We expect more measures from RBI on liquidity front: Deepak Agrawal

Central bank has 'communicated intention' to provide sufficient liquidity, says senior executive of Kotak Mutual Fund

The early February rate cut by the Reserve Bank of India (RBI) is likely to be followed by another 25 basis points (bps) reduction by June 2025, believes DEEPAK AGRAWAL, chief investment officer - debt at Kotak Mutual Fund. Agrawal, in an email interview with Abhishek Kumar, said actively managed duration funds can be considered by investors who can tolerate volatility, and medium-duration funds with a three-year tenor for those seeking less volatile portfolios. Edited excerpts:

 

What are your key takeaways from the latest RBI monetary policy? Do you expect more rate cuts in 2025?

 

The RBI decided to cut policy rates by 25 basis points (bps) after a pause of almost two years, while maintaining a neutral stance. The central bank aims to use liquidity measures to drive rates but refrained from taking any direct liquidity actions in the policy. However, they communicated their intention to provide sufficient liquidity on both an overnight and durable basis, which was followed by an increase in open market operation (OMO) purchases. We expect more liquidity measures from the RBI in the near to medium term. On the rate front, we anticipate one more 25 bps cut by June 25. The RBI's Monetary Policy Committee actions in the medium term will be determined by domestic data and global actions, particularly from the US.

 

How are you positioning your portfolios to benefit from the rate cut cycle?

 

Our strategy is to focus on short-term portfolios in corporate bonds with a three-year tenor, which are currently attractive. Additionally, we see potential in the 30-year G-Sec segment, as spreads have widened in the long-term segment. We have positioned our portfolios accordingly.

 

Which part of the yield curve is the most attractive?

 

We have observed a steepening in the G-Sec yield curve recently. With the expectation of more rate cuts and liquidity from the RBI, we continue to favour the short end of the curve. The spread between 10-year and 30-year G-Sec curves has widened to almost 35 bps, making 30-year papers also attractive.

 

Why are 10-year G-Sec yields rising? Do you see scope for significant easing in the coming months?

 

The market was expecting liquidity measures and a change in stance to be accommodative, signalling future rate cuts. However, the RBI maintained a neutral stance and did not announce specific liquidity measures, leading to a hardening of 10-year G-Sec yields by around 5-6 bps. It's worth noting that 10-year yields had already rallied by 18-20 bps from mid-January 2025 until the RBI policy. We expect 10-year G-Secs to trade in the range of 6.55 per cent to 6.75 per cent in the near term.

 

How do the three high-quality bond segments – sovereign, SDLs and AAA – compare now?

 

Given the tight liquidity conditions, high bond spreads, and an inverted yield curve for high-quality bonds, we expect the front end of the curve to perform well with curve steepening and spread compression. We are neutral on State Development Loans (SDLs). For G-Secs, we are bullish, considering the OMO purchases by the RBI.

 

Which debt MF product is ideal for investors in the present scenario?

 

Our recommendation to investors is to invest according to their time horizon. Currently, we recommend actively managed Duration Funds for investors who can tolerate volatility. For those seeking less volatile portfolios, funds with a medium duration of around three years are suitable.

(Disclaimer: Entities controlled by the Kotak family have a significant holding in Business Standard Pvt Ltd)