The RBI’s stand to keep repo rate unchanged at 6.50% may make you rethink your strategy of mutual fund investment. The RBI Monetary Policy Committee (MPC) has opted to maintain its neutral stance by keeping the repo rate unchanged. Inflation continues to be a concern at 6.25%, mainly due to high food prices, but it is expected to ease in the near future. The Reserve Bank of India reduced the Cash Reserve Ratio (CRR) by 50 basis points to 4%, bringing it back to its pre-April 2022 tightening cycle level.
Mutual fund experts believe that investors should consider allocating to government bonds within duration-focused debt funds. Besides, the liquidity boost from the CRR cut would positively impact the equity segment.
“The RBI MPC has decided to maintain its neutral stance by keeping the repo rate unchanged. The GDP growth has been somewhat weak, largely due to slowdowns in industrial sectors such as manufacturing, mining, and electricity. However, the upcoming festive season is expected to provide a boost, supporting the overall market. Inflation remains high at 6.25%, primarily driven by elevated food prices, but it is anticipated to moderate soon. The Cash Reserve Ratio (CRR) has been reduced from 4.5% to 4%, aimed at curb inflation, improve liquidity and supporting economic activity. In the last 5 yrs, CRR has changed four times out of which only during March 2020 rate cut has happened,” said Feroze Azeez, Deputy CEO, Anand Rathi Wealth Limited.
For mutual fund investment, Azeez said: “The unchanged repo rate makes debt mutual funds, especially those focused on government securities, more attractive. Long-duration bonds are expected to benefit and 90 basis points gain in the 10-year G-Sec yields today. This signals an opportunity for investors in long-term debt instruments to potentially realize better returns.”
He added: “The liquidity boost from the CRR cut is likely positive impact on the equity segment and we should see that in the next 6-8 months as the economy will stabilise and liquidity will increase.”
“Investors should consider allocating to government bonds within duration-focused debt funds, as these benefit from strong demand-supply dynamics and the potential for further yield rallies,” said Sagar Shinde, VP Research, Fisdom.
Investors who require short-term liquidity can benefit from debt mutual funds like money market funds and ultra-short-term funds due to their ability to withstand market fluctuations and provide enhanced liquidity. On the other hand, investors with medium to long-term objectives may consider dynamic bond funds or long-duration funds.
Shine further explained for immediate access to funds, money market funds or ultra-short-term funds are recommended due to their stability during market fluctuations and improved liquidity conditions. For goals requiring medium- to long-term investment strategies, dynamic bond funds or long-duration funds are excellent options, as they allow for potential gains from expected interest rate reductions and potential appreciation in bond values.
Rajeev Radhakrishnan, CIO – Fixed Income, SBI Mutual Fund, said: “While being cognisant of the incoming growth inflation mix, prudence and practicality required the RBI to address the issue of declining core liquidity. The CRR cut by 50 Bps provides adequate signalling with respect to the direction of monetary policy going forward. In the near term we could anticipate other fine tuning liquidity measures such as repo auctions apart from screen-based OMO in case core liquidity tightens further. Given the Q2FY26 CPI projections, in the absence of any incremental inflation shocks, the Feb review could be live for a repo rate reduction”.