With the
RBI signalling a pause after delivering a cumulative 125 bps rate cut and maintaining a status quo stance in its latest policy, the easy money phase now appears to be behind us.
Yet, even as further rate cuts look unlikely, elevated bond yields and widened term spreads are creating selective tactical opportunities—particularly at the longer end of the curve.
Speaking to Kshitij Anand of ETMarkets, Vikas Garg, Head – Fixed Income at Invesco Mutual Fund, explains why real yields remain compelling despite record borrowing, how supply dynamics are shaping the yield curve, and what signals investors should watch for before taking exposure to long-duration funds.
Unrated debt on the rise as investors seek higher yields
Unrated and lesser-known issuers are increasingly tapping the debt capital market, raising ₹1.5 lakh crore in FY26, driven by investor appetite for higher yields. These issuers prefer unrated structures to bypass procedural delays and regulatory disclosures, with private credit funds and AIFs emerging as key buyers.
He also outlines where corporate bonds, sovereigns and short-duration strategies fit into portfolios in the current macro environment. Edited Excerpts –
Q) Did the RBI policy outcome at this point largely meet expectations post Budget?
A) The MPC delivered a well-balanced policy, maintaining the status quo on both rates and stance, broadly in line with market expectations.
The RBI under Governor Malhotra has continued to emphasize action over guidance, having already delivered a cumulative 125 bps rate cut alongside a series of pre-emptive liquidity measures to ensure adequate system liquidity.Importantly, this policy came against the backdrop of clarity on two key variables fiscal policy and the India-US trade framework.
While the Governor reiterated a pre-emptive approach to liquidity management, the absence of specific announcements on additional liquidity measures disappointed the market.
Q) Do you think India is entering a structurally stronger phase compared to the past few years?
A) Yes, India continues to stand out as the fastest-growing major economy, well contained inflation, sound credit environment and a favorable demographic profile. This is further supported by credible fiscal and monetary policymaking, along with political stability.
Together, these factors reinforce confidence that the current strong macroeconomic backdrop is not cyclical alone, but has the potential to be sustained.
Even as financial markets are largely driven by domestic factors, global volatility can also impact the domestic markets especially when INR comes under pressure.
Q) If growth accelerates in the second half, could rising inflation alter the RBI’s rate trajectory?
A) While India is expected to remain the fastest-growing major economy in the coming financial year, the growth trajectory is still broadly aligned with potential growth and therefore not inherently inflationary.
Headline inflation this year has been at record lows, even with elevated prices of precious metals, while core inflation excluding these components remains well below the RBI’s 4% target.
Additionally, the forthcoming revision of the CPI basket where food weights are expected to decline could further moderate volatility.
Against this backdrop, inflation does not appear to be at levels that would cause near-term discomfort for the RBI. The key risk to this view remains the monsoon, given the inflation’s sensitivity to agricultural outcomes.
Q) How meaningful could potential inclusion in Bloomberg bond indices be for Indian bonds?
A) Such inclusion would be very meaningful. FY27 will see a record high gross supply of sovereign and SDL securities which will test the market appetite, especially in the backdrop of no more rate cuts going forward.
With higher gross and net borrowing outlined in the upcoming fiscal year’s Budget, the entry of a large and stable new investor base through index inclusion would provide meaningful relief to the yield curve.
Q) Given lower inflation and strong growth, what duration strategy would you recommend for investors today?
A) At present, the yield curve appears stretched, and concerns around demand–supply dynamics persist. As a result, the curve may remain steep, particularly with continued heavy supply from both the Centre and states leading to some duration fatigue.
Current 10 yr G-Sec yield at ~6.75% gives a ~150 bps term spread over the 5.25% repo rate, such spreads were last seen during the past rate hike cycle.
With the current inflation running low at ~2% for FY26, the real yields at more than 4.75% are quite elevated, making risk-reward favorable. Even the short end yields are elevated on supply concerns.
Market sentiments have turned positive after the announcement of US-India trade agreement and we expect investor appetite to pick up at these high yields. Also, as RBI conducts more OMOs and possibly G-Sec switch operations, it will help in addressing the huge fiscal supply concerns to an extent.
Considering the risk-reward dynamics, we believe Ultra Short, Money Market and Low Duration funds provide limited volatility and high accrual.
At the same time, actively managed short-term funds and corporate bond funds with balanced exposure towards 2-4 yr corporate bonds and 5-10 yr G-Secs provide suitable opportunities for core allocation in CY2026.
Q) Is there scope for a tactical entry into long-bond investing this year, and what would signal such an opportunity?
A) Yes, as we move into the next fiscal year, there could be selective tactical opportunities at the longer end of the curve.
While the government has announced a sizeable borrowing program, it has also built buffers into the fiscal framework. Upside surprises such as higher-than-expected RBI dividends, stronger GST collections, or increased mobilization through NSSF could create windows for tactical long-duration exposure during the year.
Even though with a risk of higher volatility, one can look at Gilt funds as a tactical call given that the term spreads have jumped sharply higher.
Q) How should retail investors approach long-duration funds in the current environment?
A) Retail investors should view long-duration funds primarily as a core allocation towards the buy and hold like strategy of risk-free assets as these funds can be extremely volatile depending upon the market conditions.
At times, such long-duration funds can also be used for tactical calls to benefit from the capital gain opportunities.
At the current juncture, term spread has widened sharply due to fiscal supply overhang and one can look at long-duration funds as a tactical exposure as the term spread may compress over next few months if demand from long investors like PFs, insurance companies etc picks up towards the FY end.
Q) Would you prefer sovereign bonds, SDLs, or corporate bonds at this stage?
A) At current valuations, corporate bonds in 1 – 4 yr tenor space appear attractive, with spreads over G-Sec offering a healthy accrual opportunity.
That said, sovereign bonds continue to play an important role as a potential source of capital gains, given their sensitivity to policy and macro developments.
With several negatives already priced in and yields near the upper end of the expected range, sovereigns especially in 5-10 yr space do offer some capital appreciation potential.
Q) How do higher borrowing numbers influence your outlook for the 10-year G-sec?
A) Higher borrowing impacts both the pricing and the shape of the yield curve. We expect the curve to remain relatively steep, with the longer end experiencing continued duration fatigue, while the shorter end stays supported by the RBI’s commitment to maintaining adequate liquidity in the system.
In the current environment, we see the 10-year G-sec trading in a range of 6.65% to 6.80%
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
