Long-term bonds are cheap now; patient investors may gain big, says Rahul Goswami of Franklin Templeton

When the US–Iran ceasefire was announced, oil prices fell from their highs. But now the ceasefire is off, and oil prices look set to rise again. As a fund manager, how are you reading this? Or do you think the market is already pricing in a prolonged disruption?

When the US-Iran ceasefire was announced, oil prices corrected sharply from their highs, reflecting market optimism that supply disruptions would be temporary. However, with the ceasefire now off, first round talks having failed, and crude prices once again moving higher, the market narrative has shifted meaningfully. Current prices assume a scenario where tensions remain elevated but contained.

What they probably do not reflect is the likelihood of sustained supply stress, particularly given the damage to key transit routes such as the Strait of Hormuz, where normalcy may not be restored quickly even if diplomacy resumes. For any energy import‑dependent economy, this has clear macro implications.

The Reserve Bank of India’s (RBI) inflation assumptions include crude oil averaging around US$ 85 per barrel, whereas spot prices are currently trading higher. If these levels persist, the impact on inflation, the current account deficit, and fiscal balances could be more pronounced than what is currently embedded in forecasts. Importantly, the fixed income market is already reacting, with overnight indexed swaps now pricing in a 100-basis-point (bps; 100 basis points is equal to one percentage point) rate hike over the next year, signalling higher inflation risks in the coming months. As a result, interest-rate risk premiums are likely to stay elevated.

Are we settling at higher inflation levels on a more consistent basis?

Over the last year, we have seen abnormally low inflation. However, we see upside risk to inflation, and it will probably average in the 4.5-5% range for FY (Financial year) 2027. It is not a hyperinflationary situation as in 2022-2023.

Though it is not a worrying situation, we are reasonably sure that any possible easing from the central bank looks extremely difficult from here on. In the last Monetary Policy, the RBI indicated that the inflation projection for FY27 is close to 4.6-4.7%, with a key assumption on crude oil price of $85 a barrel. But if oil and commodity prices were to rise for any reason, or worse, remain elevated, then the RBI may get more cautious and hawkish on monetary policy.

RAPID FIRE
Q.Fixed deposits or debt funds—where’s your own money?
Easy one,debt funds.
Q.Nifty lows or 10-year yield at 8%—which excites you more?
Of course, 10-yr yield @ 8%.
Q.One equity fund manager whose calls you quietly respect?
There are many…
Q.Biggest bond market call you got completely wrong?
2013 (Taper tantrum).
Q.Oil at $120 or rupee at 95, which one worries you more?
Oil at $120.
Q.One number you check first thing every morning?
Commodities,currencies & rates.
Q.Warren Buffett or Ray Dalio?
Both are very highly respectable. I’d tilt a little more to Ray Dalio.
Q.Gilt or corporate bond?
Both, 50% allocation each.
Rahul Goswami
Chief Investment Officer & Managing Director–Fixed Income India, Franklin Templeton Asset Management (India)

Do you think inflation is now becoming more of core inflation, or is it still headline inflation?

The RBI has recently said they don’t expect a second round of higher crude prices, which could seep into core inflation at a later point. And given that monsoon predictions remain below normal this year, that may also create more uncertainty regarding food inflation.

We are no longer in the 2.5-3% inflation zone, and eventually, higher headline numbers will seep into second-order impacts on consumption, etc. In other words, we will have to wait and see how much (of oil inflation) will be passed on to the consumer.

That’s more like core inflation.

For now, the RBI can afford to look through the inflation uptick — we’re coming from a very low base, and 4.7–4.8% still sits within their tolerance band. But there’s another layer to this: before the war, India’s worry was slowing demand — AI (Artificial Intelligence) disrupting IT (Information Technology) jobs, and credit growth remaining comfortable at around 15%. The RBI is weighing both sides. As long as inflation stays in the 4.5–5% range, we can expect a prolonged pause—neither cuts nor hikes. But if the trajectory moves higher, we may see the central bank shift from neutral to a tightening policy stance.

How closely are India’s interest rates linked to the US Federal Reserve, beyond domestic factors like inflation and monsoon?

The channel through which a reserve currency’s interest rates seep into an Emerging Market (EM) is the currency channel. And to that extent, currency (rupee) will remain under pressure if rates in the United States (US) remain high. And that is the channel that an EM has to guard itself against, especially India, which is somewhat sensitive to capital flows because it runs a persistent current account deficit.

In that scenario, you need consistent capital flows to come into your country to fund your current account. And for that, the reserve currency’s interest rates are important. In fact, emerging markets’ central banks are often more sensitive to currency volatility than to interest rates.

From 2008 to 2016, the US Fed rate was zero. But we had more than two interest rate cycles. First, in 2008, we had rate cuts. Then, from 2011 to 2012, we had rate hikes. Then, from 2012 to 2013, we had rate cuts. Then, from 2013 to 2015, we had rate hikes. This was partly because the economy was running on twin deficits: a large current account deficit (CAD) and a large fiscal deficit.

So, our domestic interest rates will be the function of how the domestic economy is panning out in terms of growth, inflation, and CAD. The Government of India (GOI) has demonstrated great fiscal discipline, especially post-Covid, and with a manageable current account balance, we have witnessed a benign inflation situation in recent times. All these have helped the central bank to be more supportive of growth. Obviously, as long as you have a current account deficit, you have to be mindful of interest rate trends in developed markets.

What is your duration strategy at this point? The ones where you maintain an active duration?

That depends on the bonds’ valuation and must be managed strictly within the riskreward matrix. If we find the valuations attractive, we would have increased the duration over the last, say, few months. But if we see the market evolving in a way that makes valuations look expensive, we will obviously cut duration (by selling longterm bonds and buying short-term ones). Currently, valuations are attractive, so our actively managed debt funds are running higher duration than the benchmark.

You’ve said rate cuts look very difficult from here, and that the RBI will be more cautious, yet you’re positioned with higher duration. How do you square that?

Our higher duration exposure across select segments of the yield curve is a tactical call. Some long‑duration instruments, especially government securities and state development loans, currently offer yields meaningfully higher than their long‑term averages relative to the repo rate and the benchmark 10‑year government bond.

This duration is exposure entirely to sovereign‑backed instruments and therefore entails no credit risk. While the overall duration of some schemes has increased marginally, maintaining exposure to very short-maturity instruments alongside longer-duration holdings has ensured that the portfolio’s modified duration remains at an optimal level from a risk-reward perspective.

The repo rate is at its lowest after all the cuts, yet the 10-year benchmark yield has risen since end-May 2025. How do you interpret this as a debt fund manager?

When the rate-cut cycle began in February 2025, the pace and intensity of easing were faster than the market had anticipated. In three policy meetings up to June 2025, the RBI delivered a cumulative 100 bps cut and clearly communicated that the easing was being front‑loaded. As a result, bond markets quickly priced in the bulk of the domestic rate cuts. Beyond June 2025, the 10‑year benchmark yield was no longer driven by near‑term policy expectations but by global factors, such as higher global bond yields, as well as domestic considerations, including resilient GDP growth and a reduced likelihood of further aggressive easing. From a portfolio standpoint, we felt that yields, particularly at the longer end, were not remunerative for much of 2025. The risk‑reward for adding duration was unattractive, so we consciously refrained from doing so. As we moved towards the fag end of 2025, yields began to rise to levels that better compensated for duration risk. That’s when longer‑tenor bonds started becoming more attractive again from an investment perspective.

So then, which end of the curve is cheaper today?

Those with a higher risk tolerance for duration can consider government securities funds. At present, the remunerative part of the yield curve appears to be the long end, particularly bonds with 20 to 30‑year maturities. Thirty-year government securities are trading at yields close to 7.5%, offering a spread of about 225 bps over the repo rate, above the long-term average of roughly 200–220 bps. In addition, the term premium of nearly 63 bps over the 10-year benchmark is also higher than the historical average of around 45-50 bps, indicating that investors are being well compensated for holding duration risk.

This valuation reflects excessive pessimism rather than fundamentals, especially given real yields of about 3.5%, which is among the highest in recent cycles. The imbalance suggests that long‑dated bonds are historically cheaper today, offering superior risk-reward outcomes for investors willing to look beyond near‑term volatility.

What if RBI hikes interest rates in the medium-term, say in 2027?

Markets typically move ahead of monetary policy. As seen in June 2025, when the RBI cut rates by 50 basis points, yields have since risen. So it is not exactly that the market waits for the central bank to move, and then the central bank moves. The market typically pre-empts the central bank, or starts pricing in the probability of rate hikes and the risks that are being priced in. So from that perspective, we think that corporate debt, money market and probably some participation in government securities make a lot of sense.

How has the market responded to your turnaround of Franklin Templeton’s debt funds? Are distributors, advisers and investors returning with meaningful allocations, or is it still early days?

We are still in the building phase as we scale assets under management, but the journey has been both pleasant and successful. We are seeing renewed trust across segments—from top corporates and institutional investors to a growing base of retail distributors exploring fixed income. The broader challenge, however, is that retail allocations to fixed income have declined in recent years, affecting the entire debt market.