Bond yields steady as RBI holds rates steady; construction strategies preferred to continue: Devang Shah

The Indian bond market remained largely within the range through September 2025, with 10-year government bond yields rising marginally by four basis points to 6.57%.

In contrast, US Treasury yields fell, with the 10-year yield ending the month at 4.15%, following the US Federal Reserve’s 25 basis point rate cut – the first since December 2024.

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According to Devang Shah, Head of Fixed Income, Axis Mutual Fund, continues to find support in the domestic market from stable monetary policy and healthy liquidity conditions. The Reserve Bank of India’s (RBI) Monetary Policy Committee maintained the repo rate at 5.5% and took a neutral stance, while revising FY26 GDP growth to 6.8% and lowering the average inflation forecast to 2.6%. The RBI also introduced measures to strengthen the financial ecosystem and encourage internationalization of the rupee.
Banking system liquidity has been in surplus since March 2025, helped by government withdrawals and increasing capital injections following previous CRR cuts. This surplus is expected to remain comfortable until early 2026.

Meanwhile, headline inflation rose slightly to 2.1% in August, although food prices continued to moderate, leaving core inflation stable at 4.1%.

The Fed’s rate cut has created a supportive backdrop for Indian bonds, leading to a flatter yield curve. The government’s revised borrowing calendar – reducing the supply of long-term bonds and increasing issuance in the 3- to 10-year range – has also helped stabilize interest rates.

Shah expects the RBI to make another 25 basis point rate cut in December, with a possibility of another rate cut in early 2026 if trade-related headwinds persist.

“The bulk of the RBI’s rate easing is likely behind us. With inflation remaining well within target, the outlook points to a ‘lower for longer’ interest rate environment,” Shah noted.

He added that while duration constraints have run their course, accumulation strategies now offer better risk-reward opportunities, especially in short-term corporate bonds (2 to 5 years).

Shah expects the 10-year G-Sec to trade between 6.30% and 6.65% for the remainder of FY26. From an investor perspective, Axis Mutual Fund continues to recommend short to medium term debt funds, complemented by tactical allocations of government bonds, to capture carry opportunities in a stable interest rate regime.

(Disclaimer: Recommendations, suggestions, views and opinions expressed by experts are their own. These do not represent the views of the Economic Times)