RBI rate cut: Time to lock in fixed deposits, load up on long bonds, say experts

India’s 10-year benchmark bond yield was marginally lower after the RBI policy announcement.

With the Reserve Bank of India (RBI) Governor Sanjay Malhotra leaving the door open for further repo rate cuts by changing the stance from “neutral” to “accommodative”, experts believe that investors could benefit from adding fixed-income investments to their portfolios now.

The RBI eased the repo rate by 25 basis points (bps) on April 9. While the cut was widely anticipated, the market was split on the change in the monetary stance in the run-up to the policy.

According to Vishal Goenka, Co-Founder of IndiaBonds.com, much of the RBI repo cut has been priced in the markets.

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“However, given the global macro volatility, the impact on domestic markets is likely to be neutral for now, as the move was expected. For investors, adding more fixed income remains a sensible move for portfolio diversification and any future direction of interest rates may still be downwards,” said Goenka.

Impact on yields

India’s 10-year benchmark bond yield was marginally lower after the RBI policy announcement and was trading at 6.44 percent. Given the sharp surge in US bond yields overnight and the currency volatility, the reaction in the bond market was subdued.

Deepak Panjwani, Head-Debt Markets at GEPL Capital, expects the 10-year to head towards 6.25 percent by the next RBI MPC meet and the broader range for the 10-year around 6.25 percent to 6.60 percent till September 2025.

“In total, we expect another 75 bps more easing in the repo rate from here. The tariff war will keep volatility at the higher levels and we may see a sharp swing in the global bond yields,” Panjwani said.

Further rate-cut expectations

According to Suresh Darak, Founder, Bondbazaar, the 25 bps rate cut, coupled with the RBI's shift in stance, sends a clear signal that they are comfortable with the current macroeconomic conditions, particularly inflation.

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“In essence, interest rates are likely to decrease further or remain stable for a while,” said Darak.

Meanwhile, Deepak Agrawal, Chief Investment Officer-Debt, Kotak Mahindra AMC, believes that given the changing world order, with significant tariff imposition by the US, global growth is likely to be impacted, which may have an impact on Indian growth also. “We expect a further 50 bps rate cut in the next six months by the RBI,” said Agrawal.

What should be the investors’ strategy?

Prashant Pimple, CIO-Fixed Income, Baroda BNP Paribas Mutual Fund, believes that whenever the real rates remain positive, fixed income as an asset class remains attractive.

In addition to an absolute fall in interest rates across the curve, he believes that there is a possibility of additional alpha to be generated on yield curve steepening and compression of spread within tenors and assets with the liquidity situation turning positive.

"The selection of a category of funds such as duration, credit ratings and gilts versus corporate should be a factor of one’s investment horizon and appetite for credit and duration risk," said Pimple.

Bond fund categories to benefit

The categories of funds expected to remain in demand are long-duration bond funds, dynamic bond funds and gilt funds.

Long-duration bond funds benefit from falling interest rates, as they hold bonds with extended maturity periods, allowing investors to capitalise on price appreciation. Dynamic bond funds adjust their portfolio duration based on interest rate movements, making them well-positioned in a falling rate scenario. Further, as gilt funds invest in government securities, these funds experience a direct impact from rate cuts, potentially leading to capital gains.

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Mahendra Kumar Jajoo, CIO–Fixed Income, Mirae Asset Investment Managers (India) Pvt Ltd, believes that at this point the optimum strategy will be to go for the long-duration funds.

"Alongside expectations for further easing of market rates, the long end of the yield curve remains very steep with the (yield) spread between 10-year and 30-/40-year bonds to be around 40 basis points. So, there is room for the yield curve to shift down or the curve to flatten from the long side," Jajoo said.

Meanwhile, Puneet Pal, Head-Fixed Income, PGIM India Mutual Fund, recommends dynamic bond funds.

“They are best positioned to take advantage of the current stage of the monetary cycle given the fact that dynamic bond funds have the flexibility to invest across the yield curve and also between the sub-asset classes of corporate bonds and G-secs,” Pal said.

Another way to bet on the changing policy dynamic could also be to invest via a barbell strategy, an investment approach that involves concentrating holdings at two extremes of risk or maturity rather than spreading investments evenly across a spectrum.

“Invest in both short-duration and long-duration debt instruments to balance liquidity and stability with potential gains from falling interest rates,” said Panjwani.

What should fixed deposit investors do?

The repo rate reduction, backed by the favourable liquidity conditions in the banking sector, should help banks further reduce FD rates and other liability-side fund sources. This should result in a quicker reduction of the cost of funds for banks and thereby allow more effective transmission of policy rate cuts in loans linked to internal benchmarks.

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"Depositors having investible surpluses can consider booking fixed deposits offering higher yields, especially those with longer tenures. This will allow them to earn higher FD yields, even during the falling interest rate regime. Consumers seeking higher FD yields can consider small finance banks and private sector banks, which are still offering FD yields of 8 percent and above," said Santosh Agarwal, Chief Executive Officer, Paisabazaar.