Indian mutual funds are preparing to extend their selloff of government bonds after selling approximately 4.5 billion dollars worth of securities since July 2026, as the Reserve Bank of India’s shift towards tighter monetary policy changes expectations for interest rates and bond market returns, according to a Reuters report published on October 12, 2026.

The RBI raised its policy repo rate by 25 basis points to 5.50% on October 7, marking its first rate hike in nearly four years. The central bank also shifted its monetary policy stance towards calibrated tightening amid rising inflation concerns, increasing expectations that borrowing costs could remain elevated or rise further.

Fund managers have responded by reducing exposure to longer maturity government bonds, which are particularly sensitive to changes in interest rates. Mutual funds recorded net sales of approximately ₹51 billion in government bonds over the three trading sessions following the rate hike, adding to sales of ₹378 billion during July to September.

Bond yields have risen significantly as investors reassess the interest rate outlook. The five year government bond yield crossed 7.05%, increasing by nearly 70 basis points over two months, while the 10 year yield approached 7.35%, its highest level in almost three years. Higher yields generally reduce the market prices of existing fixed rate bonds, potentially affecting the net asset values of debt mutual funds holding such securities.

Several factors are contributing to the selling pressure, including expectations of further RBI rate hikes, elevated global bond yields, uncertainty in energy markets and concerns about inflation. The RBI’s government bond sales have also affected market demand and supply. The central bank sold bonds worth approximately ₹1 trillion in September, recording its highest net sale for any financial year in more than a decade, according to the report.