Suyash Choudhary, head of fixed income at Bandhan AMC, expects the Reserve Bank of India to hike interest rates by another 100-125 basis points. With the repo rate potentially climbing to 6.5%, he suggests that investors focus on short-duration funds and high-quality credit to protect capital. The strategy emphasizes treating debt as a safety buffer during market volatility rather than chasing higher yields through risky assets.
The Reserve Bank of India (RBI) is likely to continue its path of increasing interest rates to manage persistent inflation, according to Suyash Choudhary, head of fixed income at Bandhan Asset Management Company. Choudhary expects the central bank to raise the repo rate by another 100 to 125 basis points, pushing it toward 6.50% in the current cycle. This outlook comes as global bond yields remain high, driven by massive spending in Western economies, which creates a competitive environment for capital.
Navigating the Interest Rate Cycle
When the RBI raises interest rates, it generally impacts debt mutual funds because bond prices tend to fall when yields rise. This can cause short-term dips in the net asset values of these funds. However, Choudhary suggests that investors should not panic. Instead of trying to guess when interest rates will peak, a more prudent approach for retail investors is to prioritize short-duration debt funds. By keeping the duration short, investors reduce the risk of their portfolio value falling significantly if interest rates continue to climb. This approach also allows for quicker reinvestment into higher-yielding bonds as they become available.
The Importance of Credit Quality
A common mistake for retail investors during high-inflation periods is chasing higher returns by investing in lower-rated corporate bonds. Choudhary warns against this strategy, noting that it increases the risk of defaults and reduces the core purpose of a debt portfolio, which is to provide a reliable buffer against equity market volatility. High-quality credit assets are essential for maintaining liquidity and stability.
For those managing personal finances, maintaining a balanced asset allocation remains critical. A common recommendation is a split of roughly 40% in fixed income and 60% in growth assets like equities. Investors should consider their total wealth, including stable components like the Employees' Provident Fund (EPF) and bank deposits, when calculating this ratio.
Managing External Risks
While foreign debt may look attractive due to higher yields in markets like the US, it carries significant currency risk. Since most personal financial liabilities are in Indian Rupees, exposure to foreign debt can be a speculative bet rather than a core investment strategy. Investors should focus on domestic opportunities and keep their risk appetite in check. The most effective way to handle current market uncertainties is to stay disciplined and avoid using debt funds as a tool for quick speculative gains. Investors may track upcoming RBI monetary policy committee meetings and bond yield movements for further guidance on the evolving interest rate environment.