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Looking Ahead: What 2026 Could Mean for India’s Fixed Income Landscape
As global central banks recalibrate and domestic priorities evolve, India’s fixed income market enters the new year with cautious expectations and opportunities
With markets in a period of adjustment and policy signals evolving at home and abroad, fixed income investors are reassessing expectations for the year ahead. The following perspectives consider how these shifts may shape India’s interest rate trajectory, bond yields, and portfolio decisions in 2026.
In a conversation with Marzban Irani, President – Fixed Income at LIC Mutual Fund Asset Management, we discuss how the year ahead could unfold for India’s fixed income markets.
1. As we enter the new year, how do you see India’s interest rate cycle shaping up amid global rate cuts and domestic inflation dynamics?
The commentary emanating from global central bankers has been mixed. FOMC (Federal Open Market Committee) resumed its rate cut cycle aggregating to 75bps despite the elevated levels of inflation. The Bank of England has continued to cut its benchmark rates with four rate cuts in 2025 and further expected in 2026 as it looks to support consumption. The European Central Bank has paused its rate cut cycle as the outlook for growth has stabilised. Bank of Japan on the other hand has increased its benchmark rates to a three-decade high as it combats persistent inflation.
On the domestic front, headline inflation in 2026 is expected to inch upwards to 4% as favourable base wanes, food deflation stabilises and core inflation remains in the range of 4% to 4.5%. Even as inflation is estimated to increase, it is expected to remain manageable. The central government along with the RBI is focussed on sustaining the growth momentum of the domestic economy. The recently released minutes of the MPC highlights that the members assess that weak inflation is an indication of slack in the economy and several high-frequency indicators are showing softening of growth. We believe an additional 25bp rate cut in February 2026 cannot be ruled out if growth momentum slows or inflation undershoots RBI’s estimates.
2. How critical will the upcoming Union Budget be for bond yields, particularly in the context of fiscal consolidation and borrowing plans?
The central government has announced a shift towards the debt to GDP (Gross domestic product) ratio as the fiscal anchor from FY2027. The finance minister has announced that reducing India’s gross debt to GDP will form the government’s core focus. As per the central government, the ratio for FY2026 is estimated at 56.1%. The government is aiming to bring this ratio down to 50% ± 1% by 2031. This can be achieved if the government reins in the gross fiscal deficit to 3-3.5% of the GDP by 2031 from the 4.4% estimated in FY2026, implying 15-20bps reduction every year.
To achieve this, the government needs to balance between sustained high economic growth, fiscal consolidation by reducing the borrowings, increasing tax revenues, controlling spending, especially on subsidies and populist measures. The policymakers have to ensure that the yields of government bonds are properly managed as lower interest costs/yields will lead to lower borrowing costs and thereby a more controlled deficit.
3. How are active fixed income managers repositioning portfolios to balance returns and risk in the current environment?
The fixed income market in India is transitioning from a "Rate Cut Rally" strategy to an "Accrual & Carry" strategy and investors must taper down their return expectations. The flattening of the yield curve provides an opportunity to play on the ‘belly of the curve’ (1-to-4-year segment). This duration offers a balance of accrual and moderate sensitivity to changes in the macro-economic environment.
4. Which segments of the fixed income market like short duration, corporate bonds, SDLs, or G-secs, look most attractive for the coming year?
As mentioned earlier, the schemes operating within the 1-to-4-year segment appear attractive. The current levels provide a reasonable opportunity to invest in the Money Market schemes, Short Duration and Banking & PSU schemes.
G-Sec may outperform SGS (State Government Securities) as state borrowings are expected to be higher than envisaged on the back of populist measures and the recent passing of the VB-G Ram G bill (replacement of MGNREGA) in the lower house of the parliament, which makes the states (barring North Eastern states, Himalayan states and UTs) fund 40% of the expenditure (earlier the wage component was fully funded by the centre).
The ultra-long G-Sec (40+ years) is trading at 7.50%-7.55% on an annualised basis which is a relatively higher carry level for a sovereign instrument. Investors having a longer horizon and higher risk appetite may choose to invest in GILT funds. However, this is a selective tactical call.
5. For conservative investors looking for stability, what kind of fixed income strategies make sense in the new year?
Conservative investors should invest in Money Market or Low Duration schemes as they may provide a balance between higher accruals and limited sensitivity to interest rate changes.
6. If you had to sum up 2025 for fixed income investors in one message, what would it be?
2025 was an uneven year for the fixed income investors as depreciating INR offset RBI’s monetary easing. The 10-year G-Sec yields have not moved much despite the 125bps rate cut among other liquidity easing measures undertaken by RBI. The 10-year G-Sec at the start of the year stood at 6.78% trading currently at 6.68%. Going ahead, the INR/yields may see some relief if – i) India is able to conclude the ongoing trade deal with USA, ii) capital inflows improve supported by inclusion in Bloomberg indices and iii) USD depreciates due to rate cuts by the FOMC (Federal Open Market Committee).
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