Indian Bond Yields Attractive, Downside Limited; Experts Advise Focus on Shorter Durations

Indian government bond yields are currently at attractive levels, making them a viable investment option, with experts expecting limited downside from present levels.

According to Tushar Sharma, Co-Founder of Bondbay, bond yields in the January–March 2026 quarter are likely to remain range-bound with an upward bias rather than falling sharply.

“Bond yields are expected to trade in a narrow range, reflecting fiscal dynamics and supply conditions more than monetary policy,” Sharma said.

Supply Pressures Limit Rally

Despite benign inflation and the Reserve Bank of India’s (RBI) liquidity management through open market operations (OMOs), forex swaps, and short-term tools, large government borrowing and persistent supply overhang continue to restrain any major rally in bonds.

The rebound of the 10-year government security (G-sec) yield above 6.6% highlights these challenges. While the RBI has signalled accommodative intent, its actions remain largely defensive, aimed at preventing disorderly tightening rather than pushing yields significantly lower.

Sharma expects the 10-year benchmark to trade in the 6.6%–6.7% range for the rest of the quarter, with OMOs acting mainly as stabilisers.

Budget in Focus

Market participants are closely watching the Union Budget on February 1, particularly the government’s gross borrowing numbers, which will shape near-term yield trends.

“Bond investors will focus on fiscal borrowing plans, especially amid rising global defence spending and geopolitical tensions,” said Sameer Karyatt, Executive Director and Head of Trading at DBS Bank India.

Yields to Stay Elevated

Murthy Nagarajan, Head of Fixed Income at Tata Asset Management, expects 10-year G-sec yields to stabilise between 6.50% and 6.70%, supported by RBI purchases and year-end demand from banks, insurers, and EPFO.

He added that corporate bond yields may rise slightly due to increased supply and year-end factors.

Experts agree that current yield levels are suitable for investors seeking steady returns.

Opportunities in Debt Funds

For mutual fund investors, the present environment offers opportunities to lock in attractive rates, particularly at the shorter end of the curve, said Harsimran Singh Sahni, EVP and Treasury Head at Anand Rathi Global Finance.

The 1–2 year segment and the 5-year segment, trading above 6.5%, offer favourable risk-adjusted returns in a stable rate scenario.

“With rate cuts unlikely in the near term, short- and medium-duration strategies appear better positioned than long-duration funds,” Sahni said.

Cautious Approach Recommended

Sharma advised investors to focus on steady accruals rather than betting on capital gains from falling yields.

“Extending duration purely in anticipation of easing could expose portfolios to mark-to-market volatility,” he said.

Funds focused on short-duration, money market instruments, and high-quality corporate bonds are better suited to a range-bound or mildly rising yield environment.

Nagarajan added that government and high-quality corporate bonds are currently offering returns higher than many bank fixed deposits, with limited downside risk at current levels.

Impact of Yield Movements

If bond yields decline, most debt fund categories would benefit, though gains would vary by duration.

Short- and medium-term funds would face limited volatility, while long-duration funds exposed to 10- and 30-year maturities may remain vulnerable to supply pressures and fiscal uncertainty.

“The risk-adjusted upside in long-duration strategies may remain limited,” Sahni noted.

Fund Managers’ Strategy

Fund managers are adopting a cautious accumulation approach, selectively adding exposure at higher yields while maintaining liquidity.

“There is no rush to deploy aggressively, but managers are positioning gradually,” Sharma said.

Most managers are focusing on shorter maturities and monitoring global inflation trends, domestic supply dynamics, commodity prices, and RBI policy signals.

They are also awaiting greater clarity from the RBI’s February policy review before taking stronger positions.

Overall, experts advise investors to align bond investments with their financial goals, maintain discipline, and prioritise consistency over short-term timing in the current yield environment.