The Reserve Bank of India maintained the repo rate at 5.25% in its August MPC meeting, with the central bank looking through recent food and fuel inflation given benign core inflation trends. According to multiple experts, the MPC is expected to hike rates going ahead given their inflation projections of above 5% for the next three quarters. As reported by ETMarkets, several central banks worldwide, notably in Japan, Canada, and the euro zone, are signaling plans for sharper interest rate increases than the US, putting traditional bond safety under strain. The prevailing view is that the global inflation cycle has turned higher due to the ongoing war crisis and its impact on energy prices, putting upward pressure on the short end of the yield curve.
Multiple fixed-income experts recommend staggering investments in high-quality bonds over the next 3–4 months to benefit from cost averaging, as higher policy rates in coming months could provide opportunities to lock in slightly higher yields. Puneet Pal, Head – Fixed Income at PGIM India Mutual Fund, suggests a different approach with 40% in ultra-short-term funds, 20% in money market funds, 20% in liquid funds and 20% in short-duration funds for a ₹1 crore fixed-income portfolio with a three-year horizon. For a ₹1 crore fixed-income portfolio with a three-year horizon, Dhawal Dalal, President & CIO – Fixed Income at Edelweiss Mutual Fund, suggests allocating one-third to 3-year Target Maturity Funds, one-third to Ultra Short Term Funds, and the remaining one-third equally between Corporate Bond Funds and Credit Funds. As reported by ETMarkets, experts favor 2–3-year AAA-rated bonds and money-market instruments for their attractive risk-reward profile, while remaining underweight on government bonds given current demand-supply dynamics.
The prevailing view is that the global inflation cycle has turned higher due to the ongoing war crisis and its impact on energy prices, putting upward pressure on the short end of the yield curve. According to Dalal's analysis reported by ETMarkets, while the long end of the yield curve is behaving differently across various regions, investors are grappling with challenges from rising inflation and growing geopolitical uncertainty. Pal emphasizes that investors should avoid high duration and wait for potentially higher yield levels, given the ongoing geopolitical uncertainty and elevated yields across the developed market space. He notes that chasing higher yields without assessing underlying credit risks could prove costly, making professional fund management through diversified strategies more prudent.
Multiple experts advocate for investing through funds rather than individual bonds, citing access to professional expertise, diversification, liquidity, and greater safety for investments. Pal explains that investing in a bond fund makes sense rather than buying individual bonds as the investor has the advantage of a diversified portfolio with high liquidity and a professional fund management team. As reported by ETMarkets, investors are increasingly placing greater emphasis on tax-adjusted returns when making investment decisions, leading to growing interest in fund categories that offer more attractive tax-adjusted returns. The tax efficiency is better in debt mutual funds as gains are taxed only at redemption, while in FDs, tax is levied on accrual and in direct bond investments, tax needs to be paid on regular coupon payouts apart from any capital gains at the time of sale.
Recent market developments show strong institutional demand with ICICI Bank raising $750 million through five-year dollar bonds at 105 basis points over US Treasuries, marking its second dollar issuance in a month. Strong institutional demand helped tighten pricing, while Kotak Mahindra Bank and Yes Bank prepare international bond issues. These developments highlight the continued appetite for debt instruments despite current market uncertainties, with investors seeking diversified exposure across different credit profiles and duration strategies.
