RBI policy rates & debt mutual funds

On Friday, Reserve Bank of India (RBI) held its key policy rates. The rate (repo rate) at which the bank borrows money for the short-term from RBI remains unchanged at 4 per cent. Even in the previous monetary policy review i.e. in the month of October 2020, RBI kept policy rates unchanged. So, what does this mean for a debt mutual fund investor?

The market’s expectations on the rates were status quo. However, the inflation numbers were one of the most critical points to watch in today's policy. Moreover, adjustment on the growth side was also one of the key things to watch. Markets were also expecting to see whether RBI starts a graded liquidity withdrawal or not. Having said, the central bank has maintained its stance to be ‘accommodative’.

Naveen Kulkarni, CIO of Axis Securities said, “On expected lines, the dovish policy stance has continued. Commentary on liquidity has been positive and encouraging. Upward revision in inflation and future policy stance will be critical. No major surprise in the meet.”

The inflation continues to inch up due to food prices. Besides, to strike a balance between inflation and growth, it is less likely that RBI would hike rates at the moment. In fact, the central bank hinted that it would closely watch the inflation numbers.

Currently, the yield curve is significantly steep, and therefore, investors, who have invested in the short duration funds and banking as well as PSU debt funds should remain invested. They should not change their portfolio strategy as of now.