A 40 basis points rate hike from RBI and its impact on debt fund investors!
The RBI yesterday shocked the market with a 40 basis points hike in key policy rates. How would this impact debt fund investors? Let’s find out.
Yesterday the Reserve Bank of India (RBI) stunned the market with a rate hike of 40 basis points (100 basis points equals 1%) in its key policy rates. Although market participants were anticipating a rate hike in the upcoming Monetary Policy Meet slated to be in June 2022, this was very much discounted. However, the RBI yesterday unanticipatedly came up with a rate hike and this was something that was not discounted. Therefore, earlier than expected hike in policy rates led markets (Nifty 50) to turn down around 391 points or 2.29% at 16,677.60.
Markets witnessed the first-rate hike ever since 2018. Having said that, the RBI governor said that, they will still be maintaining the accommodative stance. The RBI also hiked the Cash Reserve Ratio (CRR) by 50 basis points to 4.5% with effect from May 2022. Even the bond markets witnessed a major sell-off which led bond yields to surge by 3.64% at 7.38%, which was around 7.6%.
Impact on debt fund investors
As you know, bond prices as inversely proportional to interest rates. This means that as interest rates fall, bond yields and in turn Net Asset Value (NAV) of debt funds rises and vice versa. Therefore, yesterday’s rate hike and even those that are in the queue would lead bond yields to rise, which would negatively affect the debt mutual fund investors, especially those investing towards that higher end of the yield curve.
Therefore, in the present market scenario, it is prudent to invest in floater funds, short-duration funds and ultra-short duration funds. Moreover, even the target-date debt mutual funds are a good choice if you are saving for any of your financial goals.
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