With a lot of the RBI’s rate-cut cycle already priced in, the scope for additional capital good points from long-duration methods seems restricted.
Shriram Ramanathan, CIO – Mounted Revenue at HSBC Mutual Fund, believes 2026 is prone to be a yr of consolidation somewhat than sharp yield compression.
On this atmosphere, he argues that buyers ought to transfer away from aggressive period bets and as a substitute deal with producing steady returns by engaging yields, selective credit score publicity, and tactical alternatives throughout segments resembling cash markets, SDLs, and short-term company bonds. Edited Excerpts –
Kshitij Anand: Effectively, the benchmark 10-year yield ended at 6.5% in 2025. What I needed to grasp is that it marks the third consecutive yr of decline. How ought to buyers interpret the restricted draw back in yields?
Shriram Ramanathan: Clearly, as you stated, we’ve got seen the RBI reduce charges by nearly 125 foundation factors on this calendar yr. Nonetheless, authorities bond yields have come down by a really restricted 15 to 17 foundation factors. It’s a must to keep in mind that markets are all the time forward-looking.
If you happen to take a look at what occurred in calendar yr 2024, the 10-year G-Sec was at round 7.25% firstly of the yr and ended December 2024 at about 6.75%. So, in anticipation of charge cuts, markets had already rallied, with rates of interest on authorities bonds decrease by round 50 foundation factors.
India’s prime debt fund managers are adopting a cautious stance for the yr forward, prioritizing stability and accrual over long-term bets. With the central financial institution nearing the tip of its rate-cut cycle and investor demand subdued, methods are shifting in the direction of increased money holdings, state bonds, and shorter company debt for higher alternatives.
Subsequently, this yr as effectively, till about June, we noticed yields fall additional—from 6.75% to nearly 6.25%, which was one other 50-basis-point rally. So, in whole, yields moved almost 100 foundation factors over one-and-a-half years.
Nonetheless, as we close to the tip of a rate-cut cycle, markets begin sensing that. From June onwards, we’ve got seen a retracement in yields. Rates of interest moved up from the low of 6.25% in June to round 6.50–6.60%, as you talked about. That is typical. If you happen to return in time and take a look at the 4 rate-cutting cycles during the last 20 years, effectively earlier than the ultimate charge reduce, markets begin anticipating when the following hike would possibly occur, and that begins to affect yields.
That stated, this time is considerably totally different from earlier cycles. Even after these charge cuts, inflation stays low, oil costs are benign, and world inflationary pressures will not be very vital. Domestically as effectively, with actions taken by the federal government, forward-looking inflation seems moderately managed. Not like earlier cycles, I don’t see a pointy pullback or fears of a pointy rise in charges. As a substitute, we’re prone to see consolidation and stabilisation round present ranges.
Kshitij Anand: In an atmosphere the place charge cuts are largely behind us and the RBI is in a impartial stance, which segments of the fixed-income market—sovereign, company, or credit score—do you discover most engaging?
Shriram Ramanathan: The place to begin is that we’re nearer to the tip of a rate-cutting cycle, and that ought to affect how a lot danger buyers take. It is a section the place interest-rate danger, measured when it comes to portfolio period, ought to typically be low to average.
As we’re on the finish of the rate-cut cycle, rates of interest could also be extra unstable, and over the following two years, the gradual development is prone to be barely increased. There could also be tactical alternatives in sure segments, however structurally and essentially, portfolios ought to have decrease period and comparatively decrease danger, whereas benefiting from choose dislocations.
One such alternative is state growth loans (SDLs). There was appreciable deal with them as a result of huge provide. Within the January–March quarter, we’re prone to see almost ₹5 lakh crore of SDL issuances. This has led to spreads over authorities securities widening. We anticipate this development to proceed over the following month or so.
Presently, spreads on the 10-year SDL are near 80 foundation factors. In the event that they transfer nearer to 100 foundation factors, we imagine these ranges are fairly engaging, providing potential for unfold compression over a three- to six-month horizon. These are, after all, riskier trades, and buyers ought to be conscious of that. However for these with the required danger urge for food, such alternatives do exist.
One other section is two- to three-year company bonds. Two years in the past, company bond spreads had been as little as 25 foundation factors over authorities bonds. As we speak, they’ve widened to just about 100 foundation factors. This implies buyers can earn near 100 foundation factors over authorities securities in AAA PSU bonds within the two- to three-year section. Length danger stays low, whereas yields are engaging.
These segments are interesting for buyers who wish to preserve danger low however nonetheless earn higher returns in comparison with liquid or in a single day funds. That is the place we anticipate investor curiosity and flows to regularly transfer.
Kshitij Anand: And there may be one other factor which grabbed the headlines within the yr 25 was the rupee. In In actual fact, it weakened sharply in 2025, shifting nearer to 90. What I needed to grasp is that the rupee has additionally been exerting strain on bond sentiment. How vital will foreign money stability be in shaping international and home buyers’ curiosity within the Indian debt market in 2026? I ask this as a result of now that we’ve got touched 90, there are rising expectations and debates round whether or not the rupee may transfer in the direction of 100.
Shriram Ramanathan: Clearly, ever because the tariff-related developments started in July, the rupee has been a key focus for numerous markets, particularly fixed-income markets, as a result of foreign money and stuck earnings are intently linked in some ways. That stated, we should differentiate between what is going on with the rupee now and what occurred in 2013–14. That interval noticed real stress in India’s macroeconomic parameters, and the rupee mirrored that fragility.
As we speak, the scenario is considerably the alternative. Our underlying macroeconomic energy is arguably at its greatest. Progress is near 7–7.5%, inflation has been benign for a very long time and is clearly beneath 4%, and total financial indicators stay wholesome. Whereas there may be all the time room for enchancment, India’s macroeconomic scorecard stays pretty constructive.
Regardless of this, the rupee has reacted in a selected manner, largely on account of tariff-related developments. To some extent, this has additionally acted as a coverage lever utilized by policymakers to answer and handle the challenges arising from tariff bulletins. In that sense, it’s a response to the scenario and never essentially a detrimental sign. It’s one thing markets have to get used to.
Importantly, since this isn’t an indication of macroeconomic weak point, as soon as the uncertainty clears—every time that occurs—the rupee may see a reversal or appreciation. That’s usually how catch-up strikes pushed by valuation play out. For now, given the uncertainty, it’s cheap to imagine a gradual depreciation development, and buyers needn’t fear excessively.
So far as fixed-income markets are involved, whereas the rupee has had some impression, it has not been very vital. The results have largely been non permanent, although it’s one thing we’re monitoring intently.
One other vital issue for the rupee is the potential world bond index inclusion for India. Whereas the negatives are well-known, it is a significant constructive that would materialise as early as the approaching quarter. If it does, it may result in inflows of round $15-20 billion into Indian bond markets over the course of FY27. Provided that the rupee is pretty undervalued, any constructive information on this entrance may assist stabilise and even reverse the present development.
Kshitij Anand: In actual fact, as a result of the rupee has depreciated, one other issue that has helped the Indian economic system is decrease crude oil costs, which haven’t spiked in latest instances. This has supported the present account deficit and prevented it from worsening. In opposition to the backdrop of commerce tariff wars, can world developments resembling US Fed coverage, commerce negotiations, or a possible India–US deal meaningfully have an effect on Indian yields and capital flows in 2026?
Shriram Ramanathan: Surely, world developments—particularly these associated to tariffs—will likely be vital. Nonetheless, the bar for such information to be materially constructive is sort of excessive. For it to be a real macroeconomic recreation changer for India, we would wish a commerce deal that locations us on the decrease finish of the tariff spectrum globally, not only a partial rollback of penalties.
In sensible phrases, this may require efficient tariffs of 20% or decrease, which appears considerably unlikely. What’s extra sensible is a few easing of strain, maybe bringing tariffs down from 50% to round 25–30%. Whereas that may supply aid to markets, it might nonetheless depart India at a relative drawback and wouldn’t essentially alter the nation’s macroeconomic outlook.
That stated, any easing can be a aid, significantly for the rupee, which has borne a lot of the adjustment burden. As and when the strain eases, some retracement or restoration within the rupee is probably going.
For fixed-income markets, nevertheless, the impression of tariffs is prone to stay restricted. The antagonistic impression on development has been minimal, and since there was no vital development slowdown, the potential upside from tariff aid can also be restricted. In consequence, the impact on fixed-income markets is comparatively muted.
Concerning Fed coverage, that continues to be a key world driver. US Treasury markets have been comparatively steady, and the speed cuts signalled by the Fed are largely priced in. The important thing dangers lie in potential surprises—whether or not associated to the scale of worldwide debt issuance or sudden strikes in inflation, both increased or decrease.
Given that the majority rising markets have already used a lot of their financial coverage ammunition over the previous yr, additional easing would require the Fed to maneuver past what’s presently priced in. That’s not our base case. That is additionally why we imagine India is nearing the tip of the highway in relation to coverage charge cuts.
Kshitij Anand: How ought to portfolio managers place period and credit score publicity, given the anticipated heavy issuance by central and state governments within the coming yr—some extent you’ve got already highlighted earlier in our dialog?
Shriram Ramanathan: As I discussed earlier, it is a time to be a bit extra prudent and cautious with period throughout portfolios, and the identical applies to buyers as effectively. Broadly talking, during the last one to one-and-a-half years, we’ve got typically maintained a better period bias—we had been most likely chubby in comparison with friends and benchmarks. Now, I believe it’s time to transfer nearer to impartial and even regularly go underweight on period positioning inside every class. That’s the overarching issue.
Inside this framework, nevertheless, tactical alternatives will proceed to emerge. To call just a few, throughout January, February, and March, liquidity usually tightens, resulting in increased cash market charges, significantly financial institution certificates of deposit (CD) charges. We’re already seeing this occur. Many instances, these strikes reverse shortly as we enter April. This creates a chance in six-month to one-year financial institution CDs, which cash market funds usually put money into. From a near-term perspective, this affords a superb alternative to seize incremental returns.
Equally, as talked about earlier, state growth loans (SDLs) current one other tactical alternative. It is a dislocated market the place spreads are broad and will widen additional, creating scope to learn from a possible reversal. These tactical concepts will be overlaid on prime of the general cautious stance on period.
Past this, buyers want to stay conscious of the evolving atmosphere, as alternatives can open up unexpectedly. However as issues stand, being close to the tip of the rate-cut cycle, staying cautious on period, and selectively utilizing tactical alternatives in SDLs and cash market devices ought to be the broad method for the approaching yr.
Kshitij Anand: My subsequent query is about errors buyers might have made in 2024–25. How ought to buyers method 2026 in a different way, and what ought to they keep away from this yr?
Shriram Ramanathan: Broadly talking, each 2024 and 2025 have been moderately nice years for fixed-income buyers, as yields throughout most segments have declined. If something, buyers might not have participated as aggressively as they might have, largely as a result of different asset lessons carried out effectively throughout this era. Total, the final two years have been good for mounted earnings.
Wanting forward, this yr is extra prone to be a yr of consolidation. We don’t anticipate vital capital good points, which implies the main target ought to shift in the direction of portfolio yields. Incorporating a measured quantity of credit score publicity is smart, making certain buyers earn sufficient returns with out taking extreme interest-rate danger or volatility.
Low-duration funds, cash market funds, and short-duration funds—being much less delicate to interest-rate actions—are areas I might deal with. The concept is to make sure portfolio yields stay engaging whereas selectively including credit score publicity in a managed method. The credit score atmosphere continues to be very beneficial—arguably higher than it has been in a very long time. Financial institution stability sheets and company stability sheets are in sturdy form, which creates alternatives to boost yields by selective publicity to AA-rated devices. That, broadly, can be the playbook.
Kshitij Anand: If yields stay anchored round present ranges, what ought to be the rule of thumb for fixed-income buyers coming into 2026?
Shriram Ramanathan: Broadly, the rule of thumb is that yields are prone to inch barely increased from present ranges. Over a one- to two-year horizon, charges are most likely going to be considerably increased than the place they’re right now. The secret’s to keep away from getting caught on the unsuitable aspect of rising charges and struggling pointless capital losses.
That is very totally different from the method during the last two years, which was centered on capturing capital good points. Now, the emphasis ought to be on being cautious and measured. Dislocations will proceed to look, and buyers who’ve the power ought to look to selectively take part in alternatives resembling SDLs.
Total, the primary rule of thumb is to play it secure—deal with credit-oriented and accrual methods somewhat than taking aggressive period or interest-rate-sensitive positions.
