Bandhan AMC Cuts Bond Duration as RBI Rate Hike Risks Mount

Bandhan Asset Management Company has reduced duration across several of its bond funds amid rising risks of interest rate hikes by the Reserve Bank of India. The strategic shift follows the latest Monetary Policy Committee minutes, which have prompted investors to focus on when tightening will begin rather than debating if it will occur at all.

Suyash Choudhary, chief investment officer of fixed income at Bandhan AMC, noted that markets are now actively reassessing both the timing and quantum of potential rate increases. Previously, the firm expected no more than 50 basis points of rate hikes, but the evolving policy narrative has made that baseline assessment significantly less certain.

To manage this mounting risk, the fund house has primarily cut its exposure to long-duration government bonds. This adjustment was executed while market yields remain within the trading range observed since late June, allowing the firm to reposition portfolios before any sharp adverse moves in interest rates.

Flattening Yield Curve Expectations

Choudhary warned that fading Foreign Currency Non-Resident bond buying and shifting policy expectations could drive a flatter government bond curve over the coming months. Yields at the shorter end of the curve are likely to rise relatively faster than those at the long end as markets price in a higher probability of monetary tightening.

Despite the overall reduction in duration risk, relative valuations of long-duration government bonds versus shorter-tenor securities still appear favourable. The rise in long-end yields may be slower than at the front end, keeping the long end attractive on a duration-adjusted basis for selective investors.

Navigating Domestic Complexities

The domestic investment landscape has been further complicated by what Choudhary describes as the “Impossible Trinity.” This macroeconomic dynamic has pressured local financial conditions and limited the effective transmission of RBI policy actions to broader market rates.

Fixed-income portfolios had been actively running duration earlier in the year due to global commodity and yield volatility. However, the holding period for such positions has become increasingly uncertain given the shifting balance of risks. Choudhary emphasized that current positioning remains fluid and will adapt to future changes in inflation, capital flows, and global economic conditions.