RBI Repo Rate Unchanged! How Mutual Funds Get Affected?
In the bimonthly meeting of Reserve Bank of India for the current financial year held on Wednesday, 07th June 2017, RBI kept the repo rate unchanged at 6.5%. The repo rate is the rate at which the central bank infuses liquidity in the banking system by lending money to the commercial banks. Moreover, the CRR (Cash Reserve Ratio) which is the portion of deposits to be kept with the central bank by a commercial bank is also unchanged at 4%.
However, the Statutory Liquidity Ratio (SLR) has been reduced by 50 basis points. SLR depicts the percentage of total deposits that has been invested by the banks in the government securities.
The ‘Monetary Policy Committee’ projected the inflation at 2% to 3.5% in the first half of the year, while 3.5% to 4.5% in the second half. In February 2017, RBI shifted its policy stance to neutral, but with these changes, it can be indicated that RBI may opt for the ‘Accommodative Monetary Policy’ in the future to revive the economic growth. With high liquidity in the economy, the reduction in SLR will have no influence on the banking system. The retail inflation as measured by the CPI (Consumer Price Index) got reduced reaching a new record at 2.99% in April from a five-month high of 3.89% in March.
Reserve Bank of India has also revised the target for GVA (Gross Value Added) which is another measure of economic growth by ten basis points, i.e., 7.3%. In the upcoming month of July 2017, GST shall be implemented which would further lead to making an influential impact on the economy’s growth. So now is the time to get the in-depth knowledge of the investment market so as to grab the best opportunity.
Impact on Debt Mutual Funds
The changes in the interest rate have great influence on the debt instruments as they are related to the interest rates to a great extent. Due to unchanged repo rate, the returns on the debt instruments may get negatively affected. The short term debt funds will have a mild impact, and it would be beneficial for the investors to opt for them at present. The reason being is that the short-term debt instruments are less affected by the changes in the interest rates.
Interest Rate is Correlated with Yields - The yield and interest rates are correlated, and thus the unchanged repo rate will have no impact on the yields of the debt instruments in the short or long tenure.
Interest Rate is Inversely Related to Price Value - The debt instruments having longer tenure will have a positive trend in their values as the prices will raise in the long run. However, for the short-term debt instruments, the price shall be more volatile, and there are more chances of decreasing values in their prices.
Impact on Equity Mutual Funds
As the repo rates are unchanged, the equity market shall enjoy the positive or favourable phase. The sectors like banking, infrastructure, etc., which are growing at the rapid pace will have a positive impact as their values shall gain a hike. As the interest rate is already less, their balance sheets will have fewer liabilities regarding interest on the loans, and thus they will earn high margins on their net profits. Accordingly, the equity mutual funds will earn a greater advantage of higher returns.
Impact on the Overall Economic Growth
RBI has kept the rates unchanged keeping the liquidity factors in mind for the purpose of bringing inflation rates at the lowest. A high repo rate isn’t beneficial for the economy as it makes credit expensive, with the unchanged rate which is already less, the economy is expected to outperform and reach at a higher level. With this, the overall money and mutual fund market will raise their values providing the best returns to the investors.
What Should You Do?
If you have to invest in the debt instruments, then the short-term debt funds are more beneficial for you at present. They do not get affected by the market rate changes, and you would be able to fetch expected returns from them easily. However, if you are interested in the equity funds, then you must park your money in the schemes having banking or other growing sectors in the portfolio. It will help your money to get multiplied sooner and let you reach your investment goals.
In case you have any other query or you want to make the best investment plan for your goals, then you must consult out financial advisors for free. MySIPonline and team are always ready to cater to your needs.
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