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Gilt investors hopeful as RBI signals low Rates

RBI’s soft monetary stance may be music to the ears of investors in short-term debt schemes and gilt schemes, say experts. Even prospective investors can take cue from the apex bank’s move, which saw it cutting key rates, reverse repo and repo, by 25 basis points (bps) on Tuesday.

“RBI is signalling that it would keep interest rates lower and would provide ample liquidity to aid economic revival . This would keep yields in the shorter-end lower,” says Devendra Nevgi, CEO and CIO, Quantum Mutual Fund. ‘‘ However, it would be challenging for the central bank to keep the long-term bond yields lower because of the huge borrowing plan of the central government,” he adds.

Money market participants believe that a slew of economic packages announced by government are likely to result in huge borrowing in 2009-10. ‘‘The market participants are still apprehensive about the government’s huge borrowing programme. It remains to be seen how the RBI would maintain adequate liquidity,” says an analyst.

“The RBI has spoken about how it would conduct the government’s borrowing programme in an orderly manner. It is a significant statement. It would help keep the yields low,” says D Sundararajan, investment consultant , Trendy Investments.

So, what does it mean to fixed income investors? To begin with, you would earn less interest on bank FDs. As for investors in debt schemes of MFs, Sundrarajan says those who have already invested in short-term schemes stand to gain the most. ‘‘Even those who plan to invest in these schemes will get a direction as they know the yields are likely to drop now,” he says.

‘‘Once the yields started going down the NAVs of short-term schemes will go up. Even gilt schemes would benefit if the yields continue to fall further,” says Nevgi. However, there is a small segment in the money market which believes that investors are not likely to benefit ‘‘ substantially’.

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