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This 50-basis points repo rate hike is broadly in line with the market expectation. The fact that the RBI left the Cash Reserve Ratio (CRR) unchanged and guided to move rates in a calibrated manner has lowered the uncertainty premium on bond valuations. Bond yields came down by 5-7 basis points after the announcement.    

The RBI is now squarely focused on bringing down inflation. Taking into account the introduction of the SDF rate in the April monetary policy, the RBI has raised the effective overnight rate by 130 basis points over the last two months. This clearly shows a sense of urgency within the RBI to withdraw the ultra-easy monetary policy.  

We should expect the RBI to continue with the rate hikes in the remaining MPC meetings in 2022. We expect the RBI to hike the repo rate to near 6% by early 2023.

The Bond yield curve is already pricing for a repo rate of 6% by early next year. Thus, the bond market may not be too sensitive to RBI’s rate hikes going forward. However, high global monetary policy uncertainty, rising crude oil prices, and unfavourable demand-supply dynamics will continue to put upward pressure on medium to long-term bond yields.  

Lending rates have already moved up as most loans today are linked to benchmarks like Repo rate or MCLR. The interest rate on fixed deposits will also move higher in the coming months.

From an investor's perspective, the return potential of liquid and debt funds has improved significantly after the sharp jump in bond yields over the last six months. The gap between the bank savings rates and liquid fund returns will widen and remain attractive for your surplus funds. Investors with a short holding period and low-risk appetite should stick to categories like liquid funds of good credit quality portfolios.  

Medium to Long term interest rates in the bond markets are already at long-term averages as compared to fixed deposits which remain low. Investors with more than 2-3 years holding period can consider dynamic bond funds which have the flexibility to change the portfolio positioning as per the evolving market conditions. However, such investors should be ready to tolerate some intermittent volatility in the portfolio value.