But what does this mean for the bond market, in particular for Investors in debt funds?
Impact on the bond and debt fund market
The rate cut is bound to influence bond markets Significantly, long-duration bonds in particular. As borrowing costs fall, bond yields are likely to decline, pushing bond prices higher. This trend is particularly favorable for long-dated bonds, which are more sensitive to interest rate fluctuations.
According to Fisdom Research, this could trigger a rally in global debt markets, improving liquidity and reducing borrowing costs for both businesses and consumers.
RBI’s response: Will it follow global trends?
While the Reserve Bank of India (RBI) remains focused on domestic factors such as inflation and growth, a more accommodative global financial environment driven by the Fed’s tapering could ease some pressure on the RBI to maintain tight monetary policies.
However, the RBI is unlikely to cut rates immediately unless India sees a further decline in inflation, Fisdom said.
Should investors choose long or short duration funds?
After a rate cut, long-duration funds emerge as the best option.
With bond yields falling, these mutual funds will benefit from price appreciation.
This will make long-duration funds attractive to investors looking for potential capital gains, Fisdom said.
Short duration funds, while offering stability, will not see the same level of price gains as they are less sensitive to interest rate movements.
Fisdom Research advises investors to increase their exposure to long-duration bonds, which will benefit the most in a falling interest rate environment.
However, it is still recommended to maintain some allocation in short-duration or high-quality corporate bonds to balance risk and ensure stability.
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