“Shocker from RBI”
Dear Friends,
RBI, in its monetary policy on 8th Feb’17, changed its stance on interest rates from “accommodative” to “neutral”. What it means is that it signaled the end of immediate further interest rate cut, thereby catching off guard each and every fund manager in the country.
This act of RBI, sent seismic waves into bond market and unleashed a tsunami of bond selling. The 10-year G.Sec yield rose from 6.50 app to 6.90 app in one single day, the largest fall in prices in 3 and half years.
The surprise is not that RBI did not cut rates; the surprise factor is a change in the stance of RBI.
I produce below an extract of my article dated 9th Aug’2016 for your perusal.
“Since Jan’2015, RBI has reduced interest rates to the tune of 150 basis points. Going forward the interest rates are bound to soften further. But looking on to the current bond prices, I believe that the prices have already factored in another 50 basis point interest rate reduction.
I do not foresee a very aggressive interest rate reduction, beyond this 50 basis point ,in next 12 months time.
As such, it would be wise and prudent for investors to switch from Duration funds to Accrual funds in debt. This move would ensure that investor gets 8% + return on a very conservative side on an annualized basis.”
The idea to reproduce the above is to highlight the fact that we as investors should focus on macro picture and accordingly act.
WHAT DOES RBI ACTION IMPLY:
It signals the end of the interest rate reduction cycle for the immediate future. I believe that we should see a stable interest rate regime for the next few months or so. World markets are dynamic and is changing daily, and as such, we need to be vigilant.
Factors determining the interest rate changes, to my mind, are:
- Inflation
- Growth of domestic economy
- Interest rate in US
- Other external world factors
Can interest rates rise from here … hopefully not.
For investing in debt funds, the safest bet would be Short Term Accrual Funds.
Happy investing,
With warm regards,
Samrendra Tibarewalla, CFPCM
PS: You are the best manager of your money. Please take informed decisions only.
Disclaimer : The author in no way will be held responsible for losses incurred on the basis of above re commendations. The investors are advised to take independent decisions after verifying all facts.
FAQ: RBI’s Change in Monetary Policy Stance
1. What was the significant change in RBI’s monetary policy announced on February 8, 2017?
On February 8, 2017, the Reserve Bank of India (RBI) shifted its stance on interest rates from “accommodative” to “neutral,” signaling an end to the immediate prospect of further interest rate cuts.
2. How did the bond market react to RBI’s policy announcement?
The announcement led to a sharp sell-off in the bond market, with the 10-year Government Security (G-Sec) yield rising from approximately 6.50% to 6.90% in a single day, marking the largest price fall in over three years.
3. Why was RBI’s policy change a surprise to fund managers?
The surprise stemmed not from the lack of a rate cut but from the RBI’s unexpected shift in stance, which was not anticipated by fund managers and investors, leading to significant market reactions.
4. What had been the trend in RBI’s interest rate policy since January 2015?
Since January 2015, the RBI had reduced interest rates by a total of 150 basis points. There was an expectation of further softening of interest rates, which had been partly factored into current bond prices.
5. What factors are considered pivotal in determining interest rate changes?
Key factors include inflation, the growth of the domestic economy, interest rates in the US, and other external global factors.