The RBI, in line with expectations, went for a rate hike and changed the repo rate to 6.5% today. Consequently, the reverse repo rate adjusted to 6.25% and the Marginal Standing Facility (MCF) rate and the Bank Rate to 6.75%.
At the Repo Rate, the Reserve Bank of India lends money to commercial banks when there is a shortfall of funds. The RBI also uses these rates to control inflation in the country. Whereas, Marginal Standing Facility is a Liquidity Adjustment Facility (LAF) window of the RBI. Through MSF various commercial banks borrow overnight funds from RBI. They do so only against some of the government securities that RBI accepts.
The decision of MPC (Monetary Policy Committee) is consistent with the neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2% while supporting growth trajectory, GDP at 7.4%-7.5% till F.Y 19-20. Every bi-monthly RBI’s monetary policy committee meets to discuss things.
As they maintained the neutral stance, further increase in the rate for this FY 2018-19 is looking muted as bonds yield indicate some sign of stability in rates movement and making strong base at current levels.
Strong yield for debt instruments due to repo rate hike
It is a good time to unlock the higher yield in the case of the debt instrument. Those investors who are looking for the risk-free high return from their investments have good options with some fixed debt instruments. Investors should have exposure in fixed debt instrument for better asset allocation at this time. Currently, 10 years bond yield is trading at around 7.74% – 7.79%.
*Fixed Maturity Plan or Accrual Debt Fund is also a very good option to invest in right now. Their current YTM is around 8.5% – 9.5%.
Fixed Maturity Plans of mutual funds mainly invest in fixed income instruments. For instance, certificates of deposits or bonds. These instruments lock in the yields for a particular period of time. Basically, these are closed-ended mutual fund schemes. Also, have a pre-defined investment horizon.
Accrual debt funds are low-risk mutual fund investments. Mainly, these mutual funds schemes invest in short to medium maturity plans of various debt instruments. The main aim is to earn interest income from the coupon of the bonds.
So, if you are a risk-averse investor or even if you are looking to lock up some of your funds in risk-free but high return instruments. These avenues are for you. If you need further assistance feel free to contact me at Moneydial.com for free.