In a move that surprised everyone, the RBI hiked the repo rate from 4% to 4.4%. This means newer short-term bonds will have a higher interest rate. The market will expect longer-term bonds also to be more rewarding. The demand for all existing bonds will fall and so will the price.
Since an investor would not like to hold an existing long term bond when more rewarding new bonds are expected, the drop in price of long term bonds will be much more than short term bonds.
The 10Y gilt yield shot up by 3.64% yesterday. The 5-year yield shot up by 4.6%. An indication that RBI’s move caught the medium-term market by surprise. A rate cut has been on the cards for a long time now and the long-term market has been anticipating it for months.
The repo rate hike will slowly permeate from the short-term segment to the long-term segment. At the time of writing, the 6-months yield has shot up by 8.32% while the 3-year yield has shot up by 7.46%. So even short-term debt funds will be affected by the rate hike but will quickly recover.
We list below the debt funds that suffered the largest impact due to RBI’s decision. It must be understood that this rate hike will affect all bonds and not just govt bonds. Corporate bonds for instance have a slightly higher margin (risk premium) over gilts. If new gilt bonds have a higher coupon rate then so should new corporate bonds.
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All types of debt funds will be affected by this move as the NAV is linked to the bond price. Short-term funds like money market funds, liquid funds etc will recover fast as they will soon be holding new bonds. The long-term debt funds will take months or even years to recover depending on how future rate movements pan out.
The 1 day NAV change of debt mutual funds vs Average maturity in years is shown below.
Generally, the higher the average maturity, higher the fall in NAV. Of course, there are several exceptions because the demand vs supply forces is not the same across the bond maturity spectrum.
The outlier is Nippon India Nivesh Lakshya Fund with an average maturity of 23.15 years as of March 31st 2022. Five funds with much lower maturities fell more!.
It will be interesting to see how floating rate bonds fare. This is the 1-day NAV change. Please keep in mind that floating rate bonds will have their own supply and demand forces. They will not be immune to interest rate changes. We have already indicated better choices than this category in a rising rate environment: Should we invest in floating-rate MFs to benefit from interest rate hikes?
| Scheme Name | 1 day NAV change |
| Kotak Floating Rate Fund-Reg(G) | -0.8% |
| IDFC Floating Rate Fund-Reg(G) | -0.4% |
| Tata Floating Rate Fund-Reg(G) | -0.4% |
| Nippon India Floating Rate Fund(G) | -0.4% |
| SBI Floating Rate Debt Fund-Reg(G) | -0.4% |
| HDFC Floating Rate Debt Fund(G) | -0.4% |
| Aditya Birla SL Floating Rate Fund(G) | -0.3% |
| ICICI Pru Floating Interest Fund(G) | -0.2% |
| Franklin India Floating Rate Fund(G) | -0.1% |
Debt funds that fell the most due to the REPO rate hike
The list below shows the funds that fell by 1% or more. This is the NAV change from 2nd May to 4th May (the 3rd was a market holiday). A study of subsequent changes in NAV will also be educational.
| Scheme Name | 1 day NAV change |
| Kotak Nifty SDL Apr 2032 Top 12 Equal Weight Index Fund-Reg(G) | -2.6% |
| BHARAT Bond ETF – April 2032 | -2.4% |
| Nippon India Dynamic Bond(G) | -2.4% |
| BHARAT Bond ETF – April 2031 | -2.3% |
| BHARAT Bond ETF – April 2030 | -2.1% |
| Nippon India Nivesh Lakshya Fund(G) | -2.0% |
| Axis Dynamic Bond Fund-Reg(G) | -2.0% |
| Invesco India Banking & PSU Debt Fund(G) | -1.8% |
| Edelweiss Banking and PSU Debt Fund-Reg(G) | -1.8% |
| SBI-ETF 10 Year Gilt | -1.7% |
| ICICI Pru Constant Maturity Gilt Fund(G) | -1.7% |
| IDFC G-Sec-Constant Maturity Plan-Reg(G) | -1.7% |
| DSP 10Y G-Sec Fund-Reg(G) | -1.7% |
| L&T Triple Ace Bond Fund-Reg(G) | -1.7% |
| Nippon India ETF Long Term Gilt | -1.6% |
| SBI Magnum Constant Maturity Fund-Reg(G) | -1.6% |
| LIC MF G-Sec LT ETF-(G) | -1.6% |
| ICICI Pru Long Term Bond Fund(G) | -1.6% |
| ICICI Pru PSU Bond plus SDL 40:60 Index Fund – Sep 2027-Reg(G) | -1.5% |
| Tata Income Fund-Reg(G) | -1.5% |
| Mirae Asset Dynamic Bond Fund-Reg(G) | -1.5% |
| DSP Corp Bond Fund-Reg(G) | -1.5% |
| Nippon India Nifty AAA CPSE Bond Plus SDL – Apr 2027 Maturity 60:40 Index Fund(G) | -1.5% |
| Edelweiss NIFTY PSU Bond Plus SDL Index Fund-2027-Reg(G) | -1.4% |
| ICICI Pru Nifty SDL Sep 2027 Index Fund-Reg(G) | -1.4% |
| IDFC Bond Fund – Income Plan-Reg(G) | -1.4% |
| HDFC Income Fund(G) | -1.4% |
| SBI CPSE Bond Plus SDL Sep 2026 50:50 Index Fund-Reg(G) | -1.3% |
| L&T Banking and PSU Debt Fund-Reg(G) | -1.3% |
| Aditya Birla SL Nifty SDL Apr 2027 Index Fund-Reg(G) | -1.3% |
| Axis CRISIL SDL 2027 Debt Index Fund-Reg(G) | -1.3% |
| Kotak Nifty SDL Apr 2027 Top 12 Equal Weight Index Fund-Reg(G) | -1.3% |
| Aditya Birla SL Nifty SDL Plus PSU Bond Sep 2026 60:40 Index Fund-Reg(G) | -1.3% |
| Aditya Birla SL CRISIL SDL Plus AAA PSU Bond Apr 2027 60:40 Index Fund-Reg(G) | -1.3% |
| Axis AAA Bond Plus SDL ETF – 2026 Maturity | -1.3% |
| Edelweiss NIFTY PSU Bond Plus SDL Index Fund-2026-Reg(G) | -1.3% |
| IDBI Dynamic Bond(G) | -1.3% |
| IDFC Dynamic Bond Fund-Reg(G) | -1.3% |
| IDFC G-Sec-Invest-Reg(G) | -1.3% |
| HSBC CRISIL IBX 50:50 Gilt Plus SDL Apr 2028 Index Fund-Reg(G) | -1.3% |
| IIFL Dynamic Bond Fund-Reg(G) | -1.3% |
| BHARAT Bond ETF – April 2025 | -1.3% |
| IDFC Bond Fund – Medium Term Plan-Reg(G) | -1.3% |
| JM Medium to Long Duration Fund-Reg(G) | -1.3% |
| DSP Nifty SDL Plus G-Sec Jun 2028 30:70 Index Fund-Reg(G) | -1.2% |
| Motilal Oswal 5 Year G-Sec ETF | -1.2% |
| Nippon India ETF Nifty SDL – 2026 Maturity | -1.2% |
| Nippon India ETF 5 Year Gilt | -1.2% |
| ICICI Pru 5 Year G-Sec ETF | -1.2% |
| SBI Magnum Income Fund-Reg(G) | -1.2% |
| IDBI Gilt Fund(G) | -1.2% |
| Union Medium Duration Fund-Reg(G) | -1.2% |
| Edelweiss CRISIL PSU Plus SDL 50:50 Oct 2025 Index Fund-Reg(G) | -1.1% |
| SBI Magnum Medium Duration Fund-Reg(G) | -1.1% |
| Invesco India Medium Duration Fund-Reg(G) | -1.1% |
| IDFC Gilt 2028 Index Fund-Reg(G) | -1.1% |
| Baroda BNP Paribas Corp Bond Fund(G) | -1.1% |
| HSBC Debt Fund(G) | -1.1% |
| Aditya Birla SL G-Sec Fund(G) | -1.1% |
| Axis CPSE Plus SDL 2025 70:30 Debt Index Fund-Reg(G) | -1.1% |
| TRUSTMF Banking & PSU Debt Fund-Reg(G) | -1.1% |
| IDBI Credit Risk Fund(G) | -1.1% |
| ICICI Pru Bond Fund(G) | -1.1% |
| HDFC Medium Term Debt Fund(G) | -1.1% |
| IDFC Gilt 2027 Index Fund-Reg(G) | -1.1% |
| DSP Bond Fund-Reg(G) | -1.0% |
| UTI Bond Fund-Reg(G) | -1.0% |
| Sundaram Medium Term Bond Fund(G) | -1.0% |
| Aditya Birla SL Income Fund(G) | -1.0% |
| Aditya Birla SL CRISIL SDL Plus AAA PSU Bond Apr 2025 60:40 Index Fund-Reg(G) | -1.0% |
| Baroda BNP Paribas Banking and PSU Bond Fund-Reg(G) | -1.0% |
| Tata Medium Term Fund-Reg(G) | -1.0% |
| HDFC Credit Risk Debt Fund-(G) | -1.0% |
| Nippon India Strategic Debt Fund(G) | -1.0% |
| HSBC Flexi Debt Fund(G) | -1.0% |
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