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RBI likely to raise rates by 35-50 bps tomorrow. What should be your debt mutual fund strategy?


The Reserve Bank of India’s Monetary Policy Committee or MPC began its three-day meeting on Wednesday, and will announce the policy decision tomorrow. While analysts are unanimous that the RBI will raise the rates again tomorrow, the quantum of hike is still unknown. RBI has raised the repo rate twice this year – by 40 bps in May and 50 bps in June. 100 basis points or bps is 1%.

Despite the buzz of another rate hike, the bond market is not showing any signs of nervousness. Fund managers say that the bond market has factored in the RBI action already. That is why they are not expecting anything big in the market.

“From the bond markets perspective, much of this is already priced in as bond yields have fallen by over 25 basis points from their recent peak. Indian bond yields will likely trade in a tight range in coming months. From the monetary policy, the bond market will look for indications on the total quantum of rate hikes in this cycle,” says Pankaj Pathak, Fund manager, Quantum Mutual Fund.



The expectation of a big rate hike is being attributed to a spike in retail inflation. The Consumer Price Index (CPI) has been above the 6% mark for six consecutive months till June. After the Fed’s 75bps rate hike, RBI is also expected to move likewise.

“Recession fear in the US and in other parts of the world have been somewhat positive for India. Sharp drop in commodity prices and a pickup in monsoon should ease some pressure from the RBI. It may, nonetheless, hike the repo rate by another 50 basis points just to withdraw the excess monetary accommodation provided during the pandemic. We expect the RBI’s commentary to soften a bit with an acknowledgement that inflation risks are receding,” says Pankaj Pathak.

Fund managers also say that domestic liquidity has reduced significantly in the past fortnight averaging about Rs 1 lakh crores. Commodity prices have come off the peaks and crude has been trading near $100. But, the Fed’s action will put pressure on RBI.

“With supply side issues waning, the upside risks to CPI have eased off a bit. However, the US Fed has raised rates by 75bps again (with likelihood of similar hike in next meeting) and continues with its balance sheet reduction program. RBI has stated that it is looking to move towards neutral to positive real rates and given CPI estimations, a rate hike of 35-50bps in the forthcoming policy is likely, albeit with a less hawkish commentary,” said Anand Nevatia, Fund Manager, Trust Mutual Fund.

Fund managers say that debt mutual fund investors should not take any decision at the moment. “If you have the risk taking capacity, go for dynamic bond funds to benefit from the rate cycle. If you want to play safe, stick to short term funds,” said Pathak.



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