RBI holds repo rate again: what should mutual fund investors do?

The Monetary Policy Committee decided to keep the key policy rate unchanged in its policy review on Thursday, the RBI governor said. The RBI maintained the repo rate, the rate at which it lends money to banks, at 6.50%. The central bank had kept the rate unchanged also in its last review. Most money market pundits expected the RBI to hold rates today as the inflationary and growth scenarios were positive. What does it mean to mutual fund investors, especially debt fund investors?

'The MPC took note of the moderation in CPI headline inflation in March-April into the tolerance band, in line with projections, reflecting the combined impact of monetary tightening and supply augmenting measures. Headline inflation is projected to decline in 2023-24 from its level in 2022-23 but would still be above the target, warranting continuous vigil. The progress of the south west monsoon is critical in this regard. Domestic economic activity is holding up well. Consumer confidence is improving and businesses remain optimistic about the future. The cumulative rate hike of 250 basis points undertaken by the MPC is transmitting through the economy and its fuller impact should keep inflationary pressures contained in the coming months. Monetary policy would need to be carefully calibrated for alignment of inflation with the target. Against this backdrop, the MPC decided to keep the policy repo rate unchanged at 6.50 per cent.," said the RBI governor. "The MPC resolved to continue keeping a close vigil on the evolving inflation and growth outlook. It will take further monetary actions promptly and appropriately as required to keep inflation expectations firmly anchored and to bring down inflation to the target. The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth."

According to mutual fund advisors, since the RBI has maintained its policy stance of withdrawal of accommodation, the market will search for cues on the future course of interest rate movements. They believe that investors can continue to bet on short term funds and medium duration funds based on their goals, horizons and risk appetite. However, not many were recommending long term debt funds and gilt funds yet as they are unsure about the rate cuts in future.


Rate cuts are positive for debt funds, especially long term debt funds and gilt funds. These schemes benefit because of the inverse relationship between bond yields and prices. When bond yields go down, the prices go up. That pushes up the NAV or net asset value of debt funds.

Mutual fund investors also said that the overall scenario, including the interest rates scenario, is positive for equity mutual funds. They have been maintaining for a while that investors can invest tactically in mid cap and small cap funds as the valuations are attractive in these segments.

To sum up, continue with your investments in both equity and debt funds. And if you have surplus funds you can invest for long periods, you can invest in equity mutual funds.