the one-year period, gilt funds had outperformed most other debt categories with gains of over 10 per cent.

Experts say there are multiple factors at play that can impact the future performance of this category. “The inflation forecast for the first half of 2020 is benign with food inflation expected to soften by February. The growth outlook remains challenging. The RBI seems committed to ensuring there is adequate liquidity,” said Anurag Mittal, fund manager and associate director, IDFC AMC.

“While a moderate fiscal slippage because of lower tax collection and the slowdown in nominal gross domestic product is priced in by the markets, any fiscal stimulus will lead to a rise in term spreads,” he added.

At the end of October, gilt funds accounted for more than Rs 8,500 crore of assets under management, showed data from Association of Mutual Funds in India.

Advisors say gilt funds may not be a suitable product for retail investors, given the various factors that can influence the performance. “These funds are for investors who can make tactical calls, time their entry and exits, and closely track and monitor interest-rate cycles,” said Amol Joshi, founder of Plan Rupee Investment Services.