With interest rates coming down and liquidity rising, India’s bond market is changing fast. In this insightful interaction with BT, Shriram Ramanathan, CIO—Fixed Income at HSBC Mutual Fund, shares his outlook on navigating the evolving debt market. He also explains his views on bond investment strategies, why he prefers certain types of bonds, how to save on taxes, and why mutual funds are becoming more attractive for investors. Edited excerpts:
What is your fixed income strategy in the current environment of falling interest rates and surplus liquidity?
We’ve maintained a positive duration bias across our funds, supported by favourable demand-supply dynamics, easing rates, and strong domestic resilience. However, with yields falling and the curve steepening, we’ve begun to tactically reduce duration. Narrowing spreads between Indian and US yields have made valuations a bit expensive. RBI’s recent measures, including Open Market Operations (OMOs) purchases and Foreign Exchange (FX) swaps, have driven liquidity sharply positive, indicating that the next rally leg will be liquidity-led. We see more value in gradually shifting from IGBs to 3–5-year corporate bonds, which continue to offer 65–75 bps spreads and better risk-reward in a rate-cutting environment.
What are the key trends shaping the Indian fixed income landscape?
India’s fixed income market is seeing strong growth, driven by rising domestic participation from MFs and insurers and increased global access via index inclusion. A stable macro environment, easing inflation, and RBI’s supportive stance have fostered a more mature market. With limited global dependency, Indian debt continues to offer investors a low-risk diversification tool and scope for alpha through spread compression.
With rising geopolitical tensions and global rate volatility, how should Indian investors position their debt mutual fund portfolios?
India’s domestic-led market remains relatively insulated, and further rate cuts of around 50 bps are expected. RBI’s proactive liquidity support through OMO and FX swaps is driving yields lower. We suggest maintaining adequate duration in portfolios to benefit from this trend. Within debt, 3–5 year corporate bonds offer the most attractive spreads and are well-positioned to benefit from further compression. Investors should consider Corporate Bond and Short Duration Funds aligned to this segment.
With changes in debt fund taxation (like removal of indexation), how has investor behaviour changed?
While the tax changes were a temporary dampener, debt remains a core low-risk asset class offering predictable returns. Given recent volatility in riskier assets, there’s a renewed case for balanced portfolios. Debt funds continue to be a prudent option for stability and diversification, especially amid falling interest rates.
What are the most tax-efficient fixed income strategies today, especially for high tax-bracket investors?
There is rising interest in Income Plus Arbitrage Fund of Funds (FoFs). These funds combine arbitrage with debt exposure (below 65%) and are taxed at just 12.5% as long-term capital gains if held for over two years. This structure also provides flexibility to adapt strategies based on market shifts.
What are the risks in debt funds that retail investors often overlook?
A common pitfall is choosing products that don’t align with goals. Many investors also underutilise debt funds for cash management, missing better returns from short-duration options. Reinvestment risk is often ignored—short duration portfolios in a falling rate cycle may deliver lower-than-expected returns. Credit risk assessment is also critical. Lastly, expecting equity-like returns from debt can lead to poor investment decisions.
How are corporate bond yields and credit spreads behaving, and what do you expect going ahead?
Yields have softened across the curve, with 10Y gilts down ~50 bps and short-term corporate bonds easing 80–100 bps. Spreads have narrowed slightly, but we still see value in 3–5 year corporate bonds, which offer 65–75 bps over IGBs. With liquidity improving, we’ve increased allocation to this segment across our funds and expect further spread compression.
How do you see the mutual fund industry’s growth trajectory over the next 3–5 years, especially with increasing retail participation?
MF AUM has crossed INR 65.7 trillion with record SIPs, deeper retail reach, and an AUM-to-GDP ratio of 20%. Growth will continue with greater digital adoption, new product innovation, and increased retail education. Tax-efficient debt options like the Income Plus Arbitrage FoF are gaining popularity, offering predictability and lower tax liability. Institutional interest is also expected to broaden beyond traditional categories into more strategic debt segments in a falling rate environment.