MUMBAI, June 11 (Reuters) –
Mutual funds are expected to increase purchases of short-term Indian corporate bonds in the coming weeks, according to fund managers, after inflows into corporate bond schemes hit a two-year high in May amid surplus liquidity.
Corporate bond funds recorded net inflows of 119.8 billion rupees ($1.40 billion) last month, more than triple of April’s total and the highest since March 2023, according to data from the Association of Mutual Funds in India (AMFI).
“Liquidity is in surplus so there could be some flows, but investments should shift in the up to three-year segment as yields on other segments are expected to rise more,” said Akhil Mittal, senior fixed income fund manager at Tata Asset Management.
He added that flows were focused in the three- to five-year papers in May. Last month, Indian companies had also
the bulk of their bond supply in the up to five-year segment.
While flows may moderate after the Reserve Bank of India (RBI) signalled an end to its rate easing cycle last week, fund managers say they still expect steady demand for short-term bonds.
“Corporate bond spreads were looking attractive in May as the yield curve began to steepen from being flat to inverted,” said Mahendra Kumar Jajoo, CIO – fixed income at Mirae Asset Investment Managers (India).
He expects flows in shorter-duration bonds, including one- to three-year debt, as he does not anticipate further rate cuts in the near term.
Yields on two- and three-year AAA-rated corporate bonds fell 25-28 basis points in May, while the five-year tenor eased 22 bps, according to LSEG data.
Longer duration government and corporate bond yields have risen by 10-12 bps since Friday, when the RBI cut rates by 50 bps and shifted its stance to “neutral”.
Still, yields on up to three-year corporate bonds remain around 10 bps below end-May levels.
“The corporate bond curve, especially in the up to three- year space, could still steepen from current levels. Shorter tenor bonds remain attractive,” said Anurag Mittal, head of fixed income at UTI Asset management.
($1 = 85.4320 Indian rupees)
(Reporting by Dharamraj Dhutia, additional reporting by Bharath Rajeswaran in Bengaluru; Editing by Sonia Cheema)