Opportunities in long-term bonds, but no big rally ahead: Devang Shah

Investors should focus on short-to-medium bonds and quality corporate debt as RBI nears the end of its rate cut cycle, says Shah

Investors must focus on shorter-duration bonds and mutual funds (MF) to balance risks and rewards as the Reserve Bank of India (RBI) completes its rate cut cycle, said Devang Shah, head, fixed income, Axis Mutual Fund. Shah, in an email interview with Abhishek Kumar, explained why he has increased his exposure to corporate and medium-duration bonds. Edited excerpts:

 

How will the US Federal Reserve’s rate cut and commentary impact Indian markets? Are more rate cuts likely in India?

 

The Fed’s rate cut was expected, and its guidance for two more cuts aligns with market expectations. On the domestic front, we believe we are at the end of the rate cut cycle. However, continued impact of GST (Goods and Services Tax) rationalisation, lowering of growth potential, and easing from the Fed could potentially lead to RBI lowering the repo rate by 25 basis points (bps) in the October-November cycle. 

Do you see longer-duration bonds (30 years and more) offering attractive entry points? 

Long-duration bonds currently offer tactical opportunities amid rate volatility, but we don’t foresee a sustained structural rally in this segment. The sharp rally of the past year has given way to growing caution, as yields have hardened since June 2025 even after an unexpected 50 bps rate cut. The main concern is that unless there is another round of policy support or external shock, long bonds may not generate the same total returns due to lingering fiscal risks and weak demand. In contrast, shorter-duration G-secs (government securities) are seeing relatively stronger demand, supported by the RBI’s significant liquidity infusion through recent open market operations (OMO) purchases and cash reserve ratio (CRR) cuts.

 

Investors may consider playing the ‘belly’ of the yield curve at this point of time (short-to-medium maturities) for a better balance of yield and lower interest rate risk.

 

Does it make sense for investors to lock in elevated yields through longer-horizon funds?

 

Given that we are at the far end of the rate cut cycle, we do not anticipate further significant easing now. While there may still be tactical opportunities in the long-duration segment, we don’t expect a sustained structural rally. In this environment, clients can consider focusing on shorter-term for a more balanced risk-reward profile. For investors with a medium-term debt allocation, income plus arbitrage funds of funds represent an optimal solution due to their flexibility and tax efficiency.

 

How are your dynamic bond, G-sec and other medium-to-long horizon portfolios positioned?

 

Axis AMC's dynamic bond and gilt portfolios have actively reduced duration in recent months. This shift demonstrates a more cautious stance, reducing the portfolio’s sensitivity to interest rate movements. Medium-duration and corporate bond exposures have been preferred, supporting a more ‘carry-focused’ approach — prioritising steady income over aggressive bets on falling rates. High-quality credit, especially on the short-to-medium end, continues to be a core part of Axis AMC’s allocation in volatile times. Shorter-duration G-Secs are seeing relatively stronger demand, supported by the RBI’s significant liquidity infusion through recent OMO purchases and CRR cuts.

 

What is your view on state development loans (SDLs) and corporate bonds? How does the risk–reward profile of lower-rated credits stack up?

 

Yields on SDLs and corporate bonds have risen, driven by both higher supply and fiscal concerns at the state level, making them appear more attractive on a relative basis. High-rated (AAA/AA) corporate bonds offer higher yields compared to government securities, reflecting stable corporate balance sheets. However, for lower-rated credits, while the yield pick-up is tempting, the risk premium may not be sufficient to justify the credit risk, especially as slower growth or sudden liquidity events could lead to spread widening.

 

Axis AMC advocates being high selectivity in credit exposure and having a bias toward quality, with only marginal or tactical positions in sub-AAA credits for those equipped to handle the risks.