InvestorQ : How will the RBI rate cut impact debt funds? I am holding some G-Sec funds, some short term funds and also one credit risk fund?
Anjana Aiyar made post

How will the RBI rate cut impact debt funds? I am holding some G-Sec funds, some short term funds and also one credit risk fund?

Answer
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Deepa Salunkhe answered.
7 months ago


RBI’s rate cut and the huge infusion of $50 billion of liquidity (Rs.374,000 crore) will impact debt funds invested in long duration bonds as well as short duration bonds. Bonds have also come under pressure in the last few weeks due to the relentless selling by the foreign investors. The 75 bps rate cut has now brought the rate down to 4.4%, the lowest repo rate in history. The spread of the reverse repo has been widened taking the rate 90 bps lower to 4%. While the surge in liquidity infusion will bring down the yields on shorter duration bonds, the rate cuts will reduce the yields on long duration bonds. Thus investors invested in short term and liquid funds may earn lower yields. On the other hand, the investors in long duration bonds and medium duration bonds will benefit as the rate cut will result in a fall in yields and appreciation in the price of the bonds. However, you need to be cautious about credit risk funds as they could see elevated risk in these times as persistent lockdown could push a lot of companies back on solvency ratios.