Rate hike in CY26? Why SBI MF's Rajeev Radhakrishnan thinks tide could turn

Radhakrishnan said a persistent supply shock accompanied by a weaker currency can negatively impact inflation and fiscal direction, given the likelihood of higher subsidy requirements

Persistent supply shocks coupled with a weaker rupee could eventually force an RBI monetary policy reversal if inflation expectations remain sticky, said Rajeev Radhakrishnan, CFA, CIO - Fixed Income at SBI Mutual Fund. In an email interview with Devanshu Singla, Radhakrishnan discussed the impact of geopolitical tensions on the domestic currency, navigating the "Impossible Trinity," and why retail investors should pivot toward accrual strategies and target maturity funds in a rising yield environment. Edited Excerpts:

Given the persistent geopolitical tensions, can there be a case for rate hikes in the remaining part of CY26?

The persistence of geopolitical tensions can impact external sector balances, more so on the current account as the first-order effect. In addition to the already prevailing capital account challenges, this sets the stage for a further negative feedback loop on the Indian Rupee. A persistent supply shock accompanied by a weaker currency can negatively impact inflation and fiscal direction, given the likelihood of higher subsidy requirements. While monetary policy may look through first-order effects, persistence will eventually impact inflation expectations and could lead to stickiness in headline CPI above the policy target. This can clearly set the stage for a policy reversal at some point in 2026. Based on the current assessment of RBI’s guidance, the bar for a rate hike clearly is higher.

Can the RBI decouple from its peers going ahead, especially the US Fed?

Domestic monetary policy stance will clearly be a function of India’s growth–inflation trajectory. Even with the higher financial market interlinkages and the impact of overseas policy actions feeding in through various channels, with the currency being the predominant factor, domestic policy can still be decoupled. However, the challenges of the 'Impossible Trinity' (the conflict between exchange, capital, and interest-rate policies) need to be navigated. Running an independent monetary policy with an open capital account implies that currency movements will be reflective of global factors.

How do you expect the estimated ₹3 trillion RBI dividend to impact banking system liquidity and short-term yields over the next few quarters?

Around ₹3 trillion is broadly priced in and should not have any material impact on market yields. Dividend payment to the extent of earnings from forex reserves will add to core liquidity. Overall, banking liquidity will be positively impacted as the government spends the same amount over the coming months. In the near term, short-term yields will be more sensitive to supply pressures.

With FPIs being net sellers so far this fiscal, what is your year-end target for the 10-year G-Sec yield?

Yields are expected to move directionally higher over the year, with near-term movement being range-bound.

Are you currently leaning toward the safety of Accrual products or still betting on the Duration strategy?

In aggregate, the focus is on running shorter duration. However, consistent with specific mandates of individual portfolios, there is an ongoing focus towards accrual strategies.

In the Green Bond market, is there a real premium for investors yet, or is the lack of liquidity a deal-breaker?

Lack of liquidity and specific investor demand in the domestic market for green mandates is the key reason for the muted growth in this segment. Accordingly, investors are unlikely to provide any material greenium or green premium for issuers.

How should a conservative investor hedge their debt portfolio against rising commodity prices or a weaker Rupee?

Conservative investors should consider Target Maturity funds for broader predictability or be invested in short-tenor funds. The underlying tenors and credit exposures may align with the specific risk tolerance of the investors.

What is the safest debt product for a retail investor over the next 12 months?

Every fixed-income product, except an Overnight fund that invests only in TREPS (Triparty Repo Dealing System) and CROMS (Clearcorp Repo Order Matching System), has specific nuances of interest rate and credit risk factors that investors need to assess. Ultimately, the risk tolerance and tenor of investments of individual investors should determine the ideal product.