RBI MPC: How should debt mutual fund investors position their portfolios now?

After the Reserve Bank of India (RBI) in its bi-monthly policy meet on Wednesday announced that it would keep the repo rate unchanged at 5.5%, a market expert recommends that short-duration funds will suffice for debt exposure within overall asset allocation.

“With rates stable at 5.5% and inflation likely to subside further, short-duration funds will suffice for debt exposure within an overall asset allocation. Based on longer-term goals, investors can then continue to grow their exposure through equities,” Rajesh Minocha, a Certified Financial Planner (CFP), Founder of Financial Radiance, shared with ETMutualFunds.

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In its policy in June, the RBI announced a cut in the repo rate by 50 basis points to 5.50% and a 100 basis point CRR cut. The last repo rate cut was the third consecutive rate cut by the RBI in the current calendar year and the second one in the current financial year.

In February and April, the apex bank had reduced the repo rate by 25 basis points each. Before this, the repo rate was held at 6.5% for 11 consecutive meetings.

Post an announcement of keeping the repo rate unchanged by the RBI Governor, the expert says that although there was no rate cut this time, the scope remains for the future, given the weakening trends in inflation and consumption growth and the investors should, however, retain a larger share of debt in short-duration funds, while gradually increasing their equity allocation for long-term growth and appreciation.

The RBI Governor in his policy statement, said that on the external financing side, net foreign direct investment reached a 38-month high in July 2025, driven by increased gross foreign direct investment and a moderation in repatriation and outward foreign direct investment. However, net FPI recorded outflows of USD $3.9 billion in 2025-26 so far (April 01-September 29) due to outflows in both equity and debt segments.

According to the monetary policy report, mutual funds remained major lenders in tri-party repo, with their share increasing by 2% points to 68% in H1:2025-26 from H2:2024- 25. However, in the market repo segment, the share of mutual funds’ lending reduced to 40% in H1:2025-26 from 46% in H2:2024-25, the report said.

The expert recommends that short-term goals with an investment horizon of less than four years should continue in debt assets, whereas the longer horizon should go to equities.

“In debt, the horizon should remain short through accruals delivered by quality and in short duration. For short-term goals with a time horizon of less than four years, the funds should continue in debt assets. The longer horizon should go to equities, where, despite near-term volatility, compounding and growth potential are far more substantial,” said Minocha.

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The MPC report further mentioned that the Domestic Institutional Investors (DIIs), especially mutual funds, acted as a counterbalancing force by remaining net buyers and provided resilience to the Indian equity markets.

“The inflows into mutual funds have been supported by the sustained and expanding reach of systematic investment plans (SIPs). Average monthly contribution to mutual funds through the SIP route increased to Rs 27,464 crore in H1:2025-26 (up to August) as against Rs 25,905 crore during H2:2024-25,” it added.