With RBIs recent rate cut and more in line, is this the right time to invest in debt funds? This move has sparked optimism for debt fund investors, as falling rates could boost bond prices, particularly for longer-duration funds. With more rate cuts potentially incoming, should you put all your money in debt mutual funds?
With a wary eye on heightened global uncertainty and challenging economic scenarios, the RBI revealed a pro-growth monetary policy last week. The central bank slashed interest rates by 25 basis points (one basis point = 0.1%) while also shifting its policy stance from ‘neutral’ to ‘accommodative.’ So, does this spell an opportunity for debt fund investors?#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;}
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More rate cuts in the offing
The revision of interest rates marks the second consecutive rate cut of 25 bps in 2025. This brings India’s repo rate from 6.5% at the start of 2025 to 6% now. This was on expected lines. More pertinent is RBI’s assessment of India’s economic growth and inflation trajectory. The RBI lowered growth estimates by 20 bps to 6.5% for 2025-26 and also revised inflation estimates lower by 20 bps to 4%.With global uncertainties from escalating trade wars threatening a slowdown and inflation no longer a concern, the RBI now has room for policies supporting growth rather than taming inflation. This has prompted its shift in policy stance to ‘accommodative,’ which experts say paves the way for further rate cuts.
Rajeev Radhakrishnan, CIO-Fixed Income, SBI Mutual Fund, reckons the policy stance opens up the likelihood of additional rate cuts. “A shift to an accommodative stance, notwithstanding the earlier reference to global uncertainties, has been the key takeaway. Effectively, the key message is the unambiguous focus on domestic growth and the confidence that forward-looking inflation is likely to be aligned closer to the policy target of 4%.”
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Indian bond yields fell sharply in anticipation of rate cuts. RBI announced two rate cuts of 25 bps each in 2025. Further rate cuts may drive bond yields lower, fetching gains. Further rate cuts may drive bond yields lower, fetching gains.
Note: Interest rates and bond prices are inversely related. When interest rates fall, bond prices rise, and vice versa. Bond prices tend to move much ahead of expected changes in interest rates.Shriram Ramanathan, CIO-Fixed Income, HSBC Mutual Fund, asserts, “The RBI now believes that headline CPI is durably aligned with the 4% target, allowing it to focus on growth. The RBI Governor has clearly indicated a softening path for policy rates, which we expect to move at least towards 5.5% over the course of 2025.”
Mahendra Kumar Jajoo, CIO-Fixed Income, Mirae Asset Investment Managers, remarks, “It would seem that in the current environment of uncertainty, the central bank is set to do the heavy lifting once again, as it did during the Covid disruption. This suggests a supportive environment for fixed income in the near term.”
This could spell a bonanza for debt fund investors. Interest rates and bond prices are inversely related. When interest rates fall, bond prices rise. Longer-term bonds particularly gain significantly. Bond funds positioned towards longer duration typically stand to benefit from higher NAVs (net asset value).
US bonds may spoil the party
However, some industry experts maintain that the RBI may yet find its runway blocked. Tariff-led uncertainties could upset previous calculations regarding global growth and US Fed rate cuts, necessitating a calibrated response from the RBI. Vishal Goenka, co-founder of IndiaBonds.com, warns, “Anticipate a long pause from hereon, as future action on rates would depend on global factors again or any exogenous shocks to the world economy.”Longer duration strategies have seen big gains
These funds started clocking gains much before rate cuts started in 2025.
The sharp rise in US treasury yields could keep RBI on its toes. The US 10-year bond yield spiked to 4.5% mid-week as investors dumped US treasuries on trade war concerns. Rising yields indicate that investors have lost faith in US treasuries and that interest rates will remain higher for the foreseeable future. This implies narrowing yield spreads between US and Indian treasuries, which will keep RBI’s hands tied on further rate cuts.
Sandeep Bagla, CEO, TRUST Mutual Fund, observes, “In the US, the tariff-induced inflation fears are rising, which will lead to rising long bond yields. High global yields will influence the longer-end bond yields in India as well.” Laukik Bagwe, Fund Manager and Head-Fixed Income, ITI Mutual Fund, argues, “The RBI is likely to remain cautious about further rate cuts. External factors—such as the impact of US tariffs on global growth, expectations around US Federal Reserve rate cuts, and narrowing yield spreads between US Treasuries and Indian bonds—could influence future decisions.”
RBI’s ‘accommodative’ turn for growth
What investors should do now
Even as the RBI’s stance hints at more rate cuts, potential shocks remain. Experts advise low-risk investors to avoid pure long-duration strategies like gilts or long-duration funds. Puneet Pal, Head-Fixed Income, PGIM India Mutual Fund, says, “Investors can continue to allocate to short-term/corporate bond funds having portfolio duration up to four years while being tactical in their allocation to dynamic bond funds.” Bagla suggests investors should stick to short-duration funds, as they offer a good risk-reward trade-off.However, for investors with a high risk appetite, shifting towards longer duration strategies could prove rewarding. Jajoo asserts, “Long-duration funds could yield gains from both falling 10-year bond yields as well as narrowing of spreads between 10-year and 40-year bond yields.” However, if entering long-duration funds now, hold for at least five years. Else, any rate reversals after a year or two could erase all the gains that you make this year.
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This story originally appeared on: India Times - Author:Faqs of Insurances
