Liquidity Easing, Financial Year End &Rate Cuts Set Stage for Attractive Short-Term Debt Investments

Liquidity in our market had started to run in deficit mode since December 2024 with banks borrowing Rs 2.3 trillion on 18th March 2025 from RBI even after infusion of liquidity to the tune of Rs2 trillion by way of announced OMO purchases. This is because of a couple of factors including RBI’s intervention in the foreign exchange market to stabilize the rupee vols, given large FII equity outflows and increased currency-in-circulation. Yields at the shorter end of the curve for bank CDs, CPs and corporate papers are elevated given the seasonality seen in March and tightness in liquidity. 1 year PSU Bank CDs are available at 7.60% and 1-year / 6-month AAA NBFC NCDs are available at around 8%.  

Continued OMO purchases (infusion of liquidity) by RBI, headline inflation for February coming in at below 4% has paved the way for MPC to continue cutting rates including a probable change in stance of the monetary policy in April 2025. This scenario of financial year-end high rates and the expectation of imminent rate cutsalong with expected surplus liquidity make current levels attractive to invest. The two thematic debt constant maturity schemes, at the shorter end, i.e.  Aditya Birla Sun Life CRISIL IBX Financial Services 3 to 6 Months Debt Index Fund and Aditya Birla Sun Life CRISIL IBX Financial Services 9 to 12 Months Debt Index Fund are well positioned to take benefit out of the same.

These schemes are running a roll-down strategy, i.e. for example buying a paper of 12-month maturity and rolling it down to 6 months thereby capturing the term spread and benefit of higher carry of 12 months paper for the 6 months period. The 9 – 12 months scheme going by its name would be running a higher duration and can offer better return crossing March when yields are expected to fall.

The 3 – 6 months scheme has been designed to be policy agnostic and an all-seasons fund given that typically 6-month CDs/CPs trade at an average of 20 bps higher as compared to papers with 3 months or less than 3 months maturity. By deploying the roll-down strategy of the index, this fund will be able to monetize this structural divergence. This scheme was launched in December 2024 and has already crossed AUM of Rs 3,500 cr in March 2025.

In addition, given that these schemes are thematic debt funds in the financial services sector, they have the potential to deliver a better YTM as compared to other similar maturity open-ended debt schemes, while investing only in long-term AAA debt securities. Both schemes are open-ended in nature providing liquidity to investors without any exit load.

In essence, these schemes can create alpha for short-term debt investmentsand make it a compelling alternative to traditional investments and/or for parking monies available with investors.