The RBI’s announcement to go for an Open Market Operation (OMO) sale of G-Secs came as a surprise to the market on Friday. This led to the yield on the 10-year government bond jumping to 7.36%.
While many have called it a “knee-jerk” reaction and said much will depend on the quantum of the OMO sale as well as how the US bond yields pan out, this could add to pressure on debt mutual funds, which have been struggling thanks to the high interest rates as well as removal of the indexation benefit in March.
Chaudhary added that he pointed out that these fund categories may still find favour after these adjustments, as the macro picture remains favourable.
The medium and medium-to-long duration categories saw cumulative outflows of Rs 351 crore in August, compared to Rs 250 crore of net inflows in July. The long duration category saw net inflows of Rs 114 crore in July and Rs 180 crore in August, after just Rs 8 crore of net inflows in June, according to AMFI.
Experts say that all eyes will be on the amount and maturity of securities under the OMO operation.
“The rationale behind the RBI announcing the OMO seems to be twofold: reduce liquidity and ensure further transmission of past rate hikes, and manage the spill-over effects of the global rout in bonds. We believe H1FY 25 inflation will be in the band of 4.6-4.8%. We don’t see any hike by the RBI,” said Deepak Agarwal, head of fixed income at Kotak MF.
Agarwal added that index flows into Indian bonds next year, coupled with a pivoting by most central banks, should help in easing of yields. Hence, he advises investors with an appropriate time horizon to increase the duration of their funds, adding the he expects the 10-year bond to trade in the band of 7.15-7.45 in the near term.
Others expect a slowdown in growth, which could prompt central bank actions towards stabilising growth, which should be a positive for bonds.
“If we look at the 2-3 year AAA PSU bonds, they are currently trading at 7.80-85. They are very attractive from real yield perspective, given that the expected inflation is expected around 5.4% on average, for FY24. They are also favourable compared to fixed deposit rates of similar maturity,” said Anurag Mittal, Head of Fixed Income at UTI AMC.