Indian Debt Funds Reduce Interest-Rate Hedges Amid Oil-Driven Market Pricing

Some Indian debt fund managers are reducing interest-rate hedges on their bond holdings, stating that financial markets have already priced in substantial borrowing cost increases driven by a surge in oil prices. ICICI Prudential Asset Management Co.

is among those that have unwound overnight indexed swap positions, which are interest-rate derivatives that benefit from rising rates in the current environment.

The two-year swap rate remains near 6%, about 40 basis points above levels before the Iran conflict, indicating that markets continue to anticipate higher-for-longer interest rates. Interest-rate swaps surged following the Iran war, with up to 125 basis points of rate hikes priced in at the peak.

Even after recent easing, 50 basis points of potential hikes remain priced in. Exiting these overnight indexed swap positions exposes funds to greater interest-rate movements.

The Reserve Bank of India kept rates unchanged in its April policy meeting but adopted a cautious tone, highlighting risks to inflation and growth from the ongoing Middle East conflict. Most economists expect the Reserve Bank of India to maintain current rates for an extended period, according to a Bloomberg survey.

“At the current level of OIS, it doesn’t make sense to continue with those positions." — Chief investment officer for fixed income at ICICI Prudential Asset Management Co. Borrowing costs in India are influenced by global factors such as oil prices, which can drive inflationary pressures and shape monetary policy. The shift may signal stabilizing expectations in the Indian bond market, with stakeholders likely to track oil price trends and their impact on rates moving forward. The report did not detail the exact extent of hedge reductions or identify all involved fund managers.”