- The Federal Reserve’s decision to cut rates and halt its balance-sheet runoff signals liquidity relief globally, but carries caveats.
- In India, the interplay of the Reserve Bank of India’s open-market operations (OMOs), potential “operation twist”, and rising state borrowings is reshaping the fixed-income landscape.
- That means fixed-income portfolios must now combine accrual strategies, selective long duration and credit calls — not just the usual medium-term carry play.
1. Global backdrop: Pivot but not rush
The Fed’s recent 25 bp rate cut and its announcement to stop shrinking its Treasury holdings mark a meaningful shift. The message: The era of quantitative tightening (QT) is ending, but the easing cycle remains cautious and data-dependent. The market may be relieved but remains on alert.
For India, this means lower external constraints on interest rates and yields but also heightened scrutiny of liquidity flows and FX pressures.
2. India’s bond universe: Supply, liquidity & curve strategy
At home, a few developments stand out:
- A recent 7-year government bond auction was reportedly rejected by the RBI, reflecting discomfort with yields at the margin and signalling tighter issuance discipline.
- State development loans (SDLs) remain a substantial part of supply, and according to recent research the aggregate states’ fiscal deficit has expanded, pushing gross SDL issuance expectations up.
- Liquidity in the banking system is increasingly influenced by the RBI’s FX intervention (which drains rupee liquidity) and the market now expects RBI to deploy meaningful OMOs — and even an “operation twist” (buy long-dated, sell short-dated) — to manage yield curve risk and ensure supply absorption.
These dynamics mean the 10-year G-Sec yield may find a range around 6.35% – 6.60% but the curve shape will matter more as the RBI signals intent.
3. Rupee, inflation, growth – the policy triangle
The rupee remains under pressure, and the RBI has been intervening via FX swaps and liquidity tools to cap sharp moves. On inflation, headline CPI is expected to trend around 4 % in FY26, though food inflation remains vulnerable given erratic monsoons and recent flood-linked disruptions in some states. Growth appears headed for ~6.5 % real, supported by capex and investment flows, but the central bank’s future ease will be data-driven. If the rupee weakens further or inflation spikes, rate cuts may get delayed.
4. Portfolio stance: accrue + select duration + credit
In light of these cross-currents:
- We remain positive on accrual strategies: Owning short-to-medium-term paper (3-7 yrs) where carry remains attractive and duration risk is controllable.
- In addition, we recommend a cautious, selective exposure to long-duration government bonds (10-15yrs): With supply discipline improving and potential RBI OMOs in play, these maturities offer roll-down and capital-gain potential — provided inflation and FX remain benign. That said, ultra-long zones remain speculative unless one is comfortable with duration risk.
- On credit: We favour selective high-yield credits with strong balance sheets. With liquidity thinner, risk premia wider and issuance picking up, credit discipline matters heavily.
5. What to watch
- Upcoming government bond auctions: cut-offs, volumes and market acceptance will signal stress or trust.
- RBI’s OMO calendar and any signs of “operation-twist” in action.
- Rupee movements and RBI’s FX intervention tally: sharp depreciation could force policy caution.
- Monsoon and food-inflation dynamics: deviations could upset inflation trajectory.
- Global policy shifts: if the Fed signals further cuts, India’s yield gap and fund flows could shift.
Bottom line: The Fed’s pivot gives Indian fixed-income markets a supportive backdrop, but the real play is domestic — balance sheet manoeuvres, liquidity injections and issuance discipline. In this phase, the most compelling strategy is to lean into accrual, layer in selective long-duration government bonds and pick credit judiciously — stay active, stay selective.
(Chirag Doshi is LGT Wealth India’s CIO of Fixed Income Assets.)
Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
