Bond markets stable amid global uncertainty; Short to medium term debt funds remain attractive: Canara Robeco CIO

Global financial markets are showing surprising resilience despite a range of geopolitical and economic challenges, said Avnish Jain, Chief Investment Officer – Fixed Income at Canara Robeco Asset Management Company. Jain notes that even with the ongoing conflict between Russia and Ukraine and the recent US government shutdown, global sentiment has remained stable, largely supported by expectations of monetary easing from the US Federal Reserve.As US inflation continues to cool and growth indicators lose momentum, the Fed is widely expected to cut rates in the coming months. “These expected rate cuts, along with declining inflation, are likely to continue to soften global interest rates,” Jain explained. Lower global bond yields tend to reduce pressure on emerging markets and help attract inflows, supporting broader stability.

At home, the Indian economy remains a bright spot. Robust growth indicators, healthy corporate profits and inflation that has fallen more than expected in recent months have created a favorable macro environment. However, the Reserve Bank of India (RBI) has opted for continuity, keeping its policy stance unchanged and keeping interest rates stable.
Jain points out that while the RBI is cutting interest rates, market participants are pricing in only a single cut for the coming year. “Given this expectation, there is no reason to believe that there will be a large increase in interest rates or that interest rates will fall sharply,” he says. Instead, the market will likely continue to move sideways, especially as liquidity conditions tighten.

The system’s liquidity has entered a deficit due to higher currency leaks and festival-related expenses. Markets expect the RBI to step in with liquidity infusion measures – possibly through open market operations or floating rate repo auctions – to ease pressure on the banking system.

In such an environment, Jain believes investors would be better positioned in the short- to medium-term debt categories. “Corporate bond funds, short-term funds and bank and PSU debt funds remain well positioned in the current market,” he advises. These categories may be able to deal more effectively with a stable to softer interest rate environment while offering relatively lower volatility. With global uncertainty persisting but domestic fundamentals remaining strong, investors may benefit from remaining conservative, liquid and duration-oriented as they navigate the coming months.