Indian MFs pivot to ultra-short debt as rate outlook clouds bets

India's mutual funds will stick with ultra-short-term bonds as an uncertain interest rate outlook and global trade concerns curb appetite for long-tenor securities, fund managers said.

The Reserve Bank of India's next monetary policy decision is due on December 5 and despite inflation falling to a record low, swap markets are not pricing in a rate cut.

"Due to RBI's shift in stance, investors may have taken a view to shift to shorter duration funds in these uncertain times. Further, global uncertainties linked to US tariffs may have added to investor worries," said Avnish Jain, CIO - fixed income at Canara Robeco Mutual Fund.

In October, mutual funds saw inflows of 1.3 trillion rupees ($14.8 billion) into liquid, ultra-short duration, low duration and money market categories, data from the Association of Mutual Funds in India showed. The flows were highest since April and came after two months of outflows.

"While longer end of the yield curve is influenced by a broader set of macroeconomic factors, the shorter end tends to respond more swiftly to changes in monetary policy. This has led to increased investor interest in the money market segment," said Kruti Chheta, fund manager and fixed income analyst, Mirae Asset Investment Managers (India).

These categories invest in notes with maturities of up to one year, and fund managers anticipate further flows.

GOVERNMENT BONDS UNDER PRESSURE

Government bonds are likely to face selling pressure for a third straight month, with asset managers selling a net 72 billion rupees of bonds so far this month, following 158 billion rupees of sales in August and September, clearinghouse data showed.

"The RBI will remain dovish given the growth-inflation dynamics and the rate cut story is not yet over, although timing remains uncertain," Prashant Pimple, CIO - fixed income, Baroda BNP Paribas Mutual Fund, said.