Indian bond markets are facing renewed pressure as rising global real yields, persistent commodity price pressures and intensifying demand for capital reshape the interest rate outlook. With the US Federal Reserve potentially looking at further rate hikes and expectations of higher domestic interest rates building, investors may need to rethink their fixed-income strategies.
In this episode of ETMarkets Smart Talk, Suyash Choudhary, CIO–Fixed Income at Bandhan AMC, explains why Indian bond yields could rise further over the next few months and why investors should avoid aggressive bets on duration and credit risk. He discusses the implications of the Fed’s policy trajectory for Indian markets, the influence of global capital flows on RBI’s policy choices, and how investors should navigate the choice between fixed deposits, government securities and debt mutual funds.
He also shares his assessment of the sharp September outflows from debt mutual funds and whether the current rise in yields offers an opportunity to invest in longer-duration funds. Edited Excerpts –Q) We have seen bond yields rise, liquidity tighten and expectations around the RBI's next policy move shift.
What has fundamentally changed in India's fixed-income market over the past few weeks? A) Global real yield settings have been moving up reflecting the intensified competition for capital over the past few quarters.
This in turn is owing to the funding demand for AI infrastructure buildout, reflected as a massive pick up in private sector capital spending. It must be remembered that this pick up is happening when underlying levels of government fiscal deficits in key advanced economies have already been quite high.
Indian bond yields are also reflecting this dynamic. The other source of pressure on Indian bonds is from the broad-based commodity price pressures emanating from the West Asia war as well as extremely volatile weather conditions.
This combination, higher global real yields and wide-spread local inflationary pressures, are both leading Indian interest rate expectations higher. One may argue that, though the manifestation is more obvious over the past few weeks, the sources of pressure have in fact been building over the past few quarters.
Q) Given the October 27–28 policy meeting. Looking beyond this week's meeting, what is your base case for the Fed's policy trajectory through the first quarter of 2027, and what developments could change that outlook?
