Will RBI pause rate cuts? What should your debt Mutual Funds strategy be in this case?

Will RBI pause rate cuts? What should your debt MF strategy be in this case?

Most fund managers are equally divided on what the monetary policy review by the RBI will be like. Some argue in favor of a pause on the policy rates, while others believe that it will be a 25 basis points cut ( 100 basis points is equal to 1 percent). 

This year, RBI had cut 115 basis points in the repo rate to reach 4 percent. As per market experts, the real interest rates in bank FDs going down to negative might stop the RBI for another rate cut, and with inflation still above 6 percent, the MPC might decide to simply wait and watch. 

As per debt fund manager Pankaj Pathak of Quantum Mutual Funds, the RBI will maintain a status quo on August 6. He adds that inflation has been above the RBI’s upper threshold of 6 percent in the last three quarters. While CPI would come down in the coming quarters, its stickiness above 6 percent would continue to weigh down on the minds of the MPC members. 

Other debt fund managers believe that it will be a close call this time. Since the market is not factoring in a deep cut, either a pause or a small cut of 25 bps is expected. 

Also, the headline inflation is well above the upper limit that has been set by the RBI. The market is also witnessing some recovery; and it is possible that the RBI would hold the rates for now and use this room later if need be. 

The future rate cuts could be well dependent on growth inflation dynamics; as well as on the policies that the government adopts to address this growth challenge. In the past few months, government policies of higher taxes on fuel items and intoxicants are one of the major factors that have kept inflation elevated in the past few months. 

The RBI will also carefully watch the policies on the external trade front, especially in the wake of the objective of attaining self-sufficiency. Over the medium term, rising import duties will also push up inflation. 

There is also room for RBI to cut rates in the future; and the central bank might even look at widening the policy corridor by considering easing the reverse repo rate. 

Unless it is something completely unexpected, the debt market will not react too much to the policy. In the past, yields have been stable, and the market has already factored in a pause or a cut. 

Mutual fund investors also need to stick to shorter duration AAA funds. PSU funds and Corporate Bond Funds are a good option!