On Friday, October 6, the Reserve Bank of India (RBI) left the repo rate unchanged at 6.5 per cent. The central bank, in its latest monetary policy review meeting, decided to keep the repo rate unchanged at 6.5 percent.
The rate at which the RBI lends money to banks is known as the repo rate.
Announcing the decision of the monetary policy committee (MPC), RBI Governor Shaktikanta Das said the MPC voted anonymously to keep the repo rate unchanged. With this, the RBI has maintained a status quo on the key interest rate since February this year.
While the repo rate is usually revised to regulate inflation and growth of the country, it can also affect investors. Banks usually change interest rates on savings and loan instruments after any repo rate revision.
Repo Rate Status Quo: Will Mutual Fund Investment Be Affected?
As debt mutual fund schemes are generally invested in fixed income securities like government bonds, a decrease in the repo rate can make the schemes look more attractive as the NAV will increase. However, an increase in the repo rate can cause debt mutual funds to give lower returns, as bonds often yield less with increasing repo rates.
Consequently, we should be prepared for higher interest rates in the coming days as the RBI may increase the repo rate in the next policy review. This means that a higher interest rate could be negative for the stock market, as it raises the cost of borrowing for companies and affects their profit margins.
Speaking of mutual funds, you should always choose funds that are in line with your investment horizon. A mismatch in investment period and risk tolerance can lead to short-term volatility and losses. Those who are unsure about the future evolution of interest rates can opt for dynamic or hybrid bonds to minimize risk.
In case there is a rate cut in the coming days, one can also opt for equity mutual funds by tactically investing in midcap and smallcap funds. In summary, it is advisable to continue investing in both equity funds and debt funds but for longer periods.