RBI's decision to maintain the status quo in its October policy was as anticipated. The Repo rate is unchanged at 4%; the reverse repo rate remains at 3.35% and the monetary policy stance remains accommodative. As expected, the policy narrative centred around steps to withdraw the excess liquidity which is now more than ₹12 trillion. How does it affect debt fund investors? Should they alter their investment strategy going forward?

New liquidity management measures announced by the RBI, include a calendar proposing a gradual increase in the amount to be absorbed under the 14-day variable reverse repo rate (VRRR) from the ongoing ₹4 trillion to ₹6 trillion (by December 3rd). Besides, a new 28-day VRRR is likely to be introduced if the need arises. Even after the additional liquidity suction, RBI estimates liquidity surplus under the fixed-rate reverse repo at ₹2.5 to ₹3 trillion.

However, as per Pankaj Pathak, fund manager-fixed income, Quantum Mutual Fund, the RBIs efforts to suck out and manage the excess liquidity is minimal. " It will not have much impact on short term interest rates," he adds.

The biggest surprise was the complete removal of G-Sec Acquisition Programme (G SAP). In the background of high oil prices and rising US treasury yields, the removal of G-SAP should lead to a rise in long term bond yields.

Investors in long term debt funds, as per Pathak, should expect higher volatility and lower returns. In the last year, the long duration debt mutual funds have given an average of 6.01% returns.

Fund managers believe debt investors will be better off in short term mutual funds. "Inflationary expectations could lead to underperformance of longer maturity bonds. Easy liquidity will support the performance of funds up to maturity of three years," says Anand Nevatia Fund Manager TRUST Mutual Fund.

Short Duration Debt Funds, in the last year, have delivered 5.35% returns.

To be more precise, Investors with a shorter horizon (up to one year), should allocate to the Ultra Short and Low Duration Funds, says Kumaresh Ramakrishnan, CIO-Fixed Income, PGIM India Mutual Fund. Ultra Short Duration Funds and Low Duration funds, on average, have given 3.64% and 4.66% returns in the last year.

Ramakrishnan adds that investors seeking asset allocation to fixed income to retain the Short/mid products viz. Corporate bond and Banking & PSU fund categories as the core with some allocation to the Dynamic bond category depending on their appetite to handle yield volatility.

The 3-5 year segment, in government bonds, says Pankaj Pathak of Quantum Mutual Fund, appears to be the most attractive and a bulk of our bond portfolio is positioned in that space.

A “favourable than anticipated” inflation trajectory and downward revision of CPI at 5.30% have allayed any fears of near term rate hikes, says Anand Nevatia, but Pathak feels the RBI could have at least guided the markets that rates will be raised in the months to come.

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