The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) has cut interest rates by 25 basis points, bringing the repo rate down to 5.25 percent. This move is seen as a signal of early policy easing, ahead of other global central banks. The committee voted unanimously for the rate cut, while maintaining a “neutral” stance, despite inflation softening and growth momentum remaining strong. The RBI has also lowered its average CPI inflation forecast for the current fiscal year to 2.0 percent, citing exceptionally low food prices.
The central bank has also revised its GDP growth estimate upward to 7.3 percent, supported by resilient domestic demand and strong investment activity. In addition to the rate cut, the RBI has announced an aggressive liquidity push, including open market purchases of government bonds worth ₹1 trillion and a $5 billion buy-sell forex swap. These moves are designed to add durable liquidity to the financial system, particularly at a time when banks typically face year-end pressures.
The bond market has responded positively to the RBI’s moves, with the benchmark 10-year yield easing by around 4 basis points. However, analysts note that the yield curve remains steep due to expectations of future fiscal pressures and uncertainty around government borrowing. Investors are advised to focus on short-duration and accrual-based strategies over the next two to three months, including low-duration, money-market, and liquid funds.
Short-duration mutual funds, which invest in a mix of treasury bills, commercial papers, and government securities, are seen as a practical choice for investors looking to park money for one to three years without large fluctuations. These funds carry moderate interest rate risk and are riskier than liquid and ultra-short-term funds but safer than medium-duration and long-term funds. Investors are advised to select schemes that do not take excessive credit or duration risk, as capital safety should remain the top priority in debt investments.
Overall, the RBI’s moves are seen as supportive of the economy, and the near-term environment appears favorable for short-term debt investments. However, investors are advised to temper their expectations of a sustained rally at the long end of the curve, as volatility is expected to persist in maturities beyond 15 years. Fund houses expect the short end of the curve to remain the most stable pocket for fixed-income investors heading into early 2026, making short-duration funds a viable option for investors looking for stable returns.