Bandhan AMC has reduced duration across several of its bond funds as the risk of a Reserve Bank of India (RBI) rate hike has increased following the release of the latest Monetary Policy Committee (MPC) minutes. Shortening duration is a standard defensive move for bond fund managers, since longer-duration bonds are more sensitive to interest rate changes and lose more value when rates rise.

Suyash Choudhary, Chief Investment Officer at Bandhan AMC, said markets are increasingly debating the timing and magnitude of potential rate hikes, and that fading FCNR (Foreign Currency Non-Resident) flows combined with changing policy expectations could drive a flatter bond yield curve. FCNR deposits allow non-resident Indians to hold foreign-currency deposits with Indian banks; large inflows of such deposits in earlier periods had supported demand for government securities, and as those flows taper, that support can weaken.

The MPC minutes, which detail individual committee members' reasoning on the policy stance, have shifted market focus toward whether the RBI's next move could be a hike rather than a cut, prompting asset managers to reassess interest rate risk in their portfolios.

The key points of the asset manager's positioning are:

• 50 bps rate hike expectation now less certain
• Why Bandhan AMC is cutting duration
• Bond curve could flatten as FCNR buying fades
• Overall duration risk takes priority

Source: Economic Times Markets