Revisit investments as rate cycle nears point of reversal

Investors can relook at their strategy as investment in debt schemes of MFs, gold and bank FDs could get steady returns in the long run

- SACHIN KUMAR

WHEN the Reserve Bank of India (RBI) decided to leave the repo rate unchanged last week, economists and analysts took it as a signal of a longer pause. This unexpected pause, which came after six back-to-back repo rate hikes in 11 months, shows the interest rate cycle has reached close to its turning point, they believe. While the market agrees there will be no more hike in near future, the pause has also triggered discussions about the possibility of rate cut this year.

As the interest rate cycle is expected to turn, the rate movement will have an impact on different assets and investors should relook at their investment strategy regarding mutual funds, fixed deposits and gold.

Debt funds turn attractive

The decision by the RBI to not hike rate this time created euphoria in the bond market, but the governor doused the excitement by clarifying that the pause was for just one meeting only and it might raise rates if inflation goes beyond its target.

However, the bond market is taking it as a long pause with no more hikes expected this year. As the prices are likely to cool down going forward, investors can invest in debt schemes of mutual funds to get inflation-beating returns.

"When interest rates trend lower, bond prices move up. For a given fall in interest rates, the longer the maturity or duration of bonds, the greater the increase in the price of bonds. The street estimates that both GDP and CPI inflation could be lower than RBI estimates, which will create room for interest rates to go down," Sandeep Bagla, CEO, Trust Mutual Fund told TNIE.