Interest rates in India are at historic lows. At around 6%, the 10-year Government of India bond yield is close to a decade’s low point. However, with inflation rising and a large fiscal deficit to provide for, there are growing fears that the rate-cutting cycle may soon reverse.
A rate hike cycle inflicts losses on most types of debt funds. This is because bond prices drop when interest rates rise. Floating rate bonds are supposed to protect investors from such hikes because the interest they receive goes up with rising interest rates in the economy. However, floating rate funds may not deliver fully on this assumption, say fund managers.
