According to industry experts, the Indian debt market enters August on a constructive footing, but investors should brace for volatility as the Reserve Bank of India’s policy decision, geopolitical developments in West Asia, crude oil prices, and foreign portfolio flows remain the key market drivers.
According to them, India’s macroeconomic stability, healthy foreign inflows and improving global integration of the domestic bond market continue to support fixed income. However, they remain cautious on long-duration bonds amid lingering global uncertainties, with most favoring short- to medium-duration strategies.
July has been a month of mixed global risks but resilient domestic bonds
Debt markets in July were influenced by inflation concerns, RBI policy expectations, global bond yields and foreign portfolio inflows. While geopolitical tensions kept crude oil prices volatile, Indian government securities remained largely resilient as expectations of higher foreign participation continued to support demand.
According to Mayur Chauhan, Fund Manager- Fixed Income, Quantum AMC, global bond markets remained volatile because of geopolitical tensions that briefly pushed crude oil prices close to US$100 per barrel before easing. Despite these external pressures, India’s benchmark 10-year government bond traded within a narrow range as strong demand at higher yields and improving foreign portfolio participation kept the market stable.
Axis Mutual Fund also noted that easing geopolitical risks, RBI liquidity measures, tax incentives for foreign investors, expectations of India’s inclusion in the Bloomberg Global Aggregate Bond Index and lower crude oil prices supported Indian bond markets, leading to a decline in government security yields.
RBI policy, monsoon and crude prices to remain relevant
Market participants will closely watch the RBI’s Monetary Policy Committee meeting, scheduled for early August, for both the policy decision and commentary on inflation and liquidity.
Alok Singh, CIO of Bank of India Mutual Fund, believes the RBI is likely to maintain its neutral stance while continuing to use liquidity management tools to ensure orderly market functioning. He also expects monsoon progress and crude oil prices to remain important variables.
Piyush Baranwal, Director and Senior Fund Manager at WhiteOak Mutual Fund, says the biggest risk continues to be developments in West Asia because of their impact on crude oil, inflation and the rupee. He also points to the RBI meeting and any progress on India’s inclusion in the Bloomberg Global Aggregate Index as potential market-moving events.
According to Quantum MF, the direction of the debt market will depend on three key factors that include;
- Movement in crude oil prices and geopolitical developments
- The US Federal Reserve’s policy stance
- Sustainability of FCNR(B) inflows and foreign investments into Indian debt
Mid-term outlook remains intact
Despite near-term uncertainties, fund managers remain optimistic on Indian debt over the medium term.
Alok from BOI MF believes positive real interest rates, macroeconomic stability and improving debt market participation should continue attracting foreign investors, although global volatility may periodically affect markets.
Piyush of WhiteOak MF expects India’s increasing integration with global bond markets, aided by tax concessions for foreign investors and wider availability of Fully Accessible Route securities, to deepen the domestic bond market and diversify the investor base.
Axis Mutual Fund also believes policy reforms could potentially mobilize USD 75-80 billion of foreign inflows over the next 12-18 months through index inclusion, FCNR(B) deposits and external commercial borrowings, strengthening the rupee and broadening the bond market.
Preference to stay at the shorter-end
Most fund managers continue to recommend staying in shorter-duration debt funds until uncertainties ease.
Bank of India Mutual Fund prefers the short end of the yield curve given the RBI’s current stance.
WhiteOak MF recommends high-quality corporate bonds in the two- to four-year segment, saying they offer attractive carry while limiting duration risk. Depending on investor profile, he suggests Corporate Bond Funds, Short Duration Funds, Medium Duration Funds and Income Plus Arbitrage strategies.
Quantum AMC favours Dynamic Bond Funds that can actively adjust portfolio duration as interest rate expectations evolve.
Axis Mutual Fund also recommends maintaining a conservative stance with short-duration, accrual-focused and target-maturity strategies, while expecting the 10-year government bond yield to trade between 6.75% and 7.10% during the second half of 2026.
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