RBI MPC December 2025: A Mixed Bag, But Debt Mutual Fund Investors Get an Early Christmas Gift

The Monetary Policy Committee (MPC) and the Reserve Bank of India (RBI) delivered more than what the bond market was expecting, say mutual fund experts. The RBI today cut the repo rate by 25 bps to 5.25 per cent in a unanimous move, broadly in line with expectations. The decision comes at a time when inflation is at record lows. October CPI was just 0.25 per cent, driven by unusually soft food prices. With a neutral stance and a clear data-dependent approach, the central bank has kept the door open for more easing if conditions allow.

Along with the rate cut, the RBI also announced liquidity support measures, including Rs 1 trillion of Open Market Operation (OMO) purchases and a $5 billion FX swap. These moves, according to a note by Edelweiss Mutual Fund, signal its intent to keep liquidity comfortable and ensure that credit transmission improves so borrowers actually benefit from lower rates.

For mutual fund investors, the bond market got more than what it was pricing in, says the Edelweiss Mutual Fund note. However, it adds that the price action has remained muted at the mid and long end of the curve (15 years and above). The market will now look forward to which securities and which segments of the curve the RBI will buy under OMOs. The choice of securities matters to the market, the note emphasises.

How Did the Bond Markets React to RBI's December Policy?

The Governor’s tone was more accommodative than expected, and bond yields eased a bit:

The 10-year yield fell by about 4 bps to around 6.47 per cent.

Long-end yields softened by 3–4 bps.

The reaction, however, was modest, especially at the longer end. Even after the policy, the long end of the curve remains unsettled. The steepness has actually increased:

The 10-year now trades around 120 bps above the repo rate.

The 30-year+ trades around 210 bps above repo.

Devang Shah, Head of Fixed Income, Axis Mutual Fund, expects 10-year GSec to trade in a range of 6.4-6.6 per cent for the remaining part of FY26.  

With a large liquidity infusion already announced, the chance of further OMOs in the next two to three months has reduced, according to Edelweiss Mutual Fund. That creates uncertainty at the long end, especially with fiscal concerns still lingering.

The FX swap would provide generalised liquidity to the banking system, which typically favours the short end of the curve. But with these measures adding about Rs 1.45 lakh crore of durable liquidity in a short timeframe, the need for further liquidity measures in the next two to three months has reduced, explains the Edelweiss Mutual Fund Note. This imparts uncertainty regarding the timing of further OMOs beyond the amount stipulated, it adds.

What Should Debt Mutual Fund Investors Do?

With the 25 bps repo rate cut and significant liquidity infusion, mutual fund managers continue to advise investors to focus on short-term debt strategies.

For now, the simplest and safest approach is to stay at the short end of the curve, say fund managers. According to Edelweiss Mutual Fund, short-term funds are the biggest beneficiaries of liquidity, while the long end remains unpredictable and prone to volatility. The fund house also believes that accrual opportunities remain attractive without taking long-duration risk.

For the coming two to three months, Edelweiss Mutual Fund prefers:

• Low-duration funds

• Money market funds

• Liquid funds

• Ultra-short duration funds (selectively)

To wrap up, the RBI is maintaining a steady policy but flooding the system with liquidity. Inflation is soft, growth is firm, and the rupee requires close monitoring. For debt mutual fund investors, the message is simple: stay short, stay liquid, and focus on accruals.