The RBI has hiked the repo rate (the rate at which it lends money to banks for a short period) by 25 basis points in its policy review today.
“On balance, the MPC is of the view that further calibrated monetary policy action is warranted to keep inflation expectations anchored, break core inflation persistence and thereby strengthen medium-term growth prospects. Accordingly, the MPC decided to increase the policy repo rate by 25 basis points to 6.50 per cent. The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth,” the RBI said.
Lakshmi Iyer, CEO, investment advisory business, Kotak Investment Advisors, says the RBI decision was in line with expectations. However, she says the market is a bit concerned that RBI has not offered firm cues on a likely pause. She also believes that contrary to earlier view the Fed is also likely to continue to raise rates. These factors are likely to keep money market yields in a tight range,” says Iyer.
The central banks across the globe, including the RBI, have been raising interest rates aggressively to control runaway inflation that has been plaguing the economy. The loose monetary policy pursued by the central banks in the aftermath of covid has pushed inflation up to multi-decade highs in the developed economies across the globe. With inflation showing signs of abating, the central banks are likely to opt for lower interest rate hikes.
A rate hike is always considered negative for the markets– for both the stock and debt markets–as it raises interest rates, borrowing costs of companies and it may also hurt growth. Debt mutual funds, especially long-term debt schemes, suffer the most as rising interest rates drag returns down. Reflecting the firm rates, debt mutual funds offered lower single-digit returns in the last year.
However, with the RBI indicating lower rate hikes, debt mutual funds are likely to offer better returns in the coming months. Once the interest rates start falling, debt schemes, especially long-term funds, are likely to offer double-digit returns. The stock market has been volatile for a variety of reasons for some time. Once the Adani episode is settled, the market is likely to draw comfort from likely lower rate hikes or possible rate cuts in the coming months. This may boost returns from equity mutual funds, too.
ETMutualFunds always ask mutual fund investors to choose mutual funds based on their goals, investment horizons, and risk profile. If you are looking to invest your money in debt mutual funds to achieve your short-term goals, you can consider investing in short duration funds, corporate bond funds, banking & PSU funds, etc. If you have a longer investment horizon and you want to invest in debt schemes, you can invest in gilt schemes and long-term debt schemes.
Prableen Bajpai, founder, Finfix, says she believes the RBI may maintain the interest rates for some time to see how inflation behaves. She says she prefers the passive strategy in the debt space. “If someone has the clarity on duration, they should opt for target maturity plans. We also use low duration funds for youngsters to create a buffer,” says Bajpai. She believes that debt investors are likely to have a better year.
Lakshmi Iyer also believes that investors may look at three-four year target maturity plans as the medium term yields are looking attractive. “The long-term yield don’t look that attractive,” says Iyer.
“With inflation expected to be within the RBI’s comfort range, this could be the last rate hike from the RBI in their current rate hike cycle. There may be a pause in rates in 2023,” says Rushabh Desai, Founder, Rupee With Rushabh Investment Services. “Yields could turn out to be very attractive in the medium to long duration space, and this is a great time to start looking at medium to long duration products. With yields expected to be stabilising and a pause in rates, the next 2-3 years are going to be a golden period in terms of returns for the debt / fixed income investors. However attractive yields may be, it is important for investors to stick with high credit quality products and match their time horizon with the maturity profile of the product,” adds Desai.
