India in ‘Goldilocks’ phase; MPC likely on prolonged pause till CY26-end: PGIM India AMC

India’s macroeconomic landscape appears to be settling into a favourable “Goldilocks” zone — marked by strong growth, contained inflation and continued fiscal discipline.

While global uncertainties and external sector pressures linger, the domestic backdrop remains supportive, with core inflation well behaved and policy rates approaching neutral real levels.

In an interaction with ETMarkets, Puneet Pal, Head – Fixed Income at PGIM India AMC, says the rate-cut cycle appears to have run its course and expects the Monetary Policy Committee to remain on a prolonged pause at least till the end of CY2026.


He shares his views on the yield outlook, duration strategy, potential bond index inclusion flows and why short-duration accrual strategies may be better placed in FY27. Edited Excerpts –

Q) Do you believe India is entering a structurally stronger macro phase compared to the past few years?
A) Yes, we believe so. In terms of the key macroeconomic parameters like GDP growth and Inflation, India is in a goldilocks scenario. GDP growth is strong with lower than targeted Inflation and the central government is sticking to fiscal discipline.

The external sector has been under pressure but we think it’s a passing phase, especially with the signing of trade agreement with EU and the movement forward in the trade deal with USA.

Ultimately we expect the strong economic fundamentals to show up in the external account also with increased in portfolio flows and FDI

Q) If we are entering a growth phase which means there is a possibility of rise in inflation. If growth accelerates meaningfully in the second half, could that change the RBI’s rate trajectory?
A) Inflation is expected to remain in a range of 4% to 4.50% in FY27. Growth is expected to moderate a bit in FY27 but even if growth accelerates, we do not expect the inflation trajectory to change meaningfully. “Core inflation” has been well behaved and we expect the MPC to be on a prolonged pause at least till the end of CY2026.

Q) How meaningful could potential inclusion in Bloomberg indices be for Indian bonds?
A) The inclusion in Bloomberg Index can lead to a potential inflow of USD 20-25 bn. We have seen such inflows after the inclusion of Indian FAR securities in the JP morgan index.

We think that though the inflows from such bond inclusions are definitely helpful, it’s more of a question of the deepening of the Indian Bond markets and its development.

FPI inflows into the bond markets will result in diversification of the investor base and also the development of more financial instruments along with enhanced liquidity in the markets.

Thus we believe that apart from the obvious inflows due to index inclusion, the developmental aspect of the bond markets is equally important.


Q) Given lower inflation and strong growth, what is your recommended duration strategy for investors today?
A) Though Inflation is within target , we believe that the rate cutting cycle has come to an end given that the policy repo rate at 5.25%, the real rate will be less than 100bps assuming an average CPI inflation of 4.50% in FY27.

Thus in a scenario of no incremental rate cuts and adverse demand/supply dynamics in the bond markets, we would recommend short duration accrual strategies


Q) Do you think that there is room for a potential tactical entry for long bond investing this year. What conditions would signal that opportunity?
A) Our view is that short duration accrual strategies will outperform in FY27 though on a tactical basis duration opportunities can arise as yields at longer end of the yield curve ( >30yr maturity) have risen to almost 3 yr highs.

A tactical duration opportunity can arise if global economic outlook worsens with a resultant fall in global bond yields though its is not a base case scenario, in our view.

Q) How should retail investors approach long-duration funds in this environment?
A) Retail investors can invest in a staggered manner (SIP) in long duration funds as part of their overall asset allocation.

The current yield at the longer end of the yield curve is looking attractive from a long term perspective and one needs to have patience while investing in long duration funds.

We would recommend a staggered investment into long duration funds, keeping in line with the respective risk appetite of the investor and overall asset allocation.

Q) Would you prefer sovereign bonds, SDLs, or corporate bonds in the current phase?
A) We would prefer short duration SDL’s and Corporate Bonds currently given their relatively attractive spreads vis a vis sovereign securities. .

Q) How does the higher borrowing number influence your outlook for the 10-year G-Sec?
A) The higher than expected gross borrowing for FY27 is likely to lead to a steeper curve and that’s the reason we prefer short duration accrual strategies. We expect the 10yr Gsec yield to gradually rise towards 7% over the course of the next 3-4 months.

In our view, the prolonged pause in rates, coupled with RBI’s commitment to keep banking liquidity adequate will support the shorter end of the yield curve while the longer end of the yield curve faces headwinds from higher supply next year.

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