Investing in debt funds post RBI Monetary Policy

Reserve Bank of India (RBI) on April 7, 2021 (Wednesday) concluded its first bi-monthly monetary policy review for FY21-22. The key measures taken by RBI are as follows: 

- In order to manage the yield curve, RBI will have a quarter-wise open market operations (OMO) calendar. 

- A massive borrowing programme to the tune of Rs 1 lakh crore is expected for Q1 FY21-22. 

- RBI projects food inflation to soften but expects general inflation to rise marginally in FY21-22. 

The yield on 10-year benchmark bonds began to surge in February 2021, which by March 2021 was a little above 6 per cent. This indeed led many debt funds with high exposure to long-term papers to post negative returns. However, RBI continued to maintain its accommodative stance amid the rising Coronavirus cases across the nation and also, expected slowing of the economy. Further, in order to aid the economy to return on a growth path, the liquidity tap is likely to remain open. 

This is going to be good news for a lot of debt investors as any fall in yields makes them cheerful. This is because of the inverse relationship between yields and bond prices. If the yield falls, bond prices rise and so do the returns of fixed-income investors and vice versa. 

What should debt fund investors do?  

This would certainly depend on your investment horizon. If your investment horizon is more than 3-5 years, then investing in gilt funds (holds long-duration government securities) would be wise. Even, those who are tactical investors can invest in funds having high exposure to long-duration papers because the monetary policy is supportive of interest rate on the higher end of the yield curve. However, if your investment horizon is below 3 years, then still, it makes more sense to invest in short-duration and low-duration funds. This is because the accommodative stance of RBI is not going to be the same forever. It would certainly change if inflation remains out of control.