How this Rs 77,600 crore mutual fund made a killing on RBI's surprise Operation Twist

An asset manager’s decision to load up on long India sovereign bonds, when the government’s record debt sales was scaring others, is turning prescient.

DSP Investment Managers Pvt., which manages about 776 billion rupees ($10.8 billion), had been betting since August that longer yields would decline. That strategy paid off when the Reserve Bank of India surprised investors last month by embracing a Federal Reserve-style Operation Twist, where it buys long-end debt while selling short-end bonds.

“Recent measures by RBI largely complement our view of demand-supply being addressed to bring down the yields,” Saurabh Bhatia, head of fixed income at DSP, said in an interview in Mumbai.


The RBI resorted to the unprecedented bond auctions after a series of rate cuts failed to stop a steepening in the yield curve. Bhatia was cued to the possibility that the central bank would need to do more as spreads between policy rates and other borrowing costs remained wide.

The 10-year bond yield has dropped more than 30 basis points from mid-December as the central bank conducted two operations. The RBI will buy another 100 billion rupees of bonds maturing between 2024 and 2029 on Jan. 6, while selling a similar amount of shorter-term debt, it said on Thursday.

The DSP Government Securities Fund returned 12.8 per cent in the past year, among the top performers in the category, according to data compiled by Value Research Ltd.

Desperate Banks

Bhatia’s preference for longer bonds was also driven by the expectation that banks, flushed with liquidity, would have to buy more bonds to park their money given lackluster demand for loans.


The proportion of deposits that lenders keep in government securities rose to 28.6 per cent as of December — above the regulatory requirement of 18.5 per cent –, as loan growth slowed, data provided by RBI show.

Meanwhile, DSP’s decision to overlook rate-cuts as a driver for yields was vindicated as the RBI held the policy rate steady since October. Rising inflation has pushed back easing expectations to at least April.

The fiscal worries in the Indian bond market that made DSP’s positioning stand out still looms large.

By all indications, the government is set to miss its fiscal deficit target of 3.3 per cent of gross domestic product for the year ending March 31. Bhatia flags this risk but sees limited impact from a slight widening of the deficit gap.

The DSP Government Securities Fund has nearly 90 per cent of its investments in bonds maturing between 2029 and 2033 while DSP Strategic Bond Fund has about 82 per cent of its debt in similar maturity papers as of Nov. 30, data provided by the company show.


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