Indian debt funds set to extend $4.5 billion bond selloff

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The Economic Times daily newspaper is available online now. Read Today's Paper Indian debt funds set to extend $4.5 billion bond selloff after RBI policy shiftReutersLast Updated: Oct 12, 2026, 10:34:00 AM ISTSynopsis

Indian mutual funds have sold $4.5 billion in government bonds since July, prompted by changing rate expectations. The Reserve Bank of India raised rates for the first time in nearly four years, signaling further increases. Many asset managers are shifting to short-duration assets to mitigate risks associated with rising yields. Fund managers have noticed an increase in long-term bond yields reaching nearly three-year highs.

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Loading...×Indian mutual funds are set to sell more government bonds after offloading $4.5 billion since July, four fund managers said, as the central bank's policy shift raised expectations of a longer, steeper rate-tightening cycle.

The Reserve Bank of India raised rates for the first time in nearly four years and signalled further increases as inflation rises.

Mutual funds have reduced their exposure to longer-dated government bonds as rate expectations have changed, said Mansi Sajeja, a fixed-income fund manager at SBI Mutual Fund.

Bonds Corner Powered By Indian bonds slip on higher oil, hawkish RBI governor comments

Indian government bonds faced a downturn, attributed to soaring oil prices and statements from the Reserve Bank of India. The yield on the benchmark 6.94% 2036 bond rose following the central bank's recent rate hike. Geopolitical tensions involving Yemen and Saudi Arabia also pushed oil prices higher. With consumer inflation expected to exceed the central bank's upper tolerance limit in October, traders are keenly awaiting U.S.

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Asset managers sold a net 51 billion rupees ($527.08 million) of government bonds in the three sessions after the rate increase, adding to sales of 378 billion rupees in July-September.

"The policy tone sounded more cautionary on inflation generalization than growth outlook, giving it a hawkish tilt," Amit Somani, a deputy head of fixed income at Tata Asset Management said.

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Somani expects long-term bond yields to rise to a range of 7.20%-7.40%.

The five-year bond yield topped 7.05%, rising by almost 70 basis points in two months, while the 10-year bond yield was close to 7.35% levels, highest in nearly three years.

"Several factors, including global rate hikes, multi-decade high global bond yields, expectations of an earlier-than-anticipated domestic rate-hike cycle, and continued uncertainty in energy markets, prompted mutual funds to reduce duration risk by trimming government bond exposure," said Vikas Garg, head of fixed income at Invesco Mutual Fund.

Heavy open market sale of bonds by the RBI and risks of a repeat of such operations have also altered demand-supply dynamics, fund managers said.

The RBI sold bonds worth 1 trillion rupees last month, notching its highest net sale for any financial year in over a decade.

Shift To Short-Term Assets

While selling long duration government bonds, mutual funds are moving to ultra-short duration assets across government and corporate debt.

Axis Mutual Fund now prefers one-year to three-year high-quality corporate bonds, where favourable carry, ample liquidity and limited issuance of banks' certificates of deposit create an appealing opportunity, the fund house said in a note.

It may look to tactically add duration only when rate-hiking cycle progresses and yields become more attractive.

Aditya Birla Sun Life AMC likes the ultra-short term debt while Bandhan Asset Management has slashed its weighted average bond duration to less than a year, from around 12 years, the fund houses said in recent interviews with Reuters.
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