Debt Fund Managers Retain Duration Strategy Ahead of August RBI MPC Review

Debt fund managers are maintaining their duration positioning ahead of the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) meeting scheduled from August 3 to August 5, expecting the central bank to leave key policy rates unchanged. Market participants are closely watching the RBI’s assessment of inflation, liquidity conditions and overseas capital flows for cues on the policy outlook.

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The consensus among fund houses is that easing inflationary pressures, favourable monsoon progress and the liquidity measures announced in the previous policy review have reduced the urgency for any immediate policy adjustment. While expectations on the policy decision remain broadly aligned, investment strategies differ across asset managers.

Inflation and Growth Outlook Remain in Focus

Speaking to Moneycontrol, Basant Bafna, Head of Fixed Income at Mirae Asset Mutual Fund, said the RBI’s attention has shifted towards supporting economic growth as inflation remains within its 4-6% target band despite external risks such as crude oil price movements and weather-related uncertainties.

Bafna said the fund house does not expect a rate hike and anticipates that the RBI could lower its FY27 inflation forecast by around 15 basis points while retaining its growth projection and policy stance.

Devang Shah, Head of Fixed Income at Axis Mutual Fund, also expects no change in interest rates. Speaking to Moneycontrol, he said the central bank is likely to maintain a neutral policy tone and wait for additional domestic and global data before considering any policy action. Shah added that the probability of a policy stance change during the August meeting remains below 25%.

Tejas Soman, Head of Fixed Income at PPFAS Mutual Fund, told Moneycontrol that he expects the RBI to maintain the existing policy rate, stance and macroeconomic projections, preferring to assess evolving economic conditions before making any changes.

Liquidity Measures Expected to Continue

Fund managers believe the RBI will continue managing surplus liquidity through existing tools instead of announcing fresh measures. Bafna expects excess liquidity to be absorbed through Variable Rate Reverse Repo (VRRR) operations rather than structural steps such as a Cash Reserve Ratio (CRR) increase or open market bond sales.

Shah expects liquidity to remain comfortable through December, supported by foreign currency inflows. Soman said the central bank is likely to first evaluate the impact of its Foreign Currency Non-Resident (FCNR) deposit and External Commercial Borrowing (ECB) measures before deciding on any further action.

Portfolio Strategies Vary Across Fund Houses

While the overall preference remains tilted towards longer-duration debt, portfolio positioning differs. Mirae Asset Mutual Fund has increased duration across several debt schemes, with a preference for three-year corporate bonds and selective exposure to longer-tenor government securities.

Axis Mutual Fund has raised its allocation to corporate bonds while gradually trimming portfolio duration. Depending on fund mandates, its gilt funds now carry durations of around eight to nine years, compared with more than 10 years earlier, while dynamic bond funds have reduced duration to about 4.5-5 years.

PPFAS Mutual Fund continues to favour intermediate-tenor securities, particularly five-to-seven-year bonds and AAA-rated corporate bonds with maturities of three to five years.

Foreign Inflows Seen Supporting Liquidity

Fund managers also expect FCNR and ECB-related inflows to support liquidity and the rupee during the financial year. However, they said the currency’s movement will depend on the RBI’s intervention in the foreign exchange market and how inflows are managed. For the August policy review, the focus is expected to remain on the RBI’s commentary on inflation, liquidity and external developments rather than any immediate policy action.