In an interaction with Puneet Pal, Head - Fixed Income, PGIM India Mutual Fund

How do you see the interest rate environment shaping up over the next 6-12 months, particularly in light of the RBI’s three rate cuts this year, including the recent reduction of the repo rate to 5.5 per cent in June?
The Reserve Bank of India (RBI) has already reduced policy rates by 100 bps and infused durable liquidity of Rs 7.40 lakh crore through open market purchases and forex swaps since January 2025. The Cash Reserve Ratio (CRR) was also reduced by 100 bps in the June policy, which will take effect in four equal tranches from September 6 onwards. While cutting the policy rates by a bigger than expected 50 bps in the June MPC meeting, the MPC statement mentioned that monetary policy is left with very limited space to support growth. This means that unless growth or inflation surprises on the downside, status quo on policy rates will be maintained amidst a liquidity surplus scenario. Thus, we do not see any changes to the policy rates over the next couple of quarters.

Where do you see the most attractive opportunities within the fixed income space right now—sovereign, corporate, or SDLs and in case of duration which duration?
We find the 3-year to 6-year segment of the corporate curve to be relatively attractive given the current surplus liquidity and our view that status quo on policy rates will be maintained over the next couple of quarters. Alpha generation from duration will be limited unless there is a material downside to growth and/or inflation. So, we believe that accrual will contribute more to the total return from Debt Funds over the next 1 year and duration should at best be used tactically in the current scenario.

How do you see the role of passive debt products growing in India’s fixed income landscape?
Passive debt funds have seen huge growth but we think that given the structural changes happening globally in the economic and market landscape amidst heightened geopolitical uncertainty, actively managed strategies are a better bet compared to passive strategies. We believe that actively managed funds are better equipped to handle the uncertainty and changes that we are witnessing currently and which are likely to persist over the foreseeable future.

Do you see currency volatility playing a larger role in fixed income investment decisions going forward?
Outlook on currency movements and its volatility has and will remain an integral part of fixed income investing and as such we do not see that changing. Given the current global backdrop of trade tariffs, USD weakness and a search for reserve assets away from USD, volatility in general is likely to increase and will persist across asset classes including the currency markets. So, while investing, one has to take into account this likely increase in volatility across asset classes, including in the currency markets.

What kind of asset allocation would you recommend for conservative vs aggressive investors in the current environment and what allocation do you see for fixed income?
Asset allocation depends upon the investment objectives of the investor and the relevant risk profile. From a fixed income allocation perspective, we think that one needs to allocate more to accrual funds and duration can be used tactically. In the current backdrop of surplus liquidity and RBI’s focus being on transmission of rate cuts, we expect corporate bond funds to do well and would recommend investors to increase their allocation to them.

Given current yield levels across segments, what kind of return expectations should fixed income investors realistically have for FY26?
Debt funds have had a couple of good years as yields came down, resulting in capital appreciation. FY26 is likely to witness moderation in returns relative to the last two years as yields have already come down, resulting in lower accrual going ahead and incrementally, we believe, that the scope for rate cuts may be limited to just 25 bps. Thus, with lower accrual and limited capital appreciation, we expect debt fund returns to moderate in FY26.