Yields unlikely to drop sharply; favour short-to-medium bonds: Avnish Jain

25-bps rate cut by December looks likely, but RBI's neutral stance and global uncertainties mean yields may not fall sharply, says Jain

The Reserve Bank of India (RBI) has indicated the possibility of further easing in interest rates, but its ‘neutral’ stance suggests any additional cuts are likely to be limited, said Avnish Jain, head of fixed income, Canara Robeco Asset Management Company, in an email interaction with Abhishek Kumar. Edited excerpts: 

How do you read the bond market’s response to the latest RBI policy, and do you see scope for further rate cuts in the coming months? 

Bond markets were upbeat about the monetary policy’s dovish tilt. The RBI’s Monetary Policy Committee (MPC) acknowledged a sharper-than-expected decline in overall Consumer Price Index (CPI) inflation and revised its 2025-26 (FY26) CPI projection to 2.6 per cent, down from 3.1 per cent in the August policy meet. The MPC also noted that growth is likely to slow in the second half (H2) of FY26 due to global uncertainties and unresolved tariff issues. 

The RBI governor observed that the growth-inflation dynamics may have opened space for further easing to support growth, though earlier frontloaded policy cuts are still filtering through the economy. 

The US Federal Reserve cut rates by 25 basis points (bps) in September 2025 after holding steady for most of the year, and is expected to cut further in the coming months. Goods and services tax rationalisation may also help ease inflation. Against this backdrop, the RBI is expected to cut rates by 25 bps in its December policy meet, as CPI inflation remains below the 4 per cent target and exports face headwinds from US tariffs. 

The yields of long-duration bonds (30 years and beyond) have come off recent highs. Do you see the easing continuing? 

Long-duration bond yields have softened as overall yields have trended lower. The spread between 10-year and 30-year government securities (G-secs) has narrowed, driven by the government’s decision to reduce long-bond supply in its H2FY26 issuances. We expect the 10-year–30-year spread to compress further in the near term, as the overall yield curve continues to exhibit a softening trend. 

At current yield levels, do long-duration bonds present attractive entry points? How does the risk/reward compare with 10-year or shorter-tenor G-secs? 

Although the RBI has indicated room for further easing, its stance remains ‘neutral’, suggesting any additional cuts are likely limited. Global uncertainties, particularly around US tariffs, further constrain sharp yield declines. In this context, a steep drop in yields appears unlikely. From a risk/reward perspective, investors are better served staying in short-to-medium-duration bonds. 

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

Debt funds, particularly long-duration funds such as dynamic, income, and gilt, are actively managed. Fund managers may take tactical positions in long-duration bonds to benefit from short-term movements in yields or spread compression. Portfolios may shift between low and higher durations depending on the interest rate outlook. 

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

SDL spreads have widened since the RBI MPC adopted a ‘neutral’ stance. Ten-year SDL spreads over 10-year G-secs, which were around 30–40 bps in the first half of 2025, are now closer to 70 bps, reflecting increased SDL supply and policy positioning.

 

Corporate bond spreads (over similar-maturity G-secs) range from 80 to 100 bps in the one-to-five-year bucket. Higher spreads in SDLs and short-term corporate papers may provide attractive investment opportunities in an environment where the G-sec curve is likely to move in a narrow band. 

The yield curve playbook

 

·        RBI stays neutral; rate cuts limited

 

·        Long-duration bonds: upside constrained, risk remains

 

·        Debt funds: tactical flexibility for shifting yields

 

·        SDLs and short-term corporates: pockets of opportunity

 

·        Prioritise stability; avoid chasing volatile moves