RBI slashes rates by 50 bps: What it means for debt mutual fund investors

After the Reserve Bank of India reduced the repo rate by another 50 basis points to 5.50% and a 100 basis point CRR cut, the mutual fund experts believe that the fixed income landscape has turned even more favorable for investors. Further, the CRR cut is a strong liquidity injection, which will further push down short-end rates and improve system-wide liquidity.

“While duration strategies like gilt, long-duration, and dynamic bond funds remain relevant, the combination of already-priced-in rate cuts (via the OIS curve) and surplus liquidity suggests that returns from duration could moderate going forward,” Sagar Shinde, VP of Research at Fisdom shared with ETMutualFunds.

“Therefore, a balanced allocation across both long-duration funds and 2–3-year high-quality accrual strategies (like banking & PSU or short-duration funds) is prudent. Categories that benefit from declining short-end yields and tight credit spreads may perform well in this environment,” he further recommends.

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This is the third consecutive rate cut by the RBI in the current calendar year and the second one in the current financial year. This marks the third consecutive cut under Governor Malhotra. In February and April, the apex bank had reduced the repo rate by 25 basis points each. Before this, the repo rate was held at 6.5% for 11 consecutive meetings.In addition, the MPC changed its policy stance from ‘Accommodative’ to ‘Neutral’, RBI Governor Sanjay Malhotra announced in his monetary policy speech. RBI Governor also announced that the MPC decided to cut the Cash Reserve Ratio (CRR) by 100 basis points (bps) to 3% from 4% earlier.
“The near-term and medium-term outlook now gives us the confidence of not only a durable alignment of headline inflation with the target of 4 per cent, as exuded in the last meeting but also the belief that during the year, it is likely to undershoot the target at the margin.,” said the RBI Governor, Sanjay Malhotra.
According to the expert, the combination of a 50-bps rate cut, a neutral stance, and a 100 bps CRR cut signals that the RBI is focused on boosting transmission and improving liquidity across the curve and with surplus liquidity already in place and now further enhanced, short-term rates could stay depressed, benefiting accrual strategies at the short end.
“Simultaneously, there’s scope for some mark-to-market gains in longer-duration strategies, though the forward OIS curve already factors in much of the easing. Hence, a barbell approach—mixing duration (to capture any residual rally) and short- to medium-term accrual strategies (to harness steady income from high-quality credit)—is best suited for this phase of the cycle,” Shinde further shares with ETMutualFunds.

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The Governor in his policy statement mentioned that, “On the financing side in 2024-25, foreign portfolio investment (FPI) to India dropped sharply to 1.7 billion US$, as foreign portfolio investors booked profits in equities. Net foreign direct investment (FDI) too moderated”

Shinde thinks that the 100 bps CRR cut, on top of the rate cut and stance shift, enhances liquidity across the curve and keeps a lid on yields, particularly at the shorter end.

“While longer-term investors (3–5+ years) can still benefit from duration strategies, the limited headroom for further rate cuts suggests that short- to medium-term accrual strategies also deserve meaningful allocation. Investors should adopt a laddered horizon, combining both short (2–3 year) and long (5+ year) maturity strategies, to optimize for both income and capital appreciation while managing reinvestment and duration risks in a fully liquid market environment,” Shinde adds.

One should always choose a scheme based on risk appetite, investment horizon, and goals.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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