Fund managers see duration headwinds easing, but await better entry points

RBI and government measures to attract foreign capital have improved sentiment in the bond market, but most fund managers continue to favour shorter-duration papers

Debt fund managers believe the Reserve Bank of India’s (RBI’s) and the government’s latest measures to attract foreign capital could ease some of the pressures weighing on long-duration bonds. However, most continue to favour shorter-duration papers while waiting for more attractive entry points at the longer end of the curve.

 

The RBI kept the repo rate unchanged at 5.25 per cent on Friday but unveiled a raft of measures aimed at lifting overseas inflows. Simultaneously, the government exempted foreign investors from taxes on interest income and capital gains earned on investments in government securities.

 

Fund managers said the steps should help ease concerns around India’s balance of payments (BoP), a key overhang for the bond market in recent months. “These measures should serve to put a floor under the BoP narrative, and one can look forward to some meaningful capital flows in the months ahead. This will also help directly alleviate funding stress for banks. It will also increase the likelihood of Indian government bonds being included in global indices,” said Suyash Choudhary, chief investment officer-fixed income at Bandhan Mutual Fund (MF).

 

Choudhary added that bond valuations remain attractive and that Bandhan MF will continue to maintain an overweight stance on duration. Most other fund managers, however, remain cautious on long-duration bonds, citing global uncertainties and the possibility of further rate hikes.

 

“Given the RBI’s inflation forecast, we believe that 75 basis points of rate hikes are very much on the cards through the rest of 2026-27. Given elevated global bond yields and the challenges posed by higher debt and inflation, we believe the yield curve could steepen incrementally, with the short-term money market curve emerging as the biggest gainer as liquidity is likely to improve,” said Puneet Pal, head-fixed income at PGIM India MF.

 

“The front end of the curve should rally following the status quo on rates, while the ultra-long end may benefit from anticipated foreign demand under the fully accessible route. But that optimism comes with a caveat. The sharper upward revision in inflation cannot be ignored, and it quietly keeps the possibility of rate hikes alive,” said Siddharth Chaudhary, head-fixed income at Bajaj Finserv Asset Management.

 

Axis MF, in its latest note to investors, recommended a wait-and-watch approach. The fund house said the best time to add duration would be after the first rate hike or if crude oil prices fall below $75 a barrel. It also observed that longer-duration bonds, particularly those with maturities of 30 years and above, would become attractive if yields rise beyond 7.9 per cent.

 

Long-duration bonds and debt schemes investing in them have struggled in recent months. Rising yields — driven by concerns over inflation, elevated crude oil prices, global bond market volatility, and fears of further monetary tightening — have eroded returns across most long-duration debt funds.