InvestorQ : Why are some news channels reporting that the monetary policy will be positive for debt funds when rates have not been cut in the policy?
diksha shah made post

Why are some news channels reporting that the monetary policy will be positive for debt funds when rates have not been cut in the policy?

Answer
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Mary Joseph answered.
1 month ago


That is an interesting question and let me explain in a few key points as to why the policy will be positive for debt funds.

· In a significant move, the RBI policy has sharply reduced the risk capital to be set aside for investing in debt funds and liquid funds.

· Currently, ETFs and debt funds are at a regulatory disadvantage compared to direct bank investments in debt in terms of risk capital provision.

· For example, banks that invest in debt funds and ETFs today are required to set aside a higher risk capital provision compared to direct investments in debt.

· Now that discrepancy has been removed and debt funds will not seen in the same risk bracket as equity as it is today.

· This will drive more Indian banks to seriously start looking at domestic debt funds as a means of earning additional risk adjusted returns on their portfolio.

· Banks generally park short term monies in liquid funds and this announcement will boost the effect yields on liquid funds due to lower risk provision necessitated.

· It will also be positive for mutual funds as liquid funds and debt funds could see greater interest from Indian banks in the future.