Any delay in the economic recovery may result in a continuation of the accommodative monetary policy stance. If growth momentum picks up in the subsequent quarters and inflation remains sticky, RBI’s policy approach may turn neutral from accommodative.<\/p>\n\n\n\n

The RBI will keep a close watch on all these factors, mainly inflation, in maintaining the macro-economic stability and credibility of the framework.<\/p>\n\n\n\n

Considering these scenarios it appears that we are almost at end of the current interest rate cycle, wherein rates have bottomed out. In other Emerging Market Economies (EMEs) such as Brazil, Mexico, and Russia the central banks have already raised interest rates.<\/p>\n\n\n\n

The RBI may undertake policy normalization in a calibrated manner, ignoring inflationary pressure is going to become increasingly challenging for the MPC. Rising commodity prices (food and non-food), high shipping charges, and supply chain disruptions in some key products are already pushing CPI inflation up. If CPI inflation continues to move up for consecutive 2-3 months, the RBI may be left with no other option but to gradually increase policy rates sooner. In other words, the policy normalisation period would shorten.<\/p>\n\n\n\n

The RBI, however, would ensure that liquidity conditions in the system remain comfortable. If RBI continues to flush out more liquidity through various market operations, and inflation stays higher than the revised estimates, markets may start factoring in a potential repo rate hike sooner rather than later.<\/p>\n\n\n\n

How should you approach debt funds after the RBI’s third bi-monthly monetary policy review?<\/strong><\/p>\n\n\n\n

Avoid taking exposure to longer duration debt funds. Most of the rally at the longer end of the yield curve has already come about since the time RBI started reducing policy rates. Debt securities with longer maturity papers may not be able to generate attractive returns, as seen in the last couple of years. Moreover, in the current uncertain times, the longer end of the yield curve could be more sensitive than the shorter end. The returns may be moderate on the longer end of the yield curve and could turn riskier (may encounter high volatility) in the foreseeable future.<\/p>\n\n\n\n

To approach debt mutual funds, now the shorter end of the yield curve looks more attractive. You’ll be better off deploying your hard-earned money in shorter duration debt mutual funds. But approach even short-term debt funds with your eyes wide open–pay attention to the portfolio characteristics and quality of the scheme.<\/p>\n\n\n\n