RBI repo rate unchanged. Where should you invest now?

Reserve Bank of India (RBI) has left repo rate unchanged in its first bi-monthly monetary policy in the new financial year on Thursday. A status-quo policy is not great news for debt mutual fund investors, as debt funds gain the most when the rates go down.

“Bond market is unlikely to get affected. Everyone was expecting a status-quo because of the neutral stance and an inflation of below 4 per cent,” says Kumaresh Ramakrishanan, Head-Fixed Income, DHFL Pramerica Mutual Fund.

The RBI changed its monetary stance to neutral from accommodative in its last policy review, signalling it may pause for a while before pursuing a lower rate regime. Also, RBI wants to achieve a more durable target for CPI of 4 per cent for near to medium term.


What should investors do?
Against this backdrop, what should be the strategy of debt mutual fund investors? “Debt funds investing in short-to-medium term instruments look attractive due to excess liquidity in the system,” says R Sivakumar, Head-Fixed Income, Axis Mutual Fund.

“Money market yields have dropped significantly on account of the excess liquidity. Whereas, short term bond yields continue to offer a relatively high spread to money markets,” adds Sivakumar. He believes that “long term yields are likely to stay under pressure due to high borrowings by both central and state government but they won’t fall or rise sharply.

This means that investors would earn more by investing in short and mid duration funds that invest in instruments with a maturity between one to five years.

However, investors should bet on short-term debt funds only if they have a short investment horizon. If they have a long investment horizon, they can go ahead with dynamic bond funds. This is provided they are ready to invest at least for three years irrespective of the short-term performance of these schemes. “Invest in dynamic bond funds if you plan to stick for the complete market cycle of three years,” says Sivakumar.

Dynamic bond funds are better placed than long-term debt schemes to exploit the changes in the money market scenario as the fund manager has the flexibility to invest in any instruments of any duration and repositioning the portfolio whenever required.

“Dynamic bond funds won’t be impacted like the last time,” says Ramakrishnan. Dynamic bond funds were badly hit in February when RBI changed its monetary stance to neutral from accommodative, when most fund managers were expecting a rate cut and invested in long duration instruments. However, the fund managers are better placed now as they have started moving their investments to short-term instruments.