Indian Mutual Funds Make A Beeline For Govt Bonds As Inflation Seen To Hit Peak

Over the last 15 trading sessions, mutual funds have invested in government bonds of more than Rs 15,000 crore.

Indian Mutual Funds Make A Beeline For Govt Bonds As Inflation Seen To Hit Peak
Yields have dropped as further rate hikes are not expected due to inflation easing in India and the US.

INDIAN mutual funds are returning to government bonds as inflation is assumed to have peaked, leaving little room for further rate hikes. In turn, this has led to a sharp decline in yields, fund managers said Thursday.

"Market is expecting inflation to have peaked and slow into 2023, while growth headwinds have picked up into 2023, especially in the western world," said Vikram Chopra, a fund manager with DSP Investment Managers. This is bringing in fresh investors."

Mutual funds have bought bonds net of more than Rs 15,000 crore ($1.84 billion) over the last 15 trading sessions, data from Clearing Corp of India showed.

This trend could persist as mutual funds had limited exposure to government bonds over the last few months after the Reserve Bank of India (RBI) aggressively raised interest rates to tackle steep inflation. The central bank has raised rates by an aggregate of 190 basis points since May.

MFs sold bonds worth a net of Rs 18,400 crore in September when yields rose, with the 10-year benchmark bond yield rising over 20 basis points.

Changing Trends

Bond yields declined in the last few trading sessions, with the benchmark yield easing to 7.25 per cent on Thursday, as inflation in India and the US, eased in October, raising bets of a policy pivot.

After having opted for larger-sized 50 bps rate hikes in the last three meetings, market participants expect the RBI to opt for a smaller 25-35 bps rate increase next month.

Even though government bond yields have eased recently, they remain a preferred bet with a concentration on shorter duration papers, fund managers said.

"On a relative valuation basis, government securities are still more attractive than AAA-rated (corporate) bonds in most parts of the curve and hence they might be the instrument of choice," Pranay Sinha, senior fund manager, of fixed income investments at Nippon India Mutual Fund said.

"Since the funds are on the lower end of duration range and the relative value in government securities there is a decent probability, we can see demand persist."

The three-year government bond was yielding 7.04 per cent, while the five-year notes offered a 7.11 per cent yield, and the seven-year papers were 7.27 per cent.

"Short-end yields (5-year bond) have moved up sharply this calendar year, which is drawing in fresh investors who are looking for carry (better yield)," DSP's Chopra said.

"With curve flattening significantly, the risk-reward remains skewed to investments in the 2026-2029 segments."

With inputs from Reuters.

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