Fixed income set to perform well amid limited easing room, says Churchil Bhatt

Kshitij Anand: Let us start with the recent RBI policy announcement. Well, there were no rate cuts, but analysts have been picking up on something in the framework, and there were 22 measures that were announced. So, what is your take on the latest policy stance?

Churchil Bhatt: So, there are two aspects to the RBI policy. One is obviously the decision on the policy repo rate and the economic impact that it has.

The other is that they have also started publishing a set of statements on regulatory developments and measures separately. This time, apparently, both are pleasantly surprising.

So, first, let us start with the policy. On the face of it, the policy was a no-change policy; not much happened to the policy rates. But the key difference between, say, the past policy—at least the August policy—and the October policy is that the RBI has admitted that some policy space has opened up for easing.

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Now, this is a significant statement for any player in the interest rates market. Many believe that the RBI will now await other conducive developments before delivering a rate cut. Market participants are at least expecting more benign policy action rather than any untoward hike or tightening in the near term.In our view, the RBI, from the phrasing in the past couple of policies where they had limited room for easing, has now moved to saying they have space opened up for easing. To us, this means that really no material changes are required for them to deliver a rate cut.As long as the story pans out as they see it, the rate cut should be delivered because the space has already opened up. The only reason they may be wanting to wait and watch a bit is that they are waiting for a fuller transmission of the 100 basis point rate cuts delivered since February and may want more clarity on global trade uncertainties—although I believe this may or may not materialize by December.

Kshitij Anand: Good that you talked about the rate cut, because let me also get your perspective on the stance, which is neutral and a dovish pause—you could say it leaves the door open for future rate cuts. What indicators or developments would you look for that could trigger such a move in the near future?

Churchil Bhatt: So, like I said, the RBI has currently given us a narrative to offer a moderate slowdown in growth, although the full-year FY26 GDP has been revised upward to 6.8%.

This is largely an impact of the first two quarters, which have already transpired and are now passed. If you look at their projections for FY26 Q3 and Q4, the GDP projections are now 6.3% and 6.2%, respectively.

This financial year, they have also revised down their inflation projections substantially. In the April policy, the FY26 CPI forecast was closer to 4%.

It was then revised down to around 3.7% in June, 3.1% in August, and now I think it is closer to 2.5–2.6%. So, this is a substantial markdown in their projections of inflation as well. The Q3 forward-looking CPI continues to remain below 2%, while Q4 probably hovers closer to 4%.

So, if you look at the overall picture, what the RBI is saying is that CPI is well contained—in fact, it has positively surprised them. Inflation is, at least, not a worry at this point in time.

While growth has done well in the past, or better than probably expected, the forthcoming quarters are going to be a moderate disappointment. Given the mix, they are trying to say that some space has opened up; inflation and growth both have given them some room to act going forward.

The only thing that can derail this trajectory is a major development that impacts either growth or inflation.

So, we are not looking for any incremental narrative for the expectation of a rate cut to materialize; we are simply looking for the current narrative to continue, with no impediment or surprises to derail it. In our opinion, the rate cut will be delivered in the upcoming policy.

Kshitij Anand: So, one rate cut is a possibility in December. In fact, you did touch upon the lower CPI expectation as well as the lower CPI front, which is what the RBI has guided for, and the growth number has already been raised to 6.8%. This could actually influence the rate cut move, and you have already pointed out that December could be a month wherein we could see a marginal, 25-basis-point rate cut—or any rate cut, which is a possibility.

Let me also move to my next question because I was pointing towards this only. Let us talk about M&A financing. Can you also elaborate on the recent banking sector reforms, especially the framework for M&A financing and financing against listed debt securities, and how these changes will impact corporate borrowing and investment flows?

Churchil Bhatt: So, like I said, there was a host of—in fact, if I am not wrong—22 various measures taken on the regulatory development side.

Some of the significant ones are obviously… so, banks, after a few decades, will now be permitted to finance M&A transactions. Banks are the largest financiers of credit in the economy. In the Indian market too, they probably have around ₹190 lakh crores on their loan book, which is a fairly large number, and this space up till now was not open to them.

So, it was possibly other players—the non-banking players, either in the NBFC form or foreign players, or in some cases maybe some AIFs or other structured finance players—who were participating in these transactions, financing these deals.

I think the RBI has rightly opened up this space. This is a fairly large space; in a good year, we can see transactions upwards of almost $100 billion financing M&As, and this space is thankfully going to be opened up for banks.

It is good for borrowers—the more the number of lenders, the more efficient the market becomes. Also, in the traded credit space in India, fortunately or unfortunately, the market remains fairly liquid for relatively higher-rated credits.

So, maybe double-A space and better are the credits that get financed easily through the non-banking traded space. For any lower-rated borrower, transactions become slightly difficult because the market shrinks.

We believe that these reforms, which allow banks to step in, will also encourage M&As in corporates with relatively lower credit ratings, because that is a space which banks understand quite well.

A large portion of their loan books and relationships remain in that space, so it is a welcome move. On a structural basis, it makes the markets more efficient.

A few other measures, like…

Kshitij Anand: Now, with improved access to fixed income and corporate bonds, what opportunities do you see?

Churchil Bhatt: So, in the fixed income and corporate bond space, one of the opportunities that has opened up is that the RBI has removed restrictions on borrowing against listed NCDs. The finer details are awaited, both on the M&A side as well as multiple other regulations.

But what this does is—let us say that I am a relatively lower-rated entity, an upcoming entity, a new business entity. I may not have an established borrowing track record, but on account of my treasury or the financing that I receive, I hold good-quality, say, triple-A-rated NCDs or traded instruments.

Today, these instruments largely lie in my book as investments. Once the regulations are out, these securities can be used as collateral, against which I can borrow money to finance my otherwise business-enhancing activities.

Because these instruments are perhaps better-rated than my own rating, my financing would be cheaper, and it is easier for a lender to take a credit call with such collateral as an underlying.

So, this deepens the market. More lenders can participate, more borrowers can enter the market, and the overall efficiency of the system improves. What was otherwise only an income-earning asset now becomes an asset against which I can raise financing. More asset creation, more economic activity—it is overall good for the country.

Kshitij Anand: And finally, let us get your perspective: how is fixed income expected to perform in the next 12 months or so?

Churchil Bhatt: So, again, we are now at a stage where we believe that while some policy space has opened up and the overall macroeconomic environment remains fairly supportive of fixed income assets, the incremental room for further policy easing may not be much.

Unless we see a major global shock or a more widespread slowdown—either locally or globally or both—we believe that while there is room for more policy easing, it remains limited to, at best, 25 to 50 basis points.

To that extent, we are of the opinion that while there is some room for yields to move lower, the extent may vary depending on how the global and local macro environments shape up. Having said that, this remains an environment conducive to fixed income.

We believe that relative to other asset classes, fixed income remains a cheaper alternative. It will remain an asset class of choice, has a space in everyone’s portfolio, and is expected to perform well over the next 15 months.

Thereafter, we will have to take upcoming data into account to see where policy and rates are headed. But it looks like good times for fixed income, with better-than-average returns and a solid place in any portfolio—probably a good time for that now.

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

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