Short Description: Axis Mutual Fund’s Devang Shah believes India’s rate cut cycle is over, discusses budget borrowing’s market impact, and shares fixed income strategies for 2026.
Read Time: 2 minutes 15 seconds
Main Article
RBI Rate Cycle on Pause as Growth and Inflation Dynamics Shift
In an exclusive analysis, Devang Shah, Head of Fixed Income at Axis Mutual Fund, asserts that India’s RBI rate pause is likely to persist through most of 2026. Shah notes that the significant monetary and fiscal stimulus injected over the past year, coupled with a supportive budget and improved growth outlook, eliminates the need for further rate cuts. While acknowledging a potential inflation uptick in the latter half of the year, he believes it will remain within manageable bounds. “The rate cut cycle has come to an end,” Shah states, assigning a low probability to any rate hikes unless sparked by a significant external shock like a poor monsoon.
Budget Borrowing and the Path for Government Bond Yields
Shah expressed a measured view on the government’s elevated gross market borrowing of ₹17.2 lakh crore, noting it exceeds market expectations. He highlights a potential demand-supply gap in the G-sec market, which could pressure yields upward unless offset by substantial RBI Open Market Operations (OMOs) or expected foreign inflows from index inclusion. Consequently, Shah forecasts the 10-year bond yield to trade in a range of 6.75% to 7% for much of the year. He also downplays the immediate impact of US Treasury yields on domestic debt, citing a broken correlation where Indian bonds have rallied even as US yields surged.
Fixed Income Strategies Favor Short-Term and Tactical Plays
For fixed income investors, Shah advises a strategic shift. With the RBI on hold and a potential cycle reversal next year, he recommends favoring the short end of the yield curve. Specifically, 1-2 year AAA corporate bonds offer attractive yields with lower interest rate risk. For tactical allocations, he points to State Development Loans (SDLs), where wider spreads due to higher supply present opportunities. Shah concludes by emphasizing a goals-based approach, suggesting money market funds for very short horizons and a blend of debt and arbitrage strategies for two-year investments to optimize post-tax returns.
Short Summary
Devang Shah of Axis Mutual Fund expects the RBI to maintain a prolonged pause on interest rates in 2026, citing adequate growth support and contained inflation. Investors should navigate a higher supply of government bonds by focusing on short-duration corporate debt and tactical opportunities in state government securities, while managing yield expectations within a 6.75-7% range for the benchmark.
