Expect a long pause on policy rates as supply pressures dominate bond markets: Puneet Pal
According to Puneet Pal, Head – Fixed Income at PGIM India Mutual Fund, the outlook points to a prolonged pause on policy rates, with bond yields remaining range-bound but volatile in the coming months.
RBI Liquidity Actions to Continue, Curve to Stay Steep
Pal expects incremental open market operations (OMOs) by the Reserve Bank of India to the tune of ₹1.5–2 trillion over the next few months, as liquidity conditions remain tight amid continued FX intervention.
Indian government bonds declined for a second consecutive day. This follows a surprise decision to exclude Indian debt from a global index. Investors are cautious. Oil prices are also rising due to Middle East developments. The Reserve Bank of India is expected to support bond prices. Other investors have increased their bond purchases.
Despite these measures, supply pressures are likely to keep the yield curve steep. “The supply–demand dynamics remain unfavourable,” the PGIM India spokesperson notes, adding that the benchmark 10-year government bond yield is expected to trade in a range of 6.45% to 6.75% over the near term.
Investment Strategy: Selective Duration, Defined Horizons
From an allocation perspective, Pal suggests investors continue to favour Corporate Bond Funds with portfolio maturity up to five years, while being tactical on duration through Dynamic Bond Funds. He advises a minimum investment horizon of 12–18 months for such strategies. Money market yields for maturities of up to one year also look attractive on a risk–reward basis, making them suitable for investors with shorter time horizons, according to the PGIM India spokesperson.
Indian Bond Markets: Supply Surprises Weigh on Yields
Bond yields have edged higher at the start of the year as supply considerations took centre stage in the final quarter of FY26. This has happened despite the RBI announcing ₹2 trillion of OMOs and USD/INR buy–sell swaps to inject liquidity. While yields briefly stabilised after these announcements in late December 2025, pressure resurfaced after state government borrowing for Q4 exceeded expectations.Markets had pencilled in ₹4.5 trillion of state government securities (SGS) issuance, but the actual auction calendar came in higher at ₹4.99 trillion. This led to renewed pressure, especially at the longer end of the curve, further steepening yields. Longer-tenor yields have risen by 7–8 basis points since the start of the month, even as the benchmark 10-year yield has largely remained unchanged.
Money Markets Tighten as Credit Outpaces Deposits
Money market yields have also moved higher, reflecting stress in banking system liquidity as credit growth continues to outpace deposit accretion. The rupee slipping past 90 per dollar amid heavy RBI intervention added to the pressure. One-year certificate of deposit (CD) yields have risen 20–25 bps since end-December to around 6.90–6.95%, while shorter 2–3 month CD yields are also higher, signalling elevated loan–deposit ratios, tighter interbank liquidity, and uneven liquidity distribution across banks.
Pal cautions that the sharp rise in money market yields could further distort monetary transmission, which is already being impacted by higher long-term yields.
Macro Signals and Flows: Mixed but Watchful
On the macro front, the HSBC Manufacturing and Services PMIs moderated, with the composite index easing to 57.8 from 58.9 in the previous month. Markets are also awaiting clarity on the potential inclusion of Indian government bonds (FAR) in the Bloomberg Global Aggregate Index, which Pal says could be short-term supportive for bonds if confirmed.
The overnight indexed swap (OIS) curve has remained range-bound, with yields up 2–3 bps across tenors. RBI’s USD forward position remains sizeable, with a short position of USD 63 billion as of November. While foreign portfolio investors returned to Indian bonds with about USD 400 million of inflows, equity outflows continued. Meanwhile, India’s first advance estimate for FY26 GDP growth stands at 7.40%.
Global Cues: US Yields Elevated
Internationally, bond yields remain elevated. US 10-year yields are trading around 4.19%, up 3 bps since the start of the month. UK yields have eased by about 10 bps, while German yields have remained largely stable.
Bottom Line
The message from PGIM India’s fixed-income desk is clear: policy rates are likely on an extended pause, but bond markets will continue to grapple with supply pressures and liquidity constraints. In this environment, disciplined duration management, defined investment horizons, and selective exposure across corporate bonds and money market instruments remain key to navigating volatility.
