Fixed income investors should adjust strategies now that the Reserve Bank of India (RBI) appears to have concluded its rate-cut cycle, while liquidity remains ample. Devang Shah, Head of Fixed Income at Axis Mutual Fund, highlights that gains from long-duration investments have faded, positioning short-end yields above 7% as highly appealing.
With 1–2 year AAA corporate bond yields exceeding 7% and minimal risk of rate hikes, Shah advocates accrual-focused approaches in short- to medium-term segments for superior risk-reward profiles over bold long-duration plays. He also outlines views on 10-year government securities (G-Secs), prospective inflows from Bloomberg index inclusion, and optimal debt positioning for retail investors in 2026.
RBI Policy Matches Market Views
The RBI’s latest policy aligns closely with expectations, Shah notes. Prior actions in December and January preempted needs for further rate reductions or liquidity boosts. While some anticipated extra support, its omission triggered only a slight 8–10 basis point yield increase.
India Enters Robust Growth Era
India shifts to a stronger macroeconomic landscape, driven by synchronized efforts on capital expenditure and consumption over recent years. Coordinated GST reforms, RBI policies, credit growth, liquidity measures, and rate cuts have countered tariff-related uncertainties. A recent trade agreement bolsters prospects, with FY27 growth projected near 7%.
Inflation Shapes Future Rate Path
RBI monitors inflation, growth, and external balances closely. Supported by the trade deal and rupee stability, inflation emerges as the pivotal factor. Current high-frequency data shows no sharp rise, barring major commodity shocks. Shah expects the central bank to hold rates steady through much of 2026.
Bloomberg Inclusion Boost for Bonds
Inclusion in the Bloomberg Global Aggregate Index could draw $20–25 billion in foreign inflows, potentially lowering government bond yields by 10–15 basis points, Shah estimates.
Preferred Strategy: Short-End Focus
With most rate cuts complete and RBI managing liquidity effectively, short-end yields have climbed. Shah favors these assets yielding over 7%, prioritizing accrual strategies amid low hike risks.
Tactical Opportunities in Long Bonds
Investors should stick to short-end positions currently. A tactical shift to longer bonds may arise if 10-year G-Secs approach 7% or long bonds hit 7.60–7.70%, especially ahead of heavy government borrowing from April.
Guidance for Retail Investors
Retail portfolios suit short- to medium-duration funds in this no-cut, liquid environment, avoiding high-duration risks.
Bond Preferences and Supply Impact
Shah prefers 2–3 year corporate bonds and 8–12 year State Development Loans (SDLs), where ample supply has widened spreads for compelling medium-term value. Despite RBI’s liquidity support and open market operations, elevated borrowing pressures the 10-year G-Sec to trade at 6.60–6.80% through March 2026. Stronger growth and rising inflation could then push it to 6.80–7%.
