Impact of RBI's 50 bps repo rate hike on debt fund investors!

The Reserve Bank of India upped the repo rate by 50 basis points today, as expected. What influence, though, might debt fund investors have?

The Reserve Bank of India (RBI) raised the repo rate by 50 basis points to 4.9 per cent today at its Monetary Policy Meeting. This hike in the repo rate would significantly impact the home loan, vehicle loan, and personal loan customers, who would now have to either increase the EMI or extend the loan period. Furthermore, the policy stance would be a disengagement from the accommodation.

During the meeting, RBI Governor Shaktikanta Das stated that, “The road that we have travelled during the recent past has indeed been very arduous, but we gathered faith, focus and fortitude along the way.” In terms of estimates and projections, the real Gross Domestic Product (GDP) forecast for FY23 was kept at 7.2 per cent. However, the inflation forecast for FY23 has been revised upwards to 6.7 per cent from 5.7 per cent previously.

According to Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products at Kotak Mahindra Asset Management Company, “RBI hiked repo rate by 50 basis points - which was in line with our expectation. Status quo on CRR was maintained which is also good news for the short end of the yield curve and in line with the 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 a risk-reward basis.”

Puneet Pal, Head – Fixed Income, PGIM India MF says, “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 per cent. 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.”

“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,” says Sumit Shekhar, Economist, Ambit Capital.

What actions should Debt Fund investors take?

With the shift in the RBI's accommodating policy, higher repo rates, inflationary pressures, and the possibility of another rate hike, investing in short duration funds, low duration funds, and floater funds make more sense. Investing in long-duration funds, gilt funds, and medium to long-duration funds at this time is risky unless you have a long-term investment horizon.