Mumbai: The monetary policy review meeting by the Reserve Bank of India (RBI) kept the repo rate unchanged at 5.25% and retained a neutral stance while raising inflation projections, largely due to the rise in oil prices on account of the West Asian crisis.
Fund managers believe that fixed income investors should position their portfolios to invest a bulk of their money in corporate bonds with a tactical bet on long tenure gilt funds.
“High rated corporate bonds of two-four year maturity have a spread of 100-120 basis points over GSecs, presenting an attractive opportunity,” says Vikas Garg, head-Fixed Income, Invesco Mutual Fund. Corporate bonds will help investors earn an accrual income of 7.5-7.7% compared with an interest of 6.5% that an investor earns on a three year bank deposit.
Over the last couple of months, the global macro environment has weakened largely due to the prolonged West Asia conflict, resulting in higher prices of crude oil and other commodities and a rise in global inflation risk. In the coming quarters, the RBI will use a data-dependent, wait and watch approach to counter global headwinds and domestic risks.
The government removed both long-term and short-term capital gains taxes, along with withholding tax on interest income for foreign portfolio investors (FPI) investing in government bonds with an aim to attract foreign capital. Analysts believe these measures are aimed at supporting capital inflows to stabilise the rupee and address the balance of payments deficit and lead to inclusion in global Indices.
“With FPI route getting tax benefits due to taxation, inflows could improve. Investors can take a tactical bet on gilt funds,” says Sandeep Yadav, head-Fixed Income, DSP Mutual Fund
“As we see FPI flows in Gsecs, spreads could compress,” says Garg. Fund managers believe investors could opt for longer tenure GSecs as the spread between a 10 year G sec and 30 year Gsec is 60 basis points. As long tenure Gsec yields head down, investors could earn a capital appreciation, in addition to the coupon, which will boost their overall returns.
