RBI MPC: What strategy should mutual fund investors follow?

The Reserve Bank of India (RBI) announced on Wednesday that it would keep the repo rate unchanged at 6.50%. The repo rate is the rate at which the RBI lends money to banks. The RBI has held rates steady for the 10th consecutive time.

What does a pause mean for mutual fund investors?

According to the market experts, RBI can consider rate cuts in December or February policy meetings.


“A good monsoon season, healthy Kharif sowing, and high reservoir levels have considerably improved the inflation outlook. Meanwhile, in recent months, some key indicators like GST collections, core production, and PMIs have moderated. Therefore, we expect the RBI to initiate the rate cut cycle in the December or February policy meeting, assuming inflation evolves as anticipated. However, this will likely be a shallow rate cut cycle of 50-75 basis points,” said Vikram Chhabra, Senior Economist, 360 ONE Asset.

The RBI's Monetary Policy Committee (MPC) also changed its stance to “neutral” from "withdrawal of accommodation."

What strategy should mutual fund investors follow?

Lower interest rates are considered good for the mutual fund investors, especially debt mutual fund investors. For periods with low interest rates, investors enjoy capital appreciation on their investments. When the interest rate cycle begins to decline, the net asset value (NAV) increases, leading to capital appreciation. This would enhance returns from debt mutual fund schemes.

The market experts believe that the bond and equity markets are expected to react positively in the medium term and in the short term one can expect a buy-on-dip approach.

“The bond and equity markets are expected to react positively in the medium term. The markets may trend positive with subsequent rate cuts by the US Fed. However, stock-specific corrections can be expected based on the earnings performance. Overall, in the short term, one can expect a buy-on-dip approach with a neutral stance by RBI,” said Deepak Ramaraju, Senior Fund Manager, Shriram AMC

Where should one invest?

Mutual funds that invest for 3-5 years are an attractive option and investors with a long-term investment horizon and good risk appetite can consider investing in gilt funds, according to mutual fund experts.

“Given the kind of corporate credit pickup last year, corporate bond spreads are above long-term average. So, I believe those funds that invest for 3-5 years which includes corporate bond funds, are a good opportunity for investors. Investors having a long term investment horizon and appropriate risk appetite, gilt funds are also suitable. Investors can also create a basket of both,” recommended Mahendra Kumar Jajoo, CIO – Fixed Income, Mirae Asset Investment Managers (India).