Indian Asset Managers Unwind Rate Hedges Amid Oil-Driven Volatility

Several prominent Indian asset management companies are scaling back their protective hedges against rising interest rates, signaling a belief that the market has overcompensated for inflationary pressures. This tactical shift suggests that institutional investors view current bond yields as having already absorbed the shock of rising energy costs. The move is primarily a response to the recent spike in global oil prices, which has led traders to bet on more aggressive rate hikes to combat inflation. However, fund managers now argue that these risks are already fully baked into current borrowing costs, making expensive hedges unnecessary. Bandhan AMC Ltd. and ICICI Prudential Asset Management Co. have specifically unwound their positions in overnight indexed swaps (OIS). These derivatives typically provide a payout when interest rates rise, serving as a primary tool for hedging bond portfolios against rate volatility. Additionally, Sundaram Asset Management Co. has exited its hedge positions, particularly those associated with relatively illiquid corporate bonds. By reducing these hedges, the funds are effectively betting that interest rates will not rise as sharply as the broader market currently anticipates.