Indian Debt Mutual Funds Set to Extend 4.5 Billion Dollar Bond Selloff as RBI Shifts Policy Stance

Indian asset management companies are preparing to ramp up sales of sovereign debt securities, having already dumped government paper worth roughly $4.5 billion (around ₹42,900 crore) since July. The move comes in the wake of the Reserve Bank of India (RBI) initiating its first benchmark interest rate increase in nearly four years, triggering worries across dealing desks of a steeper, prolonged tightening cycle.

The central bank recently lifted the repo rate by 25 basis points to 5.50% and pivoted its policy stance from "neutral" to "calibrated tightening," while raising its fiscal 2027 inflation forecast to 5.2%. Following the Monetary Policy Committee's announcement, domestic mutual funds offloaded a net ₹51 billion ($527.08 million) of government bonds in just three sessions, adding to gross net sales of ₹378 billion executed between July and September.

Duration De-risking and Shift to Short Tenors

Domestic fund managers have aggressively trimmed duration to shield portfolios from mark-to-market losses caused by rising bond yields.

Mansi Sajeja, a fixed-income fund manager at SBI Mutual Fund, highlighted that asset managers have systematically drawn down their exposure to longer-dated government securities as interest rate expectations repriced upward.

Amit Somani, deputy head of fixed income at Tata Asset Management, noted that the RBI's tone sounded more cautionary on the generalisation of inflation than on growth, imparting a distinct hawkish tilt. Somani projects long-term bond yields to trade higher in the 7.20% to 7.40% range.

Vikas Garg, head of fixed income at Invesco Mutual Fund, pointed out that several factors prompted funds to curtail duration risk:

• Elevated global rate trajectories and multi-decade highs in US Treasury yields.
• Geopolitical shocks and continued price uncertainty in international energy markets.
• An earlier-than-expected domestic rate tightening cycle by the RBI.
• Altered sovereign bond demand-supply dynamics triggered by aggressive central bank liquidity absorption.

Supply Overhang and Yield Surges

Market yields have adjusted sharply across the sovereign yield curve. The benchmark 10-year bond yield traded near 7.35%, hovering around its highest levels in nearly three years. The five-year government bond yield has risen above 7.05%, climbing nearly 70 basis points over the past two months.

Compounding the pressure on long-dated papers, the RBI executed open market operations (OMO) by selling government bonds worth ₹1 trillion in September alone—marking its largest net bond sale in a single financial year in over a decade. With traders anticipating further liquidity-draining OMO sales, institutional buyers have stayed defensive.

What It Means for Indian Investors

Rather than holding volatile long-term gilts, mutual funds are redirecting flows toward ultra-short duration papers, corporate bonds, and short-term accrual assets to capture attractive yields without taking significant duration risks.

While existing unitholders in gilt funds and long-duration schemes face capital erosion due to rising bond yields, retail investors entering fixed-income strategies now have an opportunity to lock in yields exceeding 7% in ultra-short, liquid, and money market schemes with relatively subdued volatility. Financial advisers recommend a cautious, carry-focused approach until terminal policy rates become clearer.

Tags: Reserve Bank of India SBI Mutual Fund Tata Asset Management Invesco Mutual Fund Indian Bond Market Fixed Income