Short-term debt funds may see higher return on RBI steps

Raghuram Rajan on Friday eased liquidity through reduction in MSF rate by 0.75% to 9.5%

Mutual fund schemes with short-term investment horizon like liquid or ultra short-term funds are likely to witness higher returns going ahead following reduction in the marginal standing facility (MSF) rate by the central bank over the weekend, say fund managers.

"Short-term funds like liquid or ultra short-term among others will benefit from the RBI decision to reduce the MSF rate. The indication by RBI of further reduction of MSF is likely to support return in this category," Head of Fixed Income at Axis Mutual Fund R Sivakumar told PTI.

In the mid-term policy review, Governor Raghuram Rajan had on Friday eased liquidity through a reduction in the MSF rate by 0.75% to 9.5% and eased the minimum daily maintenance of the CRR to 95 from 99%.

It, however, has raised the repo rate by 25 bps to 7.5% in an effort to contain rising inflation.

Head of Fixed Income of Reliance Mutual Fund Amit Tripathi said while reduction in MSF would ease yields at the short-end of the yield curve, it will push up yields in long-term bonds.

He also said returns on short-term debt schemes like liquid funds would improve due to reduction in MSF.

Another official of FundsIndia also echoed similar views.

"Rates in the short-end, money market instruments could ease given the lowering of MSF to 9.5%. This could result in a price rally in short-term debt funds," Head of MF Research at FundsIndia Vidya Bala said.