Lower inflation, slower growth: How should fixed income investors adjust their portfolios? Marzban Irani of LIC MF explains

With US tariffs shaking up global stock and bond markets, fixed income investors are trying to figure out what’s next. Will bond markets stay strong in this uncertain environment? And which bonds are likely to give better returns? In an interaction with Business Today, Marzban Irani, Chief Investment Officer – Fixed Income at LIC Mutual Fund AMC, shares his views on the recent RBI decisions, global market trends, and what they mean for India’s bond market.

How do you see the RBI’s recent rate cut and shift to an accommodative stance impacting bond yields in the near term?
Irani: In the April 25 policy, the monetary policy committee has reduced the repo rate has been reduced by 25 bps to 6 percent. With the global uncertainty and growth slowdown, this cut was required to support the economy. The bond market has already factored in a rate cut. But the change in stance indicates a pause or rate cut going ahead. Rate hikes are ruled out. Hence, bond yields are expected to continue the declining trend going ahead.

With global volatility rising after the Trump tariff announcements, what’s your outlook on foreign inflows into Indian debt markets?
Irani: Foreign flows might not come on an immediate basis due to global uncertainty. However, going ahead if there is a recession globally, including the US, the Fed might cut rates aggressively. Also, the government and the RBI are working on domestic bond inclusion on the Bloomberg index. With strong macros, India is expected to attract foreign flows.

With the RBI cutting interest rates and global markets facing uncertainty, do you think the gap between short- and long-term bond yields will widen or shrink?
Irani: We’ve observed a decline in yields across both the short and long ends of the curve. At the long end, the RBI’s rate cut has provided confidence to the market. On the short end, the central bank has infused liquidity through Open Market Operations (OMOs), Variable Rate Repos (VRRs), and currency swaps. We expect this trend of softening yields across the curve to persist.

How are Indian corporate bonds likely to behave in this environment of easing policy amid rising global uncertainty?
Irani: In this environment, AAA-rated Indian corporate bonds are expected to largely mimic the behaviour of sovereign bonds.

What segments within fixed income look the most attractive in this macro backdrop?
Irani: The 3-to-5-year segment currently appears to offer the most attractive risk-reward balance.

With inflation projected lower and GDP growth revised down, how should investors adjust their fixed income portfolio?
Irani: Investors should consider allocating to medium- to long-duration funds, depending on their individual risk appetites. Given the lower inflation outlook and moderated growth projections, these segments may offer better potential returns while aligning with the evolving interest rate environment.

How do you see the rupee behaving against the dollar in the coming months?
Irani: With the aggressive tariff stance from the US and ongoing global uncertainty, the rupee could see some weakening in the near term. While this may result in imported inflation, it could also provide a boost to Indian exports.