Last week, before RBI boss Raghuram Rajan announced the monetary policy, the general view was that he would leave interest rates unchanged. However, there were more than a few talking heads who thought he might change rates, and one of the reasons they gave for this was that they had detected in Rajan a tendency to spring surprises.
This was a curious view because monetary policy can have many objectives, but surprising media commentators cannot possibly be one of them. Or perhaps I’m wrong — perhaps there have been RBI governors in the past who really did like to spring surprises.
Anyhow, as far as Rajan goes, his regime has actually been one of the least surprising. He threw down his anti-inflation gauntlet the day he took over, made it clear what his biggest goal was and hasn’t wavered from that path. In reality, India’s monetary policy is now more predictable than it has been for a long time. Anyone can figure out the trend of interest rates based on the trend in inflation.
Just as importantly, those who invest in fixed income mutual funds, as well as those who save in simple deposit products, the trend in returns from these products is also more predictable.
For far too many people, fixed income fund investing is an exercise in chasing returns by predicting the central banks’ thoughts and moods. Investors change fund types (and fund managers change their portfolios) based on what the wisdom of the day is on future monetary policy. This mode of debt investing doesn’t work well when the conditions are static or predictable. Such simplicity is surely welcome.
Fixed income fund investors should not bother with these games now. They should just match the time horizon of their investment with that of the fund. Investments up to a few days should be done in liquid funds, money that has to be held on demand should be in ultra-short term funds, and investments longer than a few months in short-term funds.
Money that can be locked in for a period should go to fixed maturity funds of that period. It’s a simple recipe, and one of the desirable by-products of having a focussed and predictable monetary policy.