RBI may cut rates in December; bond market outlook turning positive: Bandhan AMC’s Suyash Choudhary

With global trade tensions and tariff concerns reshaping market sentiment, the outlook for India’s bond market is turning more constructive.

Suyash Choudhary, Head – Fixed Income at Bandhan AMC, believes that the backdrop of contained inflation and emerging growth uncertainties could give the Reserve Bank of India room to cut rates as early as December.

He adds that most of the negative factors weighing on yields have already played out, creating attractive opportunities across the yield curve for fixed income investors. Edited Excerpts –

Q) With the U.S. imposing new tariffs and global trade tensions rising, how are bond yields reacting, and what does it mean for fixed income investors?
A) All other things constant, this backdrop could be construed as being positive for the bond market.

New growth uncertainties, alongside well-contained inflationary pressures, would imply that RBI may be able to conduct further monetary easing. Indeed, we do expect another repo rate cut in December.

Bond yields have been impacted lately by a variety of reasons, including neutral RBI commentary, some fears that fiscal deficit may be higher, and fatigue with respect to supply of duration bonds.

This has opened up decent opportunities across the yield curve for suitable investment horizons. We believe that most of the negative factors impacting bond yields have largely run their course.

Q) U.S. bond yields remain elevated—are we entering a “higher-for-longer” regime, and how should Indian debt investors position themselves?
A) US fiscal deficit seems now in the range of 6 – 7% of GDP for the foreseeable future. This is very different from the pre-pandemic range and obviously is impacting bond yields there.

However, debt costs there can only be manageable over the medium term if real positive yields come down and the dollar is weaker.

Thus, even though yield differentials to the US are narrowing in many other geographies including in India, we don’t expect that this will impact capital flows into other bond markets.

Put another way, we expect bond flows into India to be reasonable over the medium term, despite narrowing yield differentials to the US.

Q) Japan’s long-term government bond yields have surged to multi-decade highs. How significant is this shift for global capital flows and risk sentiment?
A) The theme of long end yields rising is consistent across many developed markets with inflation levels higher and respective fiscal stances looser than before.

On the other hand, many developing markets including India have followed more conservative macro-policies over the last few years and are now enjoying their benefits in terms of lower inflation and general macro-economic strength.

Thus, despite higher developed market bond yields, capital flows have continued into other markets where the stand-alone macro-economic story is strong, like India.

Q) Do you see rising developed market yields impacting foreign inflows into Indian debt markets, especially with India’s inclusion in global bond indices?
A) While capital flows may be subject to short-term volatility, we expect medium flows into Indian debt market to be healthy given the size of our market, the strong macro-story that we represent, and the increasingly felt need to diversify some developed market exposures where fiscal and currency pressures have risen.

Q) For investors looking at fixed income, is it wiser to lock into long-duration bonds now or stay short given the uncertain global rate environment?
A) It is always better to follow some asset allocation principles while investing –
1> be aware of both one’s risk appetite and investment horizon 2> follow a ‘core’ and ‘satellite’ approach while selecting investment avenues where the first bucket is relatively conservative on risk.

Yields across the board have risen thereby unlocking more value in various pockets of the market. While adhering to the above principles, one may choose both short term funds as well as active duration managed ones.

Q) How should investors balance between sovereign bonds, corporate bonds, and new-age fixed income products like private credit AIFs in the current scenario?
A) Sovereign and corporate bonds are both part of the traditional fixed income market and the choice between the two will depend upon corporate bond spreads available.

Our preference currently is to use sovereign bonds for duration and shorter end corporate bonds for ‘carry’.

Private credit AIFs are a completely different risk profile and should be considered as a third asset class altogether when assessing how much to allocate in terms of an overall asset allocation table.

Q) Are inflation risks largely behind us, or could tariffs and supply-side shocks reignite yield volatility in the coming quarters?
A) The tariff impact on inflation largely pertains to the US economy, where the discussion currently is whether this should be looked at as only a one-time impact or there is a risk of second round effects as well.

So far medium-term inflation expectations are relatively well-contained, and demand has weakened thereby limiting the risk of second round effects.

Indeed, the Fed seems to be getting ready to cut rates imminently and market expects more than 100 bps of additional cuts over the next one year. Thus, the base case is that most of the yield volatility from this source should be largely behind us.

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