MFs miss opportunity to exit investments in inflation index bonds

MUMBAI: Mutual funds have missed an opportunity to exit investments in the loss making inflation index bonds as the Reserve Bank of India has on Thursday rejected all higher-than-expected bids received in the buy-back scheme for Rs 6,500 crore worth of such bonds.

“After examining the bids, it has been decided in consultation with government of India not to accept any offer,” RBI said in a release on Thursday. “The repurchase auction of was conducted today.”

Mutual fund houses including ICICI Prudential, Reliance, Deutsche, Kotak, SBI are believed to have invested in those bonds. They have also bid in the buyback scheme, dealers said.

Fund houses mostly quoted a discounted price in the range Rs 87-90 per bond compared with Rs 80-81 in the secondary market in December. A single bond’s face value is at Rs 100.

“It is a question of loss mitigation, no profit making. Authorities gave a good opportunity to investors, who have lost it out of excess greed,” said a dealer.
Last week, RBI had said the government would be repurchasing the unsuccessful inflation indexed bonds (IIBs) maturing in 2023 through a reverse auction.

In the auction, RBI received bids for Rs 6000 crore worth of bonds out of total kitty.

With no more fresh issuances, the WPI bond market is highly illiquid, having little investor interest. Since the RBI is not targeting WPI inflation, it will not cut interest rates based on that, said a fund manager who didn't want to be named.

Effectively, the yield on WPI-linked bonds will also not decline. Bond yields and prices move in opposite directions. In an illiquid market, investors are stuck with no exit routes through the secondary market.