Time to invest in Long Term Bond Funds

It’s time to take an exposure to long term bond funds.

RBI (Reserve Bank of India) had during its monetary policy review 17/09/2012, had spelt out clearly that high interest rate regime cannot be reversed unless government takes policy initiatives to control inflation and fiscal deficit as controlling inflation was it’s (RBI) prime concern.

Thereafter government announced big bang reforms (Reforms Part II). It is now expected that RBI will start reducing interest rates. A token reduction in interest rate is expected in monetary policy review in late October 2012. October will spell out the thought process at RBI as regards interest rates.

We believe that it is now time to take an exposure to bond funds with a 12-15 month investment horizon.

Some of the steps taken by RBI which supports our bullish view on bond funds are as under:-

   The borrowing calendar of Government of India for second half of 2012-2013 was announced on 8/10/2012. There has been no change in the calendar as compared to the original estimate made at the beginning of the year. The government will borrows. 2 lac crores between October to March 2013.

RBI will conduct OMO (Open market operation) during this period. This we believe will set the tone for reduction in interest rates.

After the announcement of reforms measures by the Government, finance minister has announced his resolve to contain/trim the fiscal deficit and work towards subsidy rationalization. Fuel price hikes is a step in that direction.  These announcements followed by some concrete action by the government, will prod RBI to start reducing rates with a token reduction coming during the October monetary policy review meeting.

Economists said the sharp increase in diesel prices and the cap on subsidized cooking gas cylinders has sent out a strong signal that the government is keen to clear the fiscal mess. Several economists said that the bold government moves provides enough elbow room for the central bank to change its hawkish stance.

There have been arguments that there is little scope for rate reduction as long as inflation remains high. However, as said earlier, with announcement of reforms and prep talks by FM, the argument now is not about whether RBI will hike or cut rates, there is a talk about when and how much will RBI cut rates. Even in a worst case scenario, investors in bond funds may only have a longer waiting period before rate cuts become a reality. Recent events have only improved chances of RBI starting rate cuts starting October –December 2012 quarter.

Disclaimer: - The views expressed are personal views of the writer. This is not a recommendation to buy/subscribe to bond funds. Mutual fund investments are subject to market risks. Please use your own judgment/discretion or consult your financial advisor.