After RBI's Repo Rate Hike after 4 years, Which Investment Strategy Should You Make?
By Anupama Deshpande | June 07, 2018

The RBI hiked its Repo Rate by 25 basis points to 6.25% on June 6, 2018. This hike has taken place after a gap of 4 years, first time since December 2014. RBI has also hiked Reverse Repo Rate by 25 bps to 6.00%. Other rates like CRR, SLR, Bank Rate, etc. have not been changed in this policy.

• RBI hiked its Repo Rate by 25 basis points to 6.25% and Reverse Repo Rate by 25 bps to 6.00%.
• It has relaxed the LCR (Liquidity Coverage Ratio) for the banks.
• Monetary Policy Committee (MPC) has raised the forecast of CPI inflation to 4.8% to 4.9% in H1 (April-September) and 4.7% in H2 (October-March) 2018-19.
• It has maintained its neutral stance of monetary policy.
• It has maintained its GDP growth at 7.4% for 2018-19 as was announced in April 2018 policy.
• It expects to continue strong agriculture production.
• It expects increase in investments due to swift resolution under the Insolvency & Bankruptcy Code.
• Upcoming MPC meet is scheduled on July 31 and August 1, 2018.

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Hike in the Repo Rate is not good for those Mutual Fund Investors who have invested in long term debt schemes as this hike will hamper their returns.

After this repo rate hike, 10-year govt bond yields increased 9 bps to 7.92% and closed near 8% mark. As bond prices and yields move in opposite direction, with the increase in bond yield, bond prices will fall. This will have negative impact on long term debt schemes as the funds of these schemes are invested in debt instruments with higher maturity, therefore their returns will reduce. The NAV of these schemes falls each time the rates of interest go up.

There was a contrary movement on short-term interest rates as they decline marginally after the policy.

Hence one should avoid investing in long term debt instruments while key rates are being hiked by the RBI.

If someone wants to invest in debt oriented schemes of Mutual Funds, he/ she should go for investing in short term debt scheme rather than long term debt schemes in current scenario of rate hike.

Those investors who want a safe and secured investment may also think of investing in bank fixed deposits (FD) as many banks of late have already raised their fixed deposit rates. FD interest rates having long term tenure may soon come in the range of 7.25% and 7.5% in the coming 6 months.

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