In the last MPC meeting of financial year 2019-20, the RBI chose to keep the policy rates unchanged at 5.15% for the repo rate and 4.90% for the reverse repo rate and kept the policy stance unchanged at accommodative. After operation twist, the RBI today introduced Long term Repo (LTRO), one more tool to enable better monetary policy transmission. The LTRO will allow banks to borrow for the one year and 3-year periods at the policy repo rate of 5.15%." It gives banks 1 year and 3 year committed money at the repo rate of 5.15%. This move is expected to push the short-term yields in the 1 year, 3-year, 5- year space down" said Arvind Chari, Head Fixed Income at Quantum Advisors Private Limited. The corporate bond yields are also likely to come down he added. “Debt funds that are positioned at the front end of the yield curve will benefit from this move". Short duration funds, dynamic funds that invest in bonds of this tenor, corporate bond funds and bank and PSU funds are expected to benefit as yields come down and the price of existing bonds go up.
The triggers for longer-term bonds will be from how the fiscal deficit pans out and from the inclusion in bond index, said Chari. The short-term government bond yields fell 10-15 bps on the RBIs announcement and given that the policy rates may not see a reduction in the immediate future in light of the uncertain trajectory of inflation in the near term, further yield softening will depend upon how well the transmission will happen. However, the short duration funds are those that an investor should consider for inclusion in their core portfolio and not necessarily for tactical gains from the current RBI moves. Investors should continue allocation to this segment for their strategic debt exposure needs.
