ETMarkets Smart Talk | Rate-cut cycle over, RBI may be at cusp of rate hikes; yields could inch higher: Puneet Pal

After an aggressive rate-cut cycle, the Indian fixed-income market could be entering a very different phase, with rising crude oil prices, elevated global bond yields and sticky inflation putting renewed pressure on the domestic bond market.

Puneet Pal, Head of Fixed Income at PGIM India Mutual Fund, believes the rate-cut cycle is over and the Reserve Bank of India could be at the cusp of a rate-hiking cycle. He expects policy rates to rise by 50-75 basis points by the end of FY27, with bond yields likely to inch higher as inflationary pressures build.

Yet, Pal believes rising yields could also create an opportunity for fixed-income investors over the next six months. With the 10-year government bond yield around 7%, he recommends a phased approach to investing, particularly in high-quality corporate bond funds and target-maturity funds.


In this edition of ETMarkets Smart Talk, Pal discusses the outlook for interest rates and bond yields, the key risks for fixed-income investors, and how investors should position their portfolios as India moves from rate cuts towards a potentially tighter monetary policy cycle. Edited Excerpts -

Q) With the US Fed back in a rate-hiking cycle and the Indian 10-year yield around 7%, how should investors rethink the fixed-income opportunity in India right now?

A) Rising crude oil prices and elevated global bond yields are likely to keep the Indian bond curve under pressure. The CPI inflation projections in the last MPC policy meant that real rates would be negative for three quarters and with the current surge in crude prices, it’s very likely that CPI inflation projections will be revised higher, which , in our view, means that MPC will need to start hiking rates from October Policy onwards.

We expect a 50-75 bps hike in policy rates by the end of FY27. The best time to invest in Fixed Income is when rate s and yields are rising and we think that the rise in yields will present a good investment opportunity for investors over the next six months.

Q) The RBI has already delivered significant rate cuts, while inflation is moving higher. Do you think the easy part of the Indian bond rally is behind us, or can bond yields still move lower from here?

A) The rate cutting cycle is over and we are at the cusp of a rate hiking cycle and as such we do not foresee any meaningful downside in yields from here.

Indian bond yields have been rising since last year and the current deluge of liquidity on back of the FCNR flows can, at best, provide temporary relief to the bond markets. As the rate hiking cycle in India starts, we expect yields to gradually inch higher.

Q) For retail investors looking to invest in Indian bonds today, how should they choose between government securities, high-quality corporate bonds, target-maturity funds and short-duration funds in this environment?

A) Investors should invest basis their investment horizon and risk appetite and in the current stage of the interest rate cycle we would recommend high quality corporate bond funds and target maturity funds.

Q) For an investor entering the bond market today, does a 7%+ yield on government securities offer an attractive entry point, or is there a risk of yields moving even higher?

A) The current yields provide an attractive investment opportunity for fixed income investments though given the current uncertain geopolitical environment amidst elevated global bond yields and rising commodity prices, in our view, its better for investors to stagger their investments.

There is a definite risk of bond yields continuing to trend higher as central banks hike policy rates and investors can continue to invest in a phased manner

Q) For Indian Bond Investors, What Is The Bigger Risk Today: Rising Inflation, Higher Us Yields, Or A Weaker Rupee?

A) All the three risks are interlinked but Inflation is the biggest challenge for Fixed Income and thus monitoring Inflation is non-negotiable for fixed income investors.

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