Will the CRR cut make debt funds a preferred investment opportunity? Here's what experts say
Debt mutual funds have shown mixed trends across different durations. Over the last four months ( data for May is currently not available), debt mutual funds experienced significant fluctuations in investor flows.
The Reserve Bank of India’s surprise 100-basis-point cut in the cash reserve ratio (CRR) and a 50-basis-point repo rate cut is expected to significantly benefit debt mutual funds, according to fund managers.
The CRR cut is estimated to release Rs 2.5 lakh crore liquidity into the system during the second half of FY26.
Harshal Joshi, Senior Vice President – Fixed Income at Bandhan AMC, said: “The CRR cut and aggressive repo rate cut from the RBI provide greater clarity to investors about what to expect from the debt market in the coming quarters. The focus on transmission through lower rates, along with active liquidity creation, should ideally bring down the yield curve.”
Joshi noted that while markets had broadly priced in rate cuts between June and August, the CRR move was somewhat unexpected. “The market was generally anticipating RBI rate cuts at least twice during these policies (June and August), and most were positioned accordingly. The CRR cut came as a surprise, although the market has been experiencing aggressive RBI liquidity infusion for some time, so this positive liquidity outcome was somewhat expected.”
What this means for the market?
Axis Mutual Fund, in a note, suggested that the combination of liquidity and rate cuts will support the bond market. Despite easing tariff concerns and slowing global growth, Axis MF forecasts increased liquidity ahead. The large surplus liquidity favours the short end of the curve, which they see steepening over six months, with 10-year yields trading between 6% and 6.40%.
Joshi added that the increased liquidity should benefit the entire debt market across the curve over the medium term. However, Joshi suggested that investors should adopt a long-term perspective, adding that the debt market should be considered a primary tool for diversifying your overall investment.
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“It’s not a market to time entries or exits; instead, focus on debt allocation as a percentage of your portfolio, selecting categories based on your investment horizon and risk-adjusted quality,” he said
On the other hand, Sandeep Yadav, Head – Fixed Income, DSP Mutual Fund said, “The CRR cut will ensure strong flows into short-term funds, as higher liquidity will drive more inflows. The repo cut does not directly impact flows.”
“We believe short-term funds will benefit greatly, as bank supply reduces while demand increases due to higher inflows,” added Yadav.
On impact on returns, Yadav suggested that going forward the returns will not be driven by the RBI cuts as the event was largely priced on that day itself.
“Nonetheless, funds with shorter duration remain a safe bet as the higher demand will keep pressure on yields to fall. The duration funds took a hit on Friday itself as yields rose, and this makes them attractive; these higher yields are a good entry level, although such funds may face volatility,” he said.
Debt Fund Performance
Debt mutual funds have shown mixed trends across different durations. Over the last four months ( data for May is currently not available), debt mutual funds experienced significant fluctuations in investor flows. April saw the highest overall inflows of Rs 2.19 lakh crore, led by strong demand for Liquid Funds, which attracted nearly Rs 1.19 lakh crore. Overnight Funds also recorded substantial inflows of Rs 23,900 crore in April, along with Money Market Funds and Ultra Short Duration Funds, which saw inflows of Rs 31,507 crore and Rs 26,734 crore, respectively.
On the other hand, March registered the largest outflows totalling nearly Rs 2.03 lakh crore. Liquid Funds faced the most significant withdrawals, losing Rs 1.33 lakh crore, followed by Overnight Funds with outflows of Rs 30,016 crore, and Money Market Funds which saw Rs 21,301 crore exit. Other short-duration categories like Ultra Short Duration Funds also experienced notable redemptions in March.
On June 6, RBI announced a 100 basis points cut in the CRR — bringing it down to 3 percent that will be implemented in four tranches of 25 bps each. CRR is the percentage of deposits banks must keep with it as cash. When the CRR is reduced, banks have more funds available to lend or invest. This typically increases liquidity in the financial system, making more money available.
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