Many big mutual fund houses have been trimming their government securities (g-sec) position significantly in long-duration papers in anticipation of no rate cut in the current financial year and worrying external environment, said market participants.
While the sell-off began in June after the Reserve Bank of India (RBI) changed its stance to ‘neutral’ from ‘accommodative’, it has gained traction after the August policy. The yields also touched a four-month high of 6.51% on Wednesday.
Heavy Selling Post August Policy
According to data from CCIL, mutual funds net sold around Rs 9,000 crore after the policy till August 13, according to data from CCIL.
In the policy, RBI has projected CPI inflation at 4.4% in Q4FY26 and 4.9% in Q1FY27, raising the high bar for further rate cuts. This has led to sell-off in the market, pushing up the yields as much as 12 basis points in August.
“The huge selling that has happened recently were mostly in 10 and 14 year tenures as mutual funds have large exposures in these papers,” said a debt fund manager.
He added that the RBI messaging was a little bit confusing, which led the market to believe that there are no more rate cuts on the table. Secondly, given that the tax collections were lower, the market is a little bit worried about the fiscal position for the year.
Rating Upgrade Brings Temporary Relief
While there was buying on Thursday as S&P upgraded India’s sovereign rating to ‘BBB’ from ‘BBB-’, citing economic resilience and sustained fiscal consolidation. The yields also softened by 8 bps to 6.40%. However, there still isn’t clarity whether this trend will continue.
Debt fund managers said that the market needs more conviction on the rate cut cycle to increase their exposure to duration papers. “More than rating upgrade it is external stability which may drive market behaviour in the near term,” said a head of fixed income at a mutual fund.