RBI repo rate hike of 50 basis points - what should debt fund investors do?

Today, the Reserve Bank of India increased the repo rate by 50 basis points which was in line with the expectations. However, what impact would debt fund investors have?

Today, in the Reserve Bank of India’s (RBI) Monetary Policy Meet, the RBI hiked the repo rate by 50 basis points to 4.9%. This increase in repo rate would hit hard the home loan, car loan and personal loan borrowers as they would now either need to increase the EMI or increase the loan tenure. Moreover, the policy stance would be the withdrawal of accommodation. Speaking about the forecasts and projections, the real Gross Domestic Product (GDP) forecast for FY23 were retained at 7.2%. However, it revises the inflation projection for FY23 to 6.7% from the earlier 5.7%.

Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products, Kotak Mahindra Asset Management Company said that, “RBI hiked repo rate by 50 basis points - which was in line with our expectation. The status quo on CRR was maintained which is also good news for short end of the yield curve and in line with graded normalisation of liquidity. Upward revision in CPI (by 100 basis points) to 6.7 per cent suggests more rate hikes are in the offing. For fixed-income investors continue to stay at mid-end of the yield curve on risk reward basis.”

“The MPC Policy was on expected lines as the repo rate was increased by 50 basis points which the market was expecting, though inflation forecast for FY23 is higher than market expectation at 6.7%. We expect that RBI will continue to front-load rate hikes with another 50 basis points hike in repo rate in the August policy. We would recommend that investors increase their investments in actively managed short-duration products while selectively looking at dynamic bond funds as per their risk appetite,” commented Puneet Pal, Head – Fixed Income, PGIM India MF.

Sumit Shekhar, Economist, Ambit Capital says, “MPC’s focus has now turned to taming inflation as reflected by its hawkish stance and aggressive rate hike. We believe RBI is front-loading rate hikes (90bps in 2 months!). We expect another 50bps repo rate hike by the end of FY23 leading to an overall 140bps rate hike in FY23. Such a steep rise in borrowing costs will affect discretionary spending and dampen the nascent recovery of investments. We think that 10-Year G-sec would cross 8 per cent sooner than our earlier projection by end of CY22.” 

What should debt fund investors do? 

With the change in the RBI’s accommodative stance, increased repo rates, inflationary pressure and a likelihood of another rate hike, investing in short duration funds, low duration funds and floater funds make more sense. Unless you have a long-term investment horizon, investing in long-duration funds, gilt funds and medium to long-duration funds at the current juncture is risky.