In an off-cycle policy meeting, the monetary policy committee (MPC) surprised market participants by announcing the following:
- Repo Rate hiked by 40 bp to 4.4% with immediate effect
- Cash Reserve Ratio increased by 50 bp to 4.5% from May 21, 2022. This should reduce banking system liquidity by ~Rs. 85,000 crores
What should investors do?
Honestly, we are surprised by today’s move. But at the same time relieved that RBI has finally thrown in the towel on Repo Rate normalization. Bond market will experience some volatility in the next few sessions as market participants go back to the drawing board and reassess RBI’s potential hikes in next 12 months and their implications of other financial assets.
After crossing important levels such as 7.26% and 7.36%, we expect the benchmark 10Y IGB to trend towards 7.53% from a technical perspective.
Investors with long-term fixed income allocation should probably wait till June MPC policy and allocate a portion of their surplus (25%) after the June MPC outcome and keep allocating 25% each after subsequent MPC policy outcomes in Target Maturity Bond ETFs / Bond Index Funds maturing in five to 10-year residual maturities depending on their comfort. This should help them average out their investments and earn attractive tax-adjusted returns if they remain invested till the maturity of these funds.
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