- Date : 05/09/2023
- Read: 3 mins
Fluctuating inflation rates can result in interest rate changes by RBI in the future, but the present market is an opportunity for investing in short duration funds.
The June MPC review by RBI resulted in the policy interest rates remaining unchanged as inflation goes down to 4.3% in May. However, as the global market conditions become volatile, a change in inflation can impact investors in the upcoming months. Furthermore, investors are moving towards short duration funds due to lower interest rate volatility and good returns.
The inflation rate in the country as of May 2023 is 4.3%.
RBI has decided to keep the policy interest rates constant at 6.5% during the June MPC review.
Short-duration funds and money market funds have given a yearly return of 6.4% & 6.62% respectively in August 2023.
What are the key highlights of inflation impacting the RBI and the investors?
Inflation can have a deteriorating impact on the economy and investors in the market.
Inflation rates in July increased to 7.44% as compared to 4.3% in May, which is greater than the prediction made by RBI.
Fluctuations in food prices nationwide due to heavy rainfall or the El Nino effect have the potential to increase inflation.
Over the past two months, crude oil prices have surged by 20%, influencing inflation rates and ultimately affecting policy interest rates.
How can an increase in inflation influence the RBI and policy interest rates?
An increase in inflation beyond the expectation of the RBI will force them to reassess interest policy rates. If the RBI decides to reduce the interest policy rates at the end of the year, the opportunity for investing in short duration funds or money market funds would cease to exist.
Why are investors looking to invest in short duration funds & money market funds?
The 10-year return rate of long-term funds is presently at 7.17% while the returns provided by short duration funds are close to 7%. With a small difference in the interest rates, the risk associated with long-term funds is not favourable.
The interest rates for short duration and money market funds are close to their peak, presenting a good opportunity for investors to lock their trades.
A higher cash-reserve ratio set by the RBI might lead to stable interest rates for short-term funds and money market funds temporarily.
The bottom line
The current scenario of the financial market presents a unique opportunity for investors interested in short duration funds. However, with inflation on the rise, policy interest rates may not remain the same by the end of the year, causing the window of opportunity to close!
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