Expectations of a rate cut were high in the runup to the August money policy review of the Reserve Bank of India (RBI) in view of benign inflation and low growth. Interestingly, while dynamic bond funds were more cautious ahead of the policy outcome, they still continued to bet on yield rallies from rate cuts.
In the two-day review over August 1 and 2, RBI lowered the key policy rate (repo) by 25 basis points to 6 per cent.
Rising gilt exposure
After RBI threw up a surprise in February by changing its stance on interest rates, gilt yields rose sharply, lowering returns on dynamic bond funds. Gilts, or government securities, are the instruments that react the most to changes in interest rates and direction. About 80 per cent of dynamic bond funds reduced their gilt exposure in February compared with that in January, and carried this activity into March as well.
