MPC announcements: RBI's stance may boost bond market, says fund managers

Debt fund managers view the RBI's policy as supportive for bonds, but differ on duration strategy, with some favouring long-duration papers and others preferring shorter maturities.

Debt fund managers see the Reserve Bank of India's (RBI's) monetary policy announcements as supportive for the bond market as the central bank struck a more reassuring growth-inflation balance.

 

They are, however, divided over the duration strategy, with some recommending higher-duration papers while others favouring shorter-maturity bonds.

 

While keeping the policy rate unchanged, the RBI raised its FY27 GDP growth forecast to 6.7 per cent from 6.6 per cent and lowered its inflation projection to 5 per cent from 5.1 per cent. 

“For investors, this signals a continuation of a stable policy environment, with inflation remaining largely supply-driven rather than demand-led. While the RBI continues to monitor risks from an uneven monsoon, volatile energy prices and geopolitical developments, its current stance provides greater visibility on the interest rate outlook,” said Kaustubh Gupta, chief investment officer (CIO) – fixed income, Aditya Birla Sun Life Asset Management Company (AMC). 

 

The RBI commentary and guidance, according to fund managers, indicates possible easing in bond yields, going forward.

 

The expectation of a decline in yields, some fund managers say, makes it an opportune time to invest in higher-duration papers.

“Given current corporate bond yields and expectations of supportive liquidity conditions, we anticipate a gradual softening of yields. Additionally, with the G-sec yield curve remaining steep, the long end appears well positioned. This makes it an opportune time to consider increasing allocations to long-duration debt funds in line with one's risk appetite,” said Anil Bamboli, head of fixed income at HDFC AMC. 

Bandhan Mutual Fund also retained a positive view on duration. Suyash Choudhary, chief investment officer-fixed income, said, “Our portfolio preference remains for up to 3-4 year corporate bonds and 15-40 year government bonds. Assuming relevant suitable investment horizons, we think valuations here are very decent.” 

Others, however, prefer the shorter and intermediate part of the yield curve. 

“The fixed income opportunity remains attractive, but selectivity is key. We prefer 3–5 year segment of the curve, particularly high-quality corporate bonds and select state development loans (SDLs), where favourable carry, ample liquidity and limited certificate of deposit (CD) issuance create attractive risk-reward balance,” Axis MF said in a note.

Edelweiss MF advised investors against extending duration aggressively.

 

“The August policy reduces the risk of an immediate rate hike. RBI's comfort on underlying inflation, combined with its assurance on system liquidity, should support the short-to-medium part of the yield curve. However, investors should not ignore external risks. Global uncertainty, crude prices, El Niño-related food risks, elevated global bond yields and currency volatility may still induce intermittent volatility in Indian bond yields. In this environment, we believe investors should focus on accrual-led strategies rather than making aggressive duration calls," it said. 

Duration debate 

• Some fund managers back long-duration G-secs, citing expectations of softer yields and supportive liquidity
• Some favour 3-5 year corporate bonds and select state development loans for better risk-reward balance
• Managers are bullish on RBI’s unchanged rates, lower inflation forecast and improved growth outlook
• Some AMCs advise focusing on accrual-led strategies citing market volatility