RBI rate hike risk rises: Bandhan AMC’s Suyash Choudhary dials back duration in bond portfolios

Bandhan AMC has pared back duration across several of its fixed-income funds as the latest RBI Monetary Policy Committee (MPC) minutes have increased the risk of future rate hikes and altered the market’s earlier assumption of a benign monetary policy stance.

Suyash Choudhary, CIO – Fixed Income at Bandhan AMC, said the minutes of the RBI’s latest policy meeting have made the market increasingly focus on when rate hikes could begin rather than if they will happen.

According to Choudhary, the policy day had already suggested that both the possibility and timing of future rate hikes were being considered. However, the minutes appear to have tilted the balance more decisively towards the timing of hikes, while reducing the emphasis on whether a hike would be required at all.


“Once the market gets to the point of actively considering rate hikes, as it has, then both the quantum and timing start getting continually reassessed,” Choudhary said.

50 bps rate hike expectation now less certain

Choudhary said Bandhan AMC's expectation so far had been for not more than 50 basis points of rate hikes. However, he acknowledged that the evolving policy narrative has made that assessment less certain.

“We are no longer sure whether 50 bps cannot eventually be 75 bps, or whether October policy should not be considered ‘live’ for the first hike,” he said.

The change in expectations marks a significant shift from the earlier environment, where the RBI's focus on core inflation and the absence of signs of broad-based inflation had provided an important anchor for the bond market.

The RBI had also scaled down its core inflation forecast, reinforcing expectations that the MPC would not be in a hurry to tighten monetary policy. Alongside this, FCNR flows and the associated demand for bonds had provided support to the market.

Why Bandhan AMC is cutting duration

Choudhary said fixed-income portfolios had been actively running duration for much of the year, primarily because of an uncertain global environment characterised by commodity and global yield volatility, as well as a relatively bearish domestic backdrop.

The domestic construct has also been complicated by what Choudhary calls the “Impossible Trinity”, which has been pressuring local financial conditions and limiting the transmission of RBI policy to market rates.

From time to time, the fund house had added duration based on near-term changes in the balance of risks, expectations that potentially constructive medium-term factors could emerge and cheaper market valuations.

However, the holding period or “shelf life” of such positions has been more uncertain than usual because of the broader market environment.

Against this backdrop, Bandhan AMC has again dialled back duration across a number of its funds, subject to individual fund mandates and existing positioning.

The primary way of reducing duration has been through cutting exposure to long-duration government bonds.

Bond curve could flatten as FCNR buying fades

Interestingly, Choudhary said relative valuations of long-duration government bonds versus shorter-tenor government securities still appear favourable.

However, the fund house expects the government bond curve to relatively flatten over the next few months.

Two factors are expected to drive this view: tapering of FCNR-related bond buying and growing market positioning for RBI rate hikes.

This could result in yields at the shorter end of the curve rising relatively faster than those at the long end as markets price in a higher likelihood of monetary tightening.

From a relative-value perspective, this could still make the long end attractive on a duration-adjusted basis because the rise in long-end yields may be slower than at the front end.

Overall duration risk takes priority

Despite the relative attractiveness of the long end, Choudhary said investors also need to manage their overall duration risk.

That consideration has prompted the fund house to reduce long-duration government bond positions on a standalone basis.

The timing is also important because market yields remain within the trading range seen since late June, providing an opportunity to reduce exposure without having to make the move after a sharp adverse move in yields.

For bond investors, the shift signals a more cautious stance after a period in which falling or stable rate expectations had supported duration strategies.

Choudhary stressed that the latest positioning reflects Bandhan AMC's assessment at the current point in time and could change depending on how inflation, global yields, commodity prices, capital flows and RBI policy expectations evolve.

The key takeaway for debt investors is that the RBI rate cycle is no longer being viewed simply through the lens of whether hikes are possible; the market is increasingly debating their timing and magnitude — making duration management more important for bond portfolios.

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