Jun 07, 2018 3 min read

Hike in Repo Rates! What Should Be Your Next Investment Strategy?

Repo rates have increased! Read to find out what new investment strategy will work for now.
No matter how much you protect yourself from the market risk, a small move of the governing bodies shatters all your dreams of earning big. The same has happened yesterday as RBI hiked its repo rates. As the rates are increased to control the inflation, those investors who have parked their money in the debt mutual funds are under very much pressure.

In the recent months, we have heard many financial advisors and fund managers speak that the repo rates might go higher. And, now while unveiling its monetary policies, on June 6, 2018, the Reserve Bank of India has increased its repo rates by 25 basis points to 6.25% during its second bi-monthly policy review of 2018-19. The last hike was in the year 2014, and now after the long gap of four years, the rise has been announced again. This hike has come in the amid of rising oil prices and high retail inflation. Let’s find out what impact will it create for the Indian investors and how one can deal with the same!

Spike in Repo Rate Demands Change in Investment Strategy

With sudden news of a change in the rates, investors, especially the debt mutual fund investors have already started re-shuffling their portfolios. But the financial analysts at MySIPonline suggest you stick to the short-term debt funds as well as to accrual funds as they have lost all hopes of rate cuts from the market.

No doubt, the official hike in repo rates will adversely affect the long-term debt fund investors, thus considering the time now one should stay away from long-duration funds. Further, one needs to be extra mindful before investing in any credit opportunities funds. The reason being that these funds possess additional risk due to their investments in lower quality papers, which might get defaulted due to overall economic pressure.

Henceforth, investors who don’t understand risk well could opt for corporate bond funds which have investments in sound and high-rated companies. Such investments could deliver negative returns for a certain period now, but if the investment is made for a short to medium horizon, say 2-3, investors would accrue better returns than FDs.

Reactions of Market After the Rate Hike

One more trend has been going on in the market after the Central Bank announced its new rates, the banking stocks and funds have shown uptrends and experienced some gains after the announcement. The Bank NIFTY and NIFTY PSU Bank, both have trimmed gains and are trading at a half a percent higher.

Market experts are also saying that these trends will be seen for some more days. Meanwhile, most of the leading banks have already increased their MCLR (Marginal Cost of funds-based Lending Rate). And all these rises in rates will further reduce the growth in advances. But as the lending rates raised, banks will also increase the deposits rates, which is good news for savers.

The Central Bank, RBI has also raised the Reverse Repo Rates by 6%, and this hike will directly affect various sectors such as oil & gas, automotive, engineering, etc. All this will also affect the sector funds and their returns too. Thus, the financial experts at MySIPonline suggest you do not divert your investments, just because of the current hike. You should wait for the market to get neutral and let it get comfortable with the recent situations. For more such informative write-ups, stay tuned with us. In case you wish to seek help in your mutual fund investments or clear any of your doubts concerning the field, connect with our experts in no time via call or email.

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