RBI "opens the floodgates": Dhawal Dalal on why now may be the best entry point for debt investors in two years

The June MPC meeting has triggered a multi-pronged push to attract foreign debt capital into India, scrapping withholding tax, removing capital gains tax for FPIs, and easing ECB norms. Edelweiss MF's Dhawal Dalal says the combined effect could meaningfully lower short-term rates by September, and target maturity funds are the smartest way to ride that wave.

Liquid fund returns, FY26
~6.5%
Benchmark for comparison


Duration fund performance
Below cash
All duration funds underperformed

Target window for impact
Sep 30
Deadline for capital inflows

What the RBI has actually done
The June Monetary Policy Committee meeting went well beyond a rate decision. The Reserve Bank of India, working in tandem with the Government of India, removed the withholding tax and capital gains tax structures that had long deterred foreign portfolio investors from India's debt markets. In addition, the RBI proposed raising FCNR(B) deposit limits and allowed Central Public Sector Enterprises to raise funds via the External Commercial Borrowing route.

"Both these measures combined have the potential to bring in a significant amount of debt capital by 30th September, and that should provide significant liquidity injection for banks who have been struggling to grow deposits," says Dalal.

The logic is straightforward: banks have been running very high credit-deposit ratios. A surge of foreign debt capital eases that pressure, boosts deposit growth, and creates conditions for the short end of the yield curve to gradually decline — a direct tailwind for fixed income investors over the next 12 to 24 months.

Why duration funds disappointed, and what comes next

FY26 was a frustrating year for debt investors who moved beyond liquid funds. Liquid and money market funds delivered reasonable returns, but every duration fund — corporate bond funds, banking and PSU debt funds, and longer-maturity products — underperformed cash. After two years of bond market volatility, investor confidence in duration plays is understandably low.

Dalal acknowledges the hesitation but cautions against letting past performance drive future decisions. The environment has shifted. However, he is equally clear that the road ahead will not be a smooth, uninterrupted decline in bond yields. Investors should expect continued volatility even as the broader direction turns favourable.

The case for target maturity funds right now

For investors ready to take that "leap of faith," Dalal's top recommendation is target maturity funds — and the logic is compelling. These funds invest in a fixed basket of bonds and hold them to maturity, delivering predictable, high-quality returns for investors who stay the course. Volatility along the way matters far less when the endpoint return is largely locked in.

• 1-year target maturity
• 3–5 year tenors
• Up to 10-year options
• AAA CPSE bonds
• AAA NBFC paper

The market currently offers target maturity funds across a wide range of maturities — from one year all the way to ten — and across asset quality tiers, from AAA-rated CPSEs to AAA NBFCs. This gives investors the flexibility to match duration with their own financial horizon while staying in high-quality paper. For anyone with a 12 to 24-month outlook, Dalal believes this is where the fixed income opportunity of the current cycle lies.