RBI raises inflation forecast, cuts growth estimates: Is it time to rethink your mutual fund portfolio?

RBI, in its latest bi-monthly monetary policy statement, has kept the repo rate unchanged at 5.25%. However, the central bank struck a cautious tone on the economic outlook, highlighting rising global uncertainties and inflationary risks.

According to the Governor’s statement on 5 June, during the RBI’s Monetary Policy Committee (MPC) meeting, “Global economic outlook remains clouded by the continuing geopolitical impasse in West Asia, as sharply escalating energy prices and global supply chain disruptions continue to hinder economic activity. Faced with difficult trade-offs, monetary policy has turned more cautious.”

Reflecting these concerns, the RBI revised its CPI inflation forecast for FY27 upwards from 4.6% to 5.1%, while lowering its real GDP growth projection from 6.9% to 6.6%.

With inflationary pressures building and many analysts expecting rate hikes later in FY27, investors are reassessing their investment strategies. But what should mutual fund investors do in such a scenario? Let's find out what experts have to say.

A common view among experts is to favour short-duration debt funds over long-duration strategies.

According to Vaibhav Porwal, co-founder of Dezerv, when the next policy move is more likely to be a hike than a cut, the focus should shift from capital appreciation to income protection. “In this environment, accrual-oriented short-to-medium duration funds earn their place. Short-duration funds, money market funds and floating rate funds sit well because they carry limited sensitivity to rate movements while still offering competitive yields.”

He believes the current opportunity lies in locking into elevated yields through accrual strategies rather than positioning for capital gains from future rate cuts. “With the RBI on hold and a possibility of a 25-50 basis point hike by Q4 FY27 if inflation persists, holding long-duration funds exposes investors to mark-to-market losses they may not anticipate,” says Porwal.

Basant Bafna, Head – Fixed Income, Mirae Asset Investment Managers (India) Pvt Ltd, also sees value in the shorter end of the curve. “As such, while investors should give due regard to their investment horizon while making investment allocations, Ultra Short and Low Duration categories hold significant value as the curve remains significantly flat with tactical allocations into long duration.”

Abhishek Bisen, Head Fixed Income, Kotak Mutual Fund, echoed a similar view. “In this environment, short-duration and low-duration debt funds appear relatively better positioned as they can help contain mark-to-market volatility while benefiting from reinvestment at higher yields. Long-duration funds may remain more volatile owing to elevated duration risk, although long-term investors could consider accumulating gradually in the segment."

On the equity side, experts suggest that investors may need to move away from expensive growth stories.

Porwal highlighted that “On the equity side, the rate environment reinforces a preference for value over growth. When the cost of capital is elevated and rate cuts are not imminent, paying premium multiples for future earnings is a difficult bet. Funds with a value or quality tilt, or those with a disciplined active mandate, are better suited to this phase than momentum-heavy or growth-at-any-price strategies.”

“Within large caps, the positioning is straightforward: hold businesses at fair value, specifically in the 20x to 22x trailing P/E range, where earnings visibility is stable and pricing power exists to absorb margin pressure. In mid and small caps, active bottom-up selection is the right approach. Passive, broad-market allocation to this segment does not work well in the current environment.”

Nirali Bhansali, Equity Fund Manager, Samco Mutual Fund, also believes investors need to be selective. “On equities, it is a stock picker's market, and investors must be careful while selecting stocks with good growth potential and low valuation.”

For investors looking to navigate market volatility through a debt-and-equity mix, experts see merit in hybrid strategies.

Porwal highlighted that, “Balanced advantage funds are worth considering for investors who find it difficult to maintain discipline through volatility. They remove one of the most common behavioural errors, selling at the wrong moment, by rebalancing systematically.”