What should be your strategy in debt funds now?

The 10-year government bond yield, which for several months had been hovering below the 6% mark, suddenly shot up to 6.20%. Market experts say that the declining interest-rate cycle is behind us. Interest rates are likely to climb up in the coming days, albeit at a gradual pace. Clearly, the investment strategy that worked in debt funds in the past will not work in the future.

- Sudipta Mitu

There has been upward pressure on interest rates since the Budget, which held several surprises for the bond market. Most bond market participants had thought that the bulk of the government’s borrowing for the current financial year was over. However, in the Budget, the Finance Minister announced that the government would borrow another Rs. 80,000 crore this year. The government also plans to borrow Rs. 12.06 trillion in FY22.

Moreover, the government seems to have now shed its earlier reluctance to not run a very large fiscal deficit to fight the economic slowdown. Under the FRBM Act, the government should bring down its fiscal deficit to 3%. In the Budget, the government said that the fiscal deficit would come down to 4.5% by FY 26. All of this means that the government will continue to borrow heavily and will run a large fiscal deficit.