On October 7 (Wednesday), the Reserve Bank of India (RBI) is expected to deliver its first repo rate hike in nearly 3.5 years, since February 2023. A Reuters poll showed 35 of 61 economists expect a 25-basis-point hike, which would take the repo rate from 5.25% to 5.50%.
Here’s what investors should do after the RBI’s monetary policy announcement. Experts suggest mutual fund portfolio strategies for both a 25-bps rate hike and a status quo.
What should investors do after a 25-bps rate hike?
Manish P. Hingar, Founder and Chief Executive Officer of Fintoo, said equity can be left alone. Keep the SIPs running and don't sell because of one rate decision. Rebalancing may be considered if equity allocation moves more than about 5% from the target.
The key question is whether the hike marks the start of a cycle, with some forecasts seeing rates at 5.75%-6% in FY27. Harsha Vardhana VM, Founder-Group CEO, Atom Financial Services, said this calls for measured adjustments, with debt needing the most attention. Investors in gilt or long-duration funds with short-term goals could shift towards low-duration, money-market or floating-rate funds, while those with three-year-plus horizons can stay with medium-duration funds.
Souvik Biswas, Head of Research at Bajaj Capital, said arbitrage funds can be a better diversifier during rate-hike cycles, with new investments considered in arbitrage funds instead of other debt funds.
In equities, Piyush Jhunjhunwala, Founder and CEO of Stockify, said investors can reduce exposure to highly leveraged companies and rate-sensitive sectors such as real estate, automobiles and some financial segments.
Vardhana said higher borrowing costs could pressure heavily indebted companies and sectors such as real estate, autos and lending. For mutual fund investors, this means leaning on large-cap, flexi-cap or large and midcap funds for stability. Ongoing SIPs should continue.
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