He cautions investors against expecting the kind of double-digit returns seen in recent years and advises them to stay invested with realistic expectations.
According to him, the coming year will be accrual-driven, offering stability rather than extraordinary gains, making fixed income an essential part of a balanced portfolio. Edited Excerpts –
Kshitij Anand: Let us start with the global backdrop. In fact, Jerome Powell’s Jackson Hole speech always sets the tone for markets worldwide. What were your key takeaways, and more importantly, what should fixed income investors in India read into it?
Marzban Irani: Some signal from the Fed was awaited, and markets were happy after the unemployment data. The Fed has given a signal that, going ahead, there could be a cut.
The markets were really waiting for this kind of signal, and the dot chart along with the Fed Fund Implied Probability also indicated the possibility of a 50 basis point cut this year. The only question is when that cut will come. So, this statement really helped us.
Indian companies are increasingly turning to the bond market to finance acquisitions, planning to raise over $2 billion in the coming months. Mutual funds, flush with capital, are driving demand, stepping in where foreign lenders once dominated. This surge in acquisition financing has propelled corporate bond sales to a record high this year, exceeding previous figures by over 15%.
As far as inflows are concerned, in the immediate term, these inflows will go into the US because a rate cut is expected, but rates are still higher there.
However, as parity sets in with emerging markets—once US rates come down—money will start flowing into emerging markets over time, and that is when they will see some inflows.
Kshitij Anand: If we look at inflation, US inflation is still elevated—around 4%—but compared to that, Indian inflation is lower, closer to 2%. In this context, what is your outlook for Indian interest rates over the next 6 to 12 months?
Marzban Irani: A few things happened this month. At the beginning, we saw a domestic policy review where rates were left unchanged, following the earlier 50 basis point cut in the previous policy.Then, around mid-month (around the 12th), headline inflation came in at 1.5%, which is again positive if we want to cut rates further on the domestic front.
In the last week, we are also awaiting GDP and growth numbers from the US. And next month, we will have the Fed policy, where we might see a cut. All these factors together are positive for the October policy.
For the next 6 to 12 months, I would advise investors to stay put. Yes, there was some pain in between, but let us take advantage of that. With inflation at these bottom levels—around 1.5%—this is a good time domestically to consider one last cut, if pending.
The delay is mainly due to global tariffs and other uncertainties that have caused volatility in the currency. Over time, once the Fed cuts, we will get some comfort to go for additional rate cuts as well.
Kshitij Anand: Within the fixed income space, there are multiple pockets of opportunities—be it government bonds, AAA corporate, or even high-yield credits. Where do you see the best relative value right now?
Marzban Irani: See, all three are different buckets. As far as credit is concerned, I always tell investors—if you really want to take that risk, go and take it on the equity front.
I mean, it is not worth it because of the illiquidity in the corporate bond markets in the lower credits.
But as far as government securities and corporate bonds are concerned, PSU bonds in the two-year, three-year bucket are in a very sweet spot, and one can be in those types of schemes—the short-term category, the banking PSU category. So, two-to-three-year PSU bonds are good, in a very sweet spot.
As far as G-Secs are concerned, at the very long end of the curve, there are some investors who always say that they just want to invest for, say, 25 or 30 years.
They can buy a long-term G-Sec and stay invested. The yields are very attractive, at 7.30–7.35.
Kshitij Anand: In fact, we saw some selling from FIIs as well. Although they have been net sellers in the equity markets, we are also seeing some selling in the debt market. How do you expect foreign inflows into the Indian debt market to evolve post this development? And, of course, we also saw the big news of India’s G-Sec inclusion in global bond indices.
Marzban Irani: We saw the JPMorgan index results. Now, we are awaiting the Bloomberg index inclusion.
Currently, what is happening in the US—as I mentioned—is that rates are on the higher side, so attracting flows becomes a little challenging.
But as we go ahead, and with our global rating being upgraded, all this will lead to a better percentage allocation in the indices, which will result in more flows in the medium to long term.
Kshitij Anand: And for conservative investors, there is always this duration dilemma: stay short and reinvest, or lock into longer maturities. What is your advice? How should they approach this decision in the current interest rate environment?
Marzban Irani: For conservative investors, they should be—and even aggressive investors should be—at the short end of the curve. We are at the bottom of the rate cut cycle, which has really peaked out.
As we go ahead, I do not see more rate cuts coming in—maybe one cut on the domestic front—but it is not that we are going to see very deep cuts going ahead.
So, it is better to stay at the short end of the curve—be in a money market category or in a short-term category, in the two-to-three-year segment—and just take the accrual for the time being. This is not the time to be adventurous.
In the last two-to-three years, fixed income funds have done extremely well. July 2022 was the peak—yields peaked then, and have only been declining since.
We have seen double-digit returns in a lot of fixed income categories. But as we go ahead, that looks a little challenging.
Kshitij Anand: And with equity valuations looking stretched and volatility high, what role can fixed income funds play in asset allocations today?
Marzban Irani: See, equity is for growth and fixed income is for stability—that is what I tell investors. So, when there is volatility because of wars, tariffs, and these types of things on the equity side, an asset allocation towards fixed income will give you stability.
Even gold is providing stability to the portfolios of many investors. And if you notice, multi-asset funds are in flavour because people want to diversify their risks across asset classes.
Fixed income always gives stability to the portfolio, and hence, it should be a part of individual portfolios.
Kshitij Anand: And finally, if you had to leave our listeners with one key message for fixed income investing in, let us say, the remainder of 2025, what would that be?
Marzban Irani: Do not expect those double-digit returns. Do not look at the past returns of two-three years and enter fixed income. Be happy with the stability that fixed income is giving you. The next one year is more of an accrual kind of a year.
And as we go ahead, with the new inflation basket coming up—as we all know—the food component might be tweaked, and then we will see how the CPI shapes up.
Along with that, our global rating has been upgraded, and there are more inclusions in foreign indices—all this is bullish and positive for the fixed income markets.
So, do not expect too much in terms of returns immediately; stay put, stay invested.
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