Buying Shorter Debt Is Now a Hot Trade in India’s Bond Market
(Bloomberg) -- Short-term debt funds in India are attracting big inflows amid uncertainties over the central bank’s future policy stance.
Funds maturing in up to six months, including liquid and ultra-short duration funds, got the highest inflows in three months in July, swelling the total debt inflows to 737 billion rupees ($10 billion), according to the Association of Mutual Funds in India.
Rising inflation is constraining the central bank from easing further even as the economy remains vulnerable following a deadly wave of coronavirus infections. The Reserve Bank of India last week left its key rate unchanged but one policy member dissented over maintaining an accommodative stance for longer.
“On a risk-adjusted basis, most investors are moving to the shorter end, and want to just play safe,” said Arun Kumar, head of research at FundsIndia. The consensus among investors is that interest rates are going to go up in the next one-to-two years, “and whenever that happens, the longer the duration of fund, the higher the negative impact.”
Shorter-tenor debt is expected to provide flexibility to investors amid policy uncertainty as it prevents them from getting locked in for a longer duration. Fund purchases have therefore tapered off toward the long end.
Liquid funds, with maturity up to three months, got 317.4 billion rupees of inflows in July, while money-market funds got 209 billion rupees, according to data from the Association of Mutual Funds in India. Medium-to-long term funds saw outflows of 17.33 billion rupees, while government bond funds with a duration of 10-year saw sales of 472 million rupees.
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