With Most RBI Rate Cuts Done, Fund Managers See Limited Upside for Bond Prices — What Should Investors Do Now?

India’s fixed‑income landscape is entering a new phase. With the RBI delivering another 25 bps rate cut, the total easing for 2025 has reached 125 basis points — and fund managers believe the rate‑cut cycle is now near its end.

This changes the opportunity set for debt investors dramatically.

 Why the Upside in Bond Prices Is Now Limited

Bond prices rise when interest rates fall.
But with most rate cuts already behind us:

• The scope for capital gains is shrinking

• Debt returns will now depend more on accrual (interest income) than duration plays

• Investors must reset return expectations for the next few quarters

Fund managers expect a long pause from the RBI unless inflation surprises materially on the downside.

 What Should Fixed‑Income Investors Do Now?

Shift Toward Accrual-Based Strategies

Accrual funds earn primarily from interest income, not rate movements — making them ideal in low‑rate‑volatility periods.

Recommended categories for the next 2–3 months:

• Liquid Funds

• Money Market Funds

• Low-Duration Funds

Expected returns (as per fund managers):

 Duration Strategies: Only for Tactical, Experienced Investors

Duration funds benefit the most when interest rates fall — but only if the fall continues.

Some fund managers still see tactical room in long-duration government securities due to:

• Lower inflation

• Strong GDP growth

• Expected OMOs in December

• Possible Bloomberg bond‑index inclusion

If yields on the 10‑year G‑Sec (currently at 6.49%) drop further, investors may earn:

 Potential total returns: 7.5% – 7.75%

But remember:
If rates rise, these funds can fall sharply.

 Accrual vs Duration: Which Is Right for You?

Accrual Funds

✔ Stable
✔ Lower interest‑rate sensitivity
✔ Ideal when rate cuts slow down

Duration Funds

✔ Higher upside if rates fall
❌ Higher risk if rates rise
❌ Suitable only for skilled investors who can time entry/exit

 Debt Category Snapshot: Fund Performance (in %)

 Liquid Funds

• Axis Liquid

• Franklin India Liquid

• ABSL Liquid

• Groww Liquid

 Short Duration Funds

• Nippon India Short Duration

• Axis Short Duration

• ICICI Pru Short Term

• ABSL Short Term

 Money Market Funds

• UTI Money Market

• Axis Money Market

• Bajaj Finserv Money Market

• Franklin / Nippon India Money Market

 Corporate Bond Funds

• Axis Corporate Bond

• Baroda BNP Paribas Corporate Bond

• Nippon India Corporate Bond

• HSBC Corporate Bond

 Bottom Line

With the interest‑rate cycle nearing a pause:

• Accrual strategies dominate

• Duration is tactical, not structural

• Expect muted capital gains but stable income opportunities

• DIIs will likely remain strong buyers in fixed income

Investors should align their allocation with horizon, risk appetite, and liquidity needs — not chase duration without conviction.

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