How the 2025 interest rate cycle could redefine fixed income strategies

After maintaining tight monetary policy for almost two years to keep inflation in check, the Reserve Bank of India has started cutting interest rates in 2025 as price pressures ease and growth momentum stabilizes. The three interest rate cuts, totaling 100 basis points, that have already been implemented this year have brought the repo rate down to 5.5 percent. By all indications, another reduction is likely in December. The conversation among investors shifts from whether interest rates will fall further to how they should position themselves to benefit from it.

In the fixed income market, every interest rate cycle brings both risks and opportunities. Navigating these shifts requires more than just timing; it requires an understanding of the interaction between policy rates, yields and bond prices.

The connection between rate, return and price

Any change in the RBI’s policy rate triggers a chain reaction. When the central bank cuts interest rates, market yields typically fall and existing bonds with higher fixed coupons become more valuable, causing their prices to rise. Conversely, when interest rates rise, prices fall.

This simple inverse relationship between returns and prices is the cornerstone of fixed income investing.

Equally important is the term, which affects how sensitive a bond’s price is to interest rate movements. The prices of longer-term bonds move more sharply as interest rates change. In a declining interest rate cycle, these bonds yield higher capital gains. They can also correct more quickly in a rising interest rate cycle. Understanding this balance helps investors manage both opportunities and risks.

Read the current rate cycle

The recent policy shift by the RBI is part of a broader effort to support growth while keeping inflation within the target range. This year, inflation has steadily declined, giving the central bank some room to cut the repo rate from its previous restrictive policy of 6.50 percent. Retail inflation fell further sharply in June and July, reaching an eight-year low of 1.55 percent in July, although core inflation remains above 4 percent. The retail inflation figure for September 2025 is 1.54 percent. At the same time, liquidity conditions have improved, credit growth remains resilient and global central banks are also entering an easing phase. These factors have contributed to a steady decline in 10-year government bond yields, which now hover around 6.5 percent, compared to more than 7.2 percent at the start of the year. For bond investors, this shift signals potential opportunities. As yields continue to decline, existing bonds may experience price gains. However, the pace of this transmission across yield curves can vary, and investors should tailor their strategies to their time horizon and risk tolerance.

How investors can position themselves

As the interest rate cycle shifts, investors have a valuable opportunity to realign their fixed income portfolios. The goal now is to capture potential capital gains from declining returns while maintaining a predictable income stream. The choice of a strategy depends on one’s investment horizon and risk appetite. The following table outlines how investors can approach the current bond market in different time frames.

As interest rates continue to fall, investors may also consider increasing their bond holdings, spreading maturities over different time frames to manage investment risk.

Avoiding common pitfalls/

Even in a favorable interest rate cycle, discipline remains crucial. Investors should therefore:

• Avoid chasing high returns without checking credit quality.
• Diversify across issuers and ownership rights to manage both maturity and credit exposure.
• Have some liquidity on hand, as selling long-term bonds during periods of volatility can be expensive.
• Reinvest coupon streams immediately so that cash doesn’t sit idle when rates start to fall.

Today, online bond platforms make it easier for retail investors to follow these principles. They provide transparent access to listed government and corporate bonds, real-time yield detection and seamless settlement, all of which were once limited to institutions. This democratization of access is changing the way Indians participate in fixed income.

The bottom line

The 2025 interest rate cycle marks a turning point for fixed income investors. With lower interest rates and stable inflation, well-timed entries can boost bond returns. By understanding interest rate and price dynamics and aligning duration, credit quality and liquidity, investors can protect their portfolios and strategically build stronger, more resilient fixed income assets.

(The author of this article, Saurav Ghosh, is a co-founder of Jiraaf.)