Debt mutual fund managers are in wait-and-watch mode and holding onto cash in their schemes. They are concerned over a potential rise in bond yields in the short as well as longer-end of the yield curve.
“Earlier, the shorter-end of the yield curve gave a source of comfort amid concerns of interest rate hike, but with Reserve Bank of India (RBI) now reducing liquidity through Variable Reverse Repo Rate (VRRR) auctions, the yields in the shorter-end of the curve are also starting to rise,” says Marzban Irani, chief investment officer-fixed income, LIC MF.
“The reverse repo rate has effectively increased due to VRRR. But when the RBI actually raises the reverse repo rate, short-end yields could go up further,” he adds.
The reverse repo rate is the rate at which RBI borrows from banks. In August 2021, the RBI launched enhanced VRRR auctions (every fortnight) to drain excess liquidity from the banking system. In October 2021, it suspended the G-SAP (Government Securities Acquisition Program), which was used to infuse liquidity in the debt markets via the purchase of G-Secs.
Fund managers also say that the uncertainty in debt markets has increased due to inflationary pressures and the likelihood of unwinding of US Fed’s stimulus measures.
[“source=moneycontrol”]