ETMarkets Smart Talk| Higher yields offer opportunities, but investors need not rush into long-duration funds: Shriram Ramanathan

Bond markets have turned increasingly volatile amid rising crude oil prices, persistent inflation concerns, tighter liquidity and shifting expectations around global interest rates. While higher yields may create opportunities for fixed-income investors, the current environment calls for a measured approach rather than an aggressive bet on longer-duration funds.

In this edition of ETMarkets Smart Talk, Shriram Ramanathan, CIO–Fixed Income at HSBC Mutual Fund, discusses the changing dynamics in India’s bond market, the outlook for interest rates and yields, and how investors should navigate the choice between debt mutual funds, fixed deposits and government securities.

He also explains why liquidity and flexibility could matter more than rushing to lock into longer-duration bets in the current environment. 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) Before we come to India, let’s take a step back and see how the global markets have shaped in the last couple of months. Energy-induced price shock has led to a phase of spikey inflation.

Our global strategist has nicely summed up the current phase to be that of a ‘shock, boom, shock’ – substantially higher energy prices, Artificial Intelligence (AI) boom and the elevated sovereign yields (especially in key developed markets) are the key dominating forces behind recent market moves.

For many developed markets (DMs), the 10-year and other long dated yields touched multi-year highs, and started to cool by end-October.

The spike in yields and rates recalibration has been a global phenomenon as a combination of factors of elevated oil prices, inflation & fiscal worries in some countries, and a shift towards tighter monetary policy, globally.

That is the global backdrop.

Back home too, over the past couple of months, India’s policy expectations started to change. More so, driven by the two exogenous shocks, viz. persistence in crude oil price shock and a below normal monsoon; raising inflation pressures.

This, coupled with the US Fed’s policy pivot, started to alter rates’ expectations. By then, the MPC’s August meeting Minutes too re-shaped policy expectations!

So, what changed: All-in-all, a persistence in energy price shock has altered India’s inflation outlook which was aggravated by a below-normal monsoon. This coupled with tighter global financial conditions has led to a recalibration in India’s policy rates.

Certainly, domestic factors such as FX-led changes in system liquidity and RBI absorbing durable liquidity via OMO Sales have all culminated in tighter domestic financial conditions even before the policy pivoted to rate hikes (on 7-Oct).

The recent tighter liquidity conditions, largely driven by seasonal factors and FX-management, have pushed overnight rates higher. The de facto tightening with overnight rates settling near the upper bound of the policy corridor, along with market expectations of further policy rate hikes, started to shift the entire yield curve higher.

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?

A) In Sep’26, the US Fed hiked the Fed Funds rate by 25 bps; its first rate hike in 3-years. In October, it decided to hold as it awaited data to flow-in. The Fed Chair did mention, it is an "information-rich" period ahead and wanted the "accumulation of more information" to help determine the appropriate policy stance before acting again.

In this context, a December rate hike remains data-driven; However, markets and our view is that the US Fed may hike at the December meet given the current inflation levels. For the US Fed, so far inflation has been a driving factor, but if the AI boom starts to wobble and the same starts to trickle into weaker growth and labour markets, the Fed may go slow on policy recalibration.

We believe that a couple of more hikes are likely, but not four more hikes that the markets were pricing in earlier, given the potential negative growth impact. Hence, the incoming data and geopolitical developments will be critical inputs for all the Central banks as it remains one of the major sources of inflation this time around.

Q) Could a more hawkish Fed trigger further pressure on the rupee and foreign portfolio flows into Indian debt, even if the RBI keeps domestic rates unchanged?

A) This is a tricky one, as it brings forth the trilemma for the Central Banker whether to focus on domestic policy rates, FX management or capital flows. The RBI Governor’s recent comments around use of interest rate for financial stability has increased the prospects of higher domestic rates, if financial conditions were to tighten, globally.

So, yes, the US Fed’s policy does become a critical input in MPC’s reaction function. Apart from interest rate differentials, overall, other macroeconomic fundamentals too will be crucial for attracting durable, sustainable debt inflows.

A lot of the positives are already in place for India: the inflation framework and the credibility the MPC secured following its recent policy rate recalibration, governments’ fiscal commitment, India’s economic growth trajectory, and ofcourse, the recent relaxations on FPI debt investments.

These all are conducive factors to attract flows; and next year, once there is headway to include Indian bonds into the Bloomberg Global Aggregate Index, the flows into our bond markets can increase significantly.

The most immediate relief would obviously come about if there is a quick reversal on the geopolitical front which may quickly alter market sentiments. For instance, a near US$10/bbl fall in oil prices in the last few days, and we have already seen India 10-year benchmark yield easing almost 20 bps to 7.30% after almost touching 7.50% levels last week!

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Q) How should investors choose between fixed deposits, government securities and debt mutual funds?

A) Investors should choose based on their investment horizon, cash-flow needs and tolerance for fluctuations. For investors who value liquidity and flexibility to manage interest-rate exposure, debt mutual funds deserve priority, provided the fund’s risk profile matches their needs.

Their key advantage is flexibility: open-ended debt funds generally allow investors to redeem without waiting for a fixed maturity, subject to settlement timelines and applicable exit loads. They also offer a range of duration options that can be assessed based on the investors’ risk appetite. This makes debt funds a useful vehicle when rates are uncertain.

Fixed deposits remain relevant for investors who priortize a contracted rate and predictable maturity proceeds. Direct government securities suit those seeking sovereign credit quality and cash flows aligned with a known investment horizon, but selling before maturity exposes investors to prevailing market prices.

The case for prioritizing debt mutual funds is therefore liquidity, choice and professional portfolio management, not guaranteed returns or an absence of risk. Investors should match the fund’s duration to their holding period and assess credit quality, expenses, exit loads and applicable taxation.

Q) What is your outlook for interest rates and bond yields over the next three to six months?

A) Over the next three to six months, we expect interest rates and bond yields to remain volatile and broadly range-bound, with an upward bias. Geopolitical tensions and movements in crude oil prices will be key drivers, alongside seasonal liquidity pressures that could be higher than usual.

A rainfall deficient year puts upward pressure on food inflation and hence, headline inflation. Together, these risks could limit the scope for a sustained decline in yields.

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Q) What is the one fixed-income strategy investors should avoid in the current environment?

A) The one strategy investors should avoid is taking an aggressive exposure to longer-duration debt funds solely in anticipation of interest-rate easing. The current market is quite volatile, bond yields remain sensitive to inflation, crude oil prices, global yields and liquidity conditions, making a sustained fall in yields uncertain.

Longer-duration funds are more sensitive to changes in yields. The emphasis should be on managing duration and maintaining liquidity, rather than making a large directional bet on rates. Longer-duration funds can still suit investors with an appropriate long-term horizon and the capacity to withstand volatility.

Q) Debt mutual funds saw outflows of ₹1.83 lakh crore in September. Should investors interpret this as a loss of confidence in fixed income, or was it largely a temporary liquidity-management phenomenon?

A) The September outflows were largely a temporary, quarter-end liquidity-management phenomenon, rather than a loss of confidence in fixed income, per se.

Institutional investors typically redeem from liquid and money-market funds to meet advance-tax payments and other quarter-end cash requirements. Based on the current data, most of the money returned in the first week of October, the reversal reinforces that interpretation.

Q) Should investors favour short-duration and money-market funds in the current environment, or does the rise in yields create an opportunity to gradually lock into longer-duration funds?

A) Given our expectation of heightened interest-rate volatility over the next three to six months, money-market and short-duration funds can serve as temporary parking options, subject to investors’ holding periods and risk appetite.

They offer lower interest-rate sensitivity, though they are not risk-free. Higher yields may create opportunities, but investors need not rush into longer-duration funds.

As incoming data provides greater clarity and conditions stabilise, they can consider gradually extending duration. For now, the emphasis should be on liquidity and flexibility rather than an aggressive bet on falling yields.

Source: Bloomberg & HSBC MF Research estimates as on October 31, 2026 or as latest available.

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