Indian debt funds to extend bond sales as RBI moves decisively on inflation

Indian mutual funds are preparing to offload more government paper after selling $4.5 billion of sovereign debt since July, shifting capital toward short-duration paper as the Reserve Bank of India tightens monetary policy to secure long-term price stability.

Asset managers offloaded a net ₹51 billion ($527 million) in government bonds over the three trading sessions immediately following the central bank's decision to raise interest rates for the first time in nearly four years. That came on top of ₹378 billion sold during the July-September quarter, according to fund managers.

The central bank's rate rise and signal of further tightening reflect a proactive effort to tackle price pressures head-on, keeping India's broader economic expansion on a sound footing while global financial conditions remain volatile.

Why fund managers are adjusting portfolios

Bond yields have climbed across maturities as markets price in the RBI's hawkish stance. The benchmark 10-year yield has moved close to 7.35%, its highest level in nearly three years, while the five-year bond yield crossed 7.05%, up by almost 70 basis points over the past two months.

"The policy tone sounded more cautionary on inflation generalisation than growth outlook, giving it a hawkish tilt," said Amit Somani, deputy head of fixed income at Tata Asset Management. Somani expects long-term bond yields to settle in a corridor between 7.20% and 7.40%.

External conditions have reinforced the central bank's prudent posture. "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.

Supply conditions have also shifted under the RBI's liquidity management programme. The central bank sold ₹1 trillion worth of bonds through open market operations last month, recording its highest net sale for any financial year in more than a decade.

Moving capital to short-term corporate assets

Rather than pulling back from fixed income, managers are shifting allocations into ultra-short and short-duration securities across corporate and sovereign debt.

Axis Mutual Fund indicated in a market note that it now favours high-quality corporate bonds maturing in one to three years. The fund house noted that these instruments offer favourable carry yields, strong domestic liquidity, and low supply pressure from bank certificates of deposit. It plans to consider longer durations only when the monetary tightening cycle matures and long yields stabilise.

Other major managers have carried out similar adjustments. Mansi Sajeja, fixed-income fund manager at SBI Mutual Fund, noted that funds have systematically trimmed exposure to longer-dated government bonds to manage rate changes. Aditya Birla Sun Life AMC has focused on ultra-short debt, while Bandhan Asset Management reduced its weighted average bond duration to under a year from roughly 12 years, the firms said in interviews with Reuters.

By taking swift steps to address inflationary pressures early, the RBI is creating the conditions for sustainable growth, giving institutional investors room to realign portfolios smoothly across shorter maturities.