RBI rate hike by 25 bps: Should you lock into debt funds as bond yields rise? Axis MF outlines strategy for investors

The Reserve Bank of India’s decision to raise the repo rate by 25 basis points to 5.5% has changed the outlook for fixed-income investors. The October policy marked the first rate hike since February 2023, while the central bank also shifted its stance from neutral to calibrated tightening.

For debt-fund investors, the key question now is whether rising yields make it a good time to invest or whether it is better to wait for the rate-hiking cycle to play out. The answer depends largely on the fund’s maturity profile and the investor’s time horizon.

Bond yields have already moved higher

The rate hike itself was not a complete surprise for markets. Bond yields had already risen substantially before the policy announcement. According to Axis MF Research, yields across the curve increased by around 25-30 basis points in the month preceding the policy, while 3-7 year government bond yields rose by 35-40 basis points. Yields then increased another 5-10 basis points immediately after the RBI’s decision.

The 10-year government security yield stood at 7.21% in October, compared with 6.78% in August. Axis MF expects the 10-year G-Sec yield to remain in the 7.10-7.40% range for the rest of 2026.

This matters because debt-fund returns are influenced by both the interest income earned on bonds and changes in bond prices. When yields rise, existing bonds generally face price pressure. Longer-duration funds are more sensitive to such movements because their portfolios have greater exposure to longer-maturity securities.

Should investors buy debt funds now?