RBI rate hike: Debt funds, equities, FDs or gold, which asset classes may benefit as the rate cycle turns? Expert view

The Reserve Bank of India (RBI) has raised the repo rate by 25 basis points, signalling a shift in its monetary policy approach as the central bank balances stronger economic growth with emerging inflationary pressures. The move is important for investors because higher interest rates can affect bond yields, deposit rates, borrowing costs and equity valuations differently.

For retail investors, the key question now is where to position fresh money as the rate cycle changes. Short- and medium-duration debt funds could be relatively better placed, while long-duration bonds may face near-term volatility. Equities could see a mixed impact, with highly leveraged sectors more exposed to higher borrowing costs. Fixed deposits, meanwhile, could become more attractive as banks gradually reprice deposit rates.

Short-duration debt funds may weather higher rates better

Manish Srivastava, Executive Director at Anand Rathi Wealth Limited, said the impact of the rate hike is likely to be mixed across asset classes. Within fixed income, short- and medium-duration debt funds are relatively better placed because their lower duration limits the impact of rising yields and allows them to reinvest at higher yields as rates reset.

Long-duration debt funds, on the other hand, could face near-term mark-to-market pressure if bond yields move higher following the rate hike.

“Short & medium duration funds appear better placed from a risk-adjusted perspective as their lower duration reduces the MTM impact if bond yields rise further,” said Srivastava.

That does not mean investors should completely avoid long-duration funds. If inflationary pressures moderate and the RBI eventually moves towards rate cuts, longer-duration bonds could benefit because of their higher duration.