MUMBAI, Jan 27 (Reuters) - India's Axis Mutual Fund plans to run a carry-heavy debt strategy in 2026, focusing on one- to three-year corporate bonds while taking judicious exposure to longer maturity federal and state debt, the asset manger's head of fixed income said in an interview last Friday.
The strategy reflects expectations that the Reserve Bank of India is done with rate cuts, limiting the scope for price appreciation in bonds, pushing fund managers to prioritise income from higher-yielding shorter-dated debt.
"In an environment where we do not expect the RBI to cut rates and (for) liquidity infusion to continue, we believe that the theme this year is accrual or carry for building investment portfolios," said Devang Shah, head of fixed income at Axis Mutual Fund.
A carry strategy involves buying higher-yielding bonds and holding them to earn interest income, with the aim of making steady returns while limiting exposure to price swings.
The fund manager, who overlooks debt worth 1.2 trillion rupees ($13.09 billion,) said around 75% of the portfolio could be invested in one-three year corporate bonds, with the remaining 25% in a combination of longer duration state and central government debt in what's known as a "barbell" approach.
"We may selectively add tactical duration through long bonds and state debt," Shah added.
Looking ahead to India's federal budget, that will be presented on Sunday, Shah said he expects fiscal consolidation to take a backseat, predicting a fiscal deficit of about 4.3%-4.4%, compared to 4.4% that was targeted for the current year, and gross borrowing of roughly 16.5-17 trillion rupees for the next financial year.
He added that the "best" phase for bonds may be behind, with inflation likely having passed its lowest point, while banking system liquidity appears to have peaked. Along with his expectation for the pace of fiscal consolidation to slow, these factors together cap the potential for a decline in bond yields.
($1 = 91.6575 Indian rupees)
(Reporting by Dharamraj Dhutia and Khushi Malhotra; Editing by Ronojoy Mazumdar)
By Dharamraj Dhutia and Khushi Malhotra
