RBI Monetary Policy: How does it matter to a debt mutual fund investor

In RBI’s bi-monthly monetary policy statement, RBI kept the repo rate unchanged at 6.5 per cent and reverse repo rate at 6.25 per cent. RBI has decided to be consistent with the stance of tightening the monetary policy with an objective of achieving the medium-term target of Consumer Price Index (CPI) of 4 per cent, +/- 2 per cent while supporting growth.

The Monetary Policy Committee (MPC) also cited global developments as one of the factors for the decision on rates. The monetary policy statement said, “Since the last MPC meeting in August 2018, global economic activity has remained resilient in spite of ongoing trade tensions but is becoming uneven and the outlook is clouded by several uncertainties”.

The RBI’s monetary policy was a surprise for the market as it was expecting a hike in the rates. RBI’s decision on rates may be driven by the depressed general inflation and food inflation numbers.

As the yields are rising from last one year and have badly hit the long-term debt mutual funds, for debt mutual fund investors hike of rates is not a good news. Mutual fund managers are expecting rate hikes in future. They are expecting a rate hike of around 50 basis points in the current financial year. Keeping this in mind, it will be prudent for debt mutual fund investors to stick to the shorter duration debt funds. They should stay invested in liquid mutual funds, short duration debt funds and ultra-short duration debt funds.