RBI MPC: What strategy should debt mutual fund investors follow?

After the Reserve Bank of India (RBI) on Wednesday announced that it would keep the repo rate unchanged at 5.5%, a market expert recommends that investors should continue to put short-term money requirements or their emergency funds in short-duration funds and those above 20% tax bracket could consider hybrid fund like the arbitrage fund.

“There were some expectations that there will be a rate cut due to which markets have taken negatively. But considering that last time rate cut at 0.5% was higher than the expected 0.25% and considering the current uncertainties due to geopolitical and tariffs deadlock, I think it is a good decision by RBI,” Rajesh Minocha, a Certified Financial Planner (CFP), Founder of Financial Radiance shared with ETMutualFunds.

In the last policy, RBI announced a cut in the repo rate by 50 basis points to 5.50% and a 100 basis point CRR cut. The last cut was the third consecutive rate cut by RBI in the current calendar year and the second one in the current financial year.

Post an announcement of keeping the rates steady by the RBI Governor, the expert believes that the focus still stays on inflation, even though the FY26 forecast has been revised down from 3.7% to 3.1%.

“The GDP Forecast has been maintained at 6.5% for FY26 which is good news. Investors should consider a barbell strategy. Some weight should stay with short-term instruments, and the rest with long-term instruments, in order to manage their interest rate risk,” he adds.

The Governor in his statement mentioned that, “On the external financing side, gross foreign direct investment (FDI) to India remained strong during April-May 2025-26. However, net FDI moderated during this period due to higher outward FDI. Foreign portfolio investment (FPI) inflows to EMEs have remained strong in May and June 2025. However, net FPI to India recorded outflows of US$ 0.8 billion in 2025-26 so far (April-July 31) due to outflows in the debt segment.”

Minocha is of the opinion that short or medium-term investors (1–3 years) may stick to short-duration funds and those inclined to be long term (3+ years) can consider long-duration funds, in a phased manner.

“This should be considering their overall asset allocation, as investments beyond 5 years time horizon should be towards equity funds and equity focussed hybrid funds,” he further added.

Here is how other experts decode RBI MPC:

Nilesh Shah, MD – Kotak Mahindra AMC

The Credit Policy has come as per market expectations. Growth estimates and policy rates remain unchanged. Inflation estimates revised downwards. The liquidity situation remains comfortable and will remain growth supportive. ⁠Future Policy decision will be data driven.

Vishal Goenka, Co-Founder of IndiaBonds.com

With front loading and 100bps rate cuts already, continue to see long end rates come under pressure for now. Interestingly RBI acknowledged that large corporates have been agile to fund from bond markets given the slower transmission of rate cuts. We continue to see robust growth of corporate bond markets this year both from supply and demand side.

Naval Kagalwala, COO & Product Head at Shriram Wealth

We continue with our outlook that the short/mid end of the corporate bond yield curve will continue to outperform due to a mix of liquidity and good spreads vis-à-vis G-secs. We suggest investors look at funds investing in high rated bonds maintaining duration of 2 to 4 years. This includes categories such as Corporate Bond funds, Banking & PSU funds, Short Duration and Target Maturity funds.

Sneha Pandey, Fund Manager- Fixed Income , Quantum AMC

In this evolving landscape, dynamic bond funds are a smart choice for investors looking to stay flexible as interest rate expectations shift. These funds actively adjust their portfolio duration (simply put – the average time it takes for a bond’s cash flows to repay) in response to changing market conditions, including interest rate movements.

Vikas Garg, Head – Fixed Income, Invesco Mutual Fund

Forward-looking growth-inflation dynamics set a high bar for any future rate cuts. A small window for a possible final rate cut may open in the October or December policy meetings, but only if economic growth surprises meaningfully on the downside.

“Comforting commentary on adequate banking liquidity provides some relief. Currently elevated market yields, combined with low running inflation, offer a favourable risk-reward profile for investors.,” Garg added.