It has been a challenging year for investors, who have had to navigate numerous odds, including macroeconomic highs and lows, volatile equity markets and hardening bond yields.
We expect the Reserve Bank of India (RBI) to keep interest rates on hold through H1 FY27, as it focuses on capital-flow-enabling measures rather than rate hikes, lowering the probability of near-term policy tightening. However, elevated commodity prices and higher global rates amid risks to growth and inflation are likely to prompt the RBI to raise rates in late FY27. In our view, the current tightening cycle is likely to be around 50-75 basis points (bps).
Laddering strategy for bond investors
Current market yields have not fully priced in the probability of rate hikes. As the yield curve is likely to shift higher, a laddering strategy is a prudent approach for bond investors facing rising interest rates.
Allocation to short-maturity bonds: As monetary tightening flattens the yield curve, the gap between short-term (1–3 year) and long-term (10+ year) yields narrows. Short-maturity bonds offer attractive accrual income with contained duration risk. Further, current short-term yields reflect
market expectations for higher interest rates, with the 1-year Overnight Indexed Swap (OIS) spread indicating potential 50bps rate hike in the next year, presenting opportunities for reinvestment at higher yields later in the cycle.
Preference for high-quality corporate bonds: Current market conditions favour high-quality corporate bonds. Valuations are attractive relative to government securities, making high-quality corporate bonds a valuable addition to a diversified bond portfolio.
Opportunistic allocation to selective bond strategies: Investors may allocate capital to dynamic bond strategies for enhanced returns through active duration management and floating rate strategies to mitigate inflation and duration risks.
Add multi-asset strategies: Multi-asset strategies diversify across asset classes, lowering overall risk through reduced correlation with traditional asset classes and possibility to generate income from sources like high-dividend stocks, long-term bonds, or alternatives such as Real Estate Investment Trusts (REITs)/ Infrastructure Investment Trusts (INVITs). However, these strategies involve higher risks than bonds, so investors should ensure their asset allocations match their risk tolerance.
In summary, we expect the RBI to stay on hold in H1 2027, with rate hikes likely in late FY2027 as India’s macro-outlook remains constructive amid elevated commodity prices and higher global rates. The yield curve is expected to move higher and maintaining a well-diversified bond portfolio and implementing a laddering strategy would help investors tide in a higher rates environment.
The writer is head, Investment Products and Strategy, Standard Chartered Wealth, India
Disclaimer: The views expressed in this article are solely those of the author and do not reflect the official policy, editorial position or views of Financial Express. The article is intended for informational purposes only and should not be construed as tax, legal or financial advice.
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