Policy push for portfolio?

While event-based tactical calls are risky, a rate cut will help both borrowers and investors

Will Reserve Bank of India (RBI) governor Raghuram Rajan cut repo rates on Tuesday? It is a question everyone is asking. For retail investors, a rate cut has many ramifications. For example, a lower rate cycle will improve returns of long-term bonds and stocks of banking, infrastructure and others will get a fillip. Then, there are car and home loan borrowers who will benefit if any rate cut is passed on by banks. Only fixed deposit investors feel the pinch of a rate cut, as their returns will fall.

Says investment advisor Arun Kejriwal: “A 25-basis point rate cut has already been priced in by the market. In the absence of any positive surprises, any upside will be momentary. At best, there will be a rise of two-three per cent. In such a situation, the risk-reward ratio is not in favour of any investor.”

What will be key for investors is the statement from Rajan, believes Kejriwal. In case, there is an indication of future cuts sooner than later, the market will be more interested.

While the equity market does not look too positive unless there is a positive surprise, what should investors do in debt? From a financial planning perspective, most don’t advise any big strategy change in the portfolio based on events such as the monetary policy because of the high risk of timing the market.

However, many have already started positioning themselves for taking advantage of an impending rate cut cycle. Says financial planner Suresh Sadagopan: “We have already advised our clients to invest in long-duration papers, which will improve their returns when the rate cut cycle happens.” According to him, whether it is companies or retail investors, the big benefit will only come when rates fall by a good 200 basis points.

A rate cut will help long-term bonds because when interest rates fall, bond prices go up. But even sectors such as banking, housing finance companies, realty and others are likely to be positively impacted greatly on hopes that the economy would start doing well. Owning stocks of good companies or sector funds will help improve returns. The category average returns of banking sector funds have been better than the S&P Sensex. That is, while the benchmark index has fallen three per cent, banking funds have returned nine per cent in the past year.

Some market players say since the festival season is coming in and people buy a lot of physical gold in this season, RBI might come up with guidelines for gold bond scheme which has been recently cleared by the Centre. “I would advise my clients to go for this scheme because it will provide them with more liquidity and help them earn some interest on their idle gold,” says Kartik Jhaveri, director, Transcend India, a wealth management firm. According to experts, if banks offer up to three-five per cent in the gold bond scheme, there will be many people willing to give their idle gold to banks.