In an exclusive interaction with businessline, Devang Shah, Head-Fixed Income, Axis Mutual Fund, discusses RBI’s policy rate action, demand supply dynamics in the G-sec market and the way forward for fixed income investors.
The RBI cut 125 basis points between February and December last year. Do you think that the current rate cycle has come to an end?
As you rightly summed up, RBI has taken a lot on monetary policy action in the last 12 months and they have been very supportive to the growth agenda. We also need to keep in mind that there has been more than ₹18 lakh crore of liquidity infusion in the last 12 months through various actions OMOs, CRR cuts, FX swaps etc. This is a big sum.
The Budget has been quite supportive for growth. They have continued with fiscal consolidation, but they’re focused on growth too. There is significant increase in spending on capital investment plus increase in expenditure towards major schemes. So, the RBI need not worry about giving any further growth impulse. The second good news in the last few days is the trade deal with the US. If tariffs continued at 50 per cent, the growth in H2 of 2026 could have been weaker.
So, with that context, we believe that growth can be in the 6.75 to 7 per cent band for FY27. As far as inflation goes, yes, there can be an uptick in inflation in the second half of the year, but not immediately. But at this point of time, when we look at the full year inflation, or even the H2 inflation, it doesn’t go above 4.75 per cent. And with that context, I think RBI can stay on a pause for most of this year.
If we see a bad monsoon or a significant uptick in inflation, then probably RBI might look at some bit of rate increase in the second half of this year. But I will assign a very low probability to it.
Yes, I think the rate cut cycle has come to an end, because there is no further impulse needed for growth and H2 inflation can be higher due to new inflation series, higher commodity prices, and so on.
What is your view on the gross market borrowing of ₹17.2 lakh crore in the Budget? Does the market have the capability to absorb the supply?
From the bond market perspective, we look at two or three aspects. The quality of the Budget, the fiscal deficit and the borrowings. The Budget numbers seem quite conservative, be it on tax revenue, on the nominal GDP, even, disinvestment. The fiscal deficit and the glide path to bring the debt to GDP number lower looks okay. The gross borrowing of ₹17.25 lakh crore seems to be slightly higher. Our estimates were closer to ₹16.5 to ₹16.75 lakh crore.
The inclusion of the Indian bonds in Bloomberg active global aggregator index can help bridge the demand supply gap somewhat as that can fetch $25 billion of flows. The flows could however be shifted to the second half of this year or next year.
We believe that with the ₹17.2 lakh crore of gross borrowing, there is a demand supply gap of close to ₹2 -2.5 lakh crore, even after assuming, ₹4-5 lakh crore of OMOs by the RBI. Unless the Bloomberg flows come in there can be some impact of this large borrowing on government bonds.
What is the range that the 10-year bond yield can move in the next year or so?
We see the 10-year yield in the 6.60-6.80 band from January to March 2026. But if there is no action, if RBI disappoints a bit on the OMOs or if they happen mostly in the second half of the year, then we might see yields inching up to reach 6.80-7 per cent, April onwards. So, I would say for the full year, the band can be between 6.75 to 7 for the most part.
What is your view on the global bond yields? Does the hardening of US yields affect domestic yields as well?
Any kind of larger global reversal in yields does have some bit of impact on Indian bond markets. But, they’re now not so massively correlated as they were before. We have time and again explained that the correlation is to a large extent broken between US bonds and Indian bonds.
In 2022, US treasuries were closer to 2 per cent. Today, they are at 4.25 per cent. At the same time, the Indian 10-year yield in 2022 was 7.5 per cent. Today it is at 6.75 per cent. So, despite all the rate hikes, despite all the noise and concerns on the US treasuries, our bond markets have actually rallied.
Global central bankers now would be on a pause because they have done a lot of rate easing over the last 12-18 months.
Hence, we believe the large part of the global rate cut cycle is behind us. A 25-50 bp rate cut by the US Fed this year is possible, but I would not attribute a significant yield movement due to this.
What is your advice for fixed income investors ? What kind of strategies fund managers are likely to pursue?
I think 2024 was the year for duration, when long bonds gave the highest returns; 2025 was a year of liquidity, which led to steepness in the curve, where we saw the short end of the curve massively outperforming long bonds. In 2026, RBI will be on a pause for the most part of the year. If they start getting worried about inflation, a reversal of the interest rate cycle is possible. So, it will be good to stick to the short end of the curve and buy 1-2-year AAA corporate bonds which are available at significantly higher yields.
For investors going for tactical bets, there’s a significant rise in spreads for State development loans due to higher supply. Retail investors can look at gilt funds that have a higher allocation to State government securities.
As far as fund strategy is concerned, investors should always focus on two aspects: investment horizon and risk-return analysis.
If an investor is looking for shorter term investment horizons (3-6 months), one should always target parking in solutions like money market strategies. In case of a medium-term investor looking to invest for up to two years, income plus arbitrage fund of funds is a very good category, which is a blend of debt fund and arbitrage fund in the ratio of 65:35. They are also taxed like equity funds, if you stay invested for two years.
(Devang Shah, Head of Fixed Income at Axis Mutual Fund, joined Axis AMC in 2012 as a Fund Manager. With over 20 years of industry experience, he manages fixed-income strategies, navigating bond markets with a focus on risk and yield optimisation)
