Indian mutual funds flock to government bonds as inflation is seen to peak

“The market is expecting inflation to peak in 2023 and slow further, while growth picks up in 2023,” said Vikram Chopra, a fund manager at DSP Investment Managers.

“It’s bringing in new investors.”

Mutual funds bought bonds worth over 150 billion Indian rupees ($1.84 billion) in the last 15 trading sessions, Data from Clearing Corp of India showed.

This trend may continue as mutual funds had limited exposure to government bonds in the last few months after the Reserve Bank of India (RBI)reserve Bank of India) Aggressively raising interest rates to combat high inflation. The central bank has raised rates by a total of 190 basis points since May.

After suffering heavy losses in September, mutual funds stayed away from government bonds for most of October amid a sudden reversal in the direction of yields as hopes of India’s inclusion in global bond indexes dashed.

Mutual funds sold bonds worth a net Rs 184 billion in September, when yields soared, outperforming the 10-year benchmark bond yield by more than 20 basis points.

saw the tide turn

bond yields In the past few trading sessions, benchmark yields eased as low as 7.25% on Thursday as inflation in India as well as the United States eased in October, raising the stakes of the policy pivot.

After opting for a sizable 50 bps rate hike in the last three meetings, market participants expect the RBI to opt for a smaller rate hike of 25-35 bps next month.

Fund managers say that even though government bond yields have eased recently, they remain the preferred bet with a focus on shorter duration papers.

Pranay Sinha, Senior Fund Manager, Fixed Income Investments, Nippon India, “Based on relative valuations, government securities are still more attractive than AAA-rated (corporate) bonds across most of the curve and hence may be the preferred instrument Huh.” Mutual Fund said.

“Since funds are at the lower end of the duration range and relative pricing in government securities is a good possibility, we can expect demand to continue.”

The three-year government bond yielded 7.04%, while the five-year note yielded 7.11% and the seven-year paper yielded 7.27%.

DSP’s Chopra said, “Short-end yields (5-year bonds) have risen sharply this calendar year, attracting new investors who are looking for carry (better yields).”

“With the curve flattening, the risk reward skew remains skewed for investments in the 2026-2029 segment.”