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Despite optimism from the recent India–U.S. trade deal, Indian mutual funds are expected to continue selling government bonds. In January 2026 alone, funds offloaded ₹290 billion ($3.2 billion) worth of securities—the highest monthly sale on record—driven by supply overhang and expectations that the RBI’s rate-cutting cycle is nearing its end.
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Indian mutual funds, the seventh-largest holders of government bonds, are maintaining their selling streak despite positive sentiment from the India–U.S. trade agreement announced earlier this week. Managers cite demand–supply imbalances and cautious monetary outlook as key drivers of continued sales.
Notable Updates
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Record sales: Net bond sales of ₹290 billion ($3.2 billion) in January 2026—the highest ever in a single month.
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Additional sales: ₹53 billion worth of bonds sold on February 2, 2026.
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Holdings impact: Over 10% of total mutual fund bond holdings (₹2.81 trillion) liquidated last month.
Major Takeaways
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Despite tariff cuts to 18% from 50% under the new trade deal, debt investors remain cautious.
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The absence of a government bond buyback program has intensified supply pressures.
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Fund managers anticipate limited upside until the RBI signals further monetary easing.
Important Points
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Bond yields dipped briefly after the trade deal announcement but remain elevated due to higher borrowing plans.
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Analysts suggest continued sales could pressure yields, impacting borrowing costs for the government.
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Mutual funds’ strategy reflects a short-term defensive stance amid uncertain global and domestic conditions.
Sources: Reuters, The Economic Times, Business Standard, ICRA Analytics
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