RBI cuts rates: Edelweiss AMC says short-duration debt funds offer best value now

The Reserve Bank of India’s Monetary Policy Committee (MPC) delivered a 25-basis-point rate cut on Friday, bringing the repo rate down to 5.25 percent and signalling an early-policy easing ahead of global peers. The committee voted unanimously for the reduction while retaining its stance at “neutral,” even as inflation softened sharply and growth momentum remained robust.

The RBI lowered its average CPI inflation forecast for FY26 to 2.0 percent from 2.6 percent, citing exceptionally benign food prices. At the same time, the central bank revised its FY26 GDP growth estimate upward to 7.3 percent, supported by resilient domestic demand and strong investment activity. Growth for the first two quarters of FY27 is also projected to stay near 6.7–6.8 percent.

What surprised markets more than the rate cut was the RBI’s aggressive liquidity push. The central bank announced open market purchases of government bonds worth ₹1 trillion in two tranches and a $5 billion buy-sell forex swap scheduled for mid-December. Both moves are designed to add durable liquidity into the financial system at a time when banks typically face year-end pressures. The governor noted that the RBI is comfortable maintaining liquidity at about 1 percent of banking system deposits, though the new infusion is expected to push it above that threshold and aid policy transmission.

Bond markets responded positively, with the benchmark 10-year yield easing by around 4 basis points. Yields on longer maturities also softened, although analysts noted that the curve remains steep due to expectations of future fiscal pressures and uncertainty around upcoming government borrowing.

Investors, however, may need to temper expectations of a sustained rally at the long end of the curve. Despite the RBI’s supportive tone, volatility is expected to persist in maturities beyond 15 years as markets wait to see which securities the central bank targets in its OMO purchases. Meanwhile, the forex swap is likely to benefit shorter-tenor bonds by improving systemic liquidity.

For investors, Edelweiss AMC recommends focusing on short-duration and accrual-based strategies over the next two to three months, including low-duration, money-market and liquid funds. With roughly Rs 1.45 lakh crore set to enter the system through liquidity operations, the near-term environment appears more favourable for short-term debt than for long-duration bets.

Investing in short-duration mutual funds

Short-duration mutual funds invest in a mix of treasury bills, commercial papers, certificates of deposit, corporate bonds and government securities to manage liquidity and generate stable returns. As per SEBI guidelines, these funds can hold debt instruments with maturities between one and three years, making them suitable for investors with a short- to medium-term horizon.

In the debt fund spectrum, short-duration schemes carry moderate interest rate risk. They are riskier than liquid, ultra–short-term and low-duration funds but safer than medium-duration and long-term funds. Their portfolios typically balance short-term bonds with very short-term money market instruments, helping reduce volatility while offering reasonable returns.

For investors looking to park money for one to three years without large fluctuations, short-duration funds can be a practical choice. However, it is important to select schemes that do not take excessive credit or duration risk, as capital safety should remain the top priority in debt investments.

As uncertainties around global policy, currency movements and fiscal dynamics linger, fund houses expect the short end of the curve to remain the most stable pocket for fixed-income investors heading into early 2026.