What can you expect from the fixed income market in 2026?
The year 2025 witnessed several major events, including the shock of tariffs introduced by the US government and uncertainty around the trade deal between India and the US. Additionally, the year saw multiple rate cuts by the Reserve Bank of India (RBI), totalling 125 basis points.
With a new year knocking on the door, market participants are expecting another eventful year in 2026. Here’s what veteran fund managers — Akhil Mittal, Senior Fund Manager – Fixed Income, Tata MF; Mayur Chauhan, Fund Manager – Fixed Income, Quantum AMC; Prashant Pimple, CIO – Fixed Income, Baroda BNP Paribas MF; Pratik Shroff, Fund Manager – Debt, LIC MF; Puneet Pal, Head – Fixed Income, PGIM India MF — along with two leading AMCs, Axis MF and Franklin Templeton MF, expect going forward.
Events to Look Forward to in 2026
Fund managers unanimously cited Union Budget 2026 and RBI’s liquidity infusion measures, such as open market operations (OMOs), as the key events to watch in the new year.
Prashant added that he will closely track domestic inflation and the growth trajectory, along with their evolving composition. He will also monitor the movement of the Indian rupee against the US dollar and the State Development Loan (SDL) auction calendar.
Pratik shared that he is looking forward to the possible inclusion of Indian bonds in the Bloomberg Global Bond Index, which he believes could help ease the demand-supply mismatch.
Outlook for 2026
Akhil expects markets to stabilise and yields to move downward once the INR stabilises in the new year. He believes that low inflation provides room for policy easing to support the economy. He expects the RBI to maintain surplus liquidity on a sustainable basis and sees yields drifting lower over the next two quarters, assuming no major macroeconomic risks emerge.
In its annual outlook, Axis MF stated that a stable interest rate cycle, sustained liquidity normalisation, and the anticipated inclusion of Indian debt securities in the Bloomberg Global Aggregate Index could result in a flatter yield curve in 2026. The fund house added that RBI’s OMOs will help bridge the supply-demand gap and ensure smoother absorption of supply.
While maintaining a positive outlook on Indian fixed income markets, Franklin Templeton MF expressed concerns about the tariff situation. It stated that the absence of a trade deal could lead to weaker exports and employment losses in labour-intensive sectors. While inflation has remained low, the fund house noted that the current account deficit has widened due to tariffs and expects a balance of payments net deficit of 1% of GDP in FY26.
Mayur expects liquidity in the economy to remain in surplus over the medium-term following RBI’s rate cuts. He added that much of the liquidity has already been front-loaded through OMOs, leading him to expect the bond market to remain range-bound.
According to Prashant, the debt market outlook for 2026 remains supported by the fact that many negative factors are already priced into yields. He pointed out that the INR depreciated by nearly 6% in 2025 without a meaningful deterioration in fundamentals, making a strong case for increased foreign inflows. He expects another rate cut by the US Federal Reserve by March 2026 and believes that domestic inflation and growth dynamics support one more rate cut by the RBI, in alignment with global monetary policy trends.
Pratik also maintained a constructive outlook for 2026, citing the gradual transmission of the 125-bps rate cut by the RBI. He believes the debt market may transition from a rate-cut cycle to a prolonged pause, given low inflation and moderate growth expectations. He expects credit spreads on sovereign bonds to widen due to higher SDL supply and added that the 10-year yield may remain in a wide range of 6.45%–6.70% amid near-term global volatility. He noted that 2–4-year corporate bonds yielding 150–175 bps above the overnight rate may offer better risk-adjusted returns.
Puneet highlighted a lack of appetite for bonds in the Indian market despite a dovish RBI and persistent OMOs. He expects bond yields to decline by another 10–15 bps over the next few months and said markets will closely watch the supply of State Government Securities (SGS) in the coming quarter.
Fund Recommendations
Akhil Mittal, Senior Fund Manager – Fixed Income, Tata MF
Funds with up to one-year duration and gilt funds for a medium- to long-term perspective.
Axis MF
A barbell strategy combining short-tenor bonds for liquidity and long-duration government bonds for tactical gains is optimal. Two-year AA-rated corporate bonds for accrual and long-term government bonds are preferred.
Franklin Templeton MF
Investors should focus on actively managed short- and medium-duration fixed income strategies. Selective introduction of duration risk is advisable while maintaining caution amid global uncertainties.
Mayur Chauhan, Fund Manager – Fixed Income, Quantum AMC
Short- or medium-term duration bond funds are preferred at the current stage.
Prashant Pimple, CIO – Fixed Income, Baroda BNP Paribas MF
Recently launched FoFs (Income Plus Arbitrage and Multi-Asset FoF) provide an optimal tax-efficient solution. Tactical allocation to gilt or dynamic bond categories can also be considered due to attractive long-term sovereign spreads.
Pratik Shroff, Fund Manager – Debt, LIC MF
Investors may consider the shorter end of the yield curve through categories such as liquid or money market funds for steady accrual. Those willing to take slightly higher risk may consider Banking & PSU or similar categories for attractive risk-adjusted returns.
Puneet Pal, Head – Fixed Income, PGIM India MF
For maturities of up to five years, corporate bond funds with tactical duration allocation via dynamic bond funds are recommended. Money market instruments with maturities of up to one year also appear attractive from a risk-reward perspective.
