Fundview: India's large debt fund pivots to short-term bonds as it braces for RBI rate hikes

Aditya Birla Sun Life Amc

05/10/2026 07:36

By Khushi Malhotra
MUMBAI, Oct 5 (Reuters) - Aditya Birla Sun Life AMC has turned cautious on longer-dated bonds, favouring three - to six-month securities as it expects the Reserve Bank of India to begin raising rates, a fund manager said.
The fund house expects two rate increases this year as the RBI tackles persistent inflation and excess liquidity, limiting the appeal of longer-dated bonds.
It also expects the central bank's efforts to drain liquidity to put further pressure on the bond market.
"We need to be cautious on duration in the current scenario," said Kaustubh Gupta, chief investment officer for fixed income at Aditya Birla Sun Life AMC, adding the fund house therefore prefers ultra-short part of the curve.
The fund house, which manages 250 billion rupees ($2.8 billion) in debt assets, has been trimming duration across its schemes for the past one-and-a-half months, he said.

RATE HIKES LOOM
Bond traders are betting heavily on an RBI rate hike on Wednesday, with swaps implying almost a 100% chance of a 25-basis-point increase. 
That conviction runs ahead of the economist consensus, where 60% of respondents in a Reuters poll see the central bank raising rates for the first time since February 2023.
Markets are already pricing in 75-100 basis points of rate increases during the cycle, Gupta said.

LIQUIDITY DRAIN ADDS HEADWINDS
"The market is demanding a steep premium from the RBI to absorb the surplus liquidity," Gupta said. 
The RBI has used FX swaps, variable-rate reverse repos and open-market bond sales to drain excess liquidity created by deposits from non-resident Indians.
The effects of the operations have spilled into other markets. FX swaps have pushed up dollar-rupee forward premiums, raising hedging costs, while bond sales have driven yields higher.
The banking system's daily liquidity surplus stood at 4.37 trillion rupees.
Gupta expects the surplus to persist for three to six months before moving towards neutral.
     A temporary increase in the cash reserve ratio for about three months could be a more effective way to absorb liquidity if accompanied by clear communication that the move will be unwound, he said. 


 (Reporting by Khushi Malhotra; Editing by Nivedita Bhattacharjee)
 ((khushi.malhotra@thomsonreuters.com))