New Delhi, May 6 -- Just a few weeks ago, the case for gilt funds, which hold government bonds with long tenures, seemed compelling.

A sharp rise in government bond yields had made valuations attractive, market sentiment had turned very pessimistic, and several fund managers argued that much of the concern around elevated borrowing and supply pressures was already priced in.

Government bond yields rose amid inflation fears stoked by the West Asia war. A rise in yield means a drop in prices, making gilt funds attractive. The market sentiment further boosted the case for gilts, with many believing that most of the concerns around elevated borrowing and supply pressures were already priced in.

Banks, flush with liquidity after the Reserve...