Money market, PSU debt funds among best bets for investors: Marzban Irani

With headline inflation close to 2 per cent and a growth trajectory going south after Q2FY26, we expect interest rates to remain lower for longer, Irani said

The proposed external commercial borrowing (ECB) reforms should help the credit spreads in the domestic markets to ease slightly, says Marzban Irani, president – fixed income at LIC Mutual Fund Asset Management in an email interview with Devanshu Singla. Money market, short duration, and PSU debt funds, he says, may be suited well from a risk reward trade-off for investors. Edited excerpts:

 

What is your current view on the interest rate trajectory over the next 6-12 months? 

With headline inflation close to 2 per cent (lower end of RBI’s tolerance band) and a growth trajectory going south after Q2FY26, we expect interest rates to remain lower for longer to aid recovery in growth. The yield curve will remain steep as incremental risk-reward in running higher duration remains limited.

 

 

How well has the debt market, especially government securities and corporate bonds, priced in global rate cuts? Are there segments or maturities that you believe are mispriced? 

The yield curve has become steeper post the June and August MPC (Monetary Policy Committee) meeting, reflecting limited scope for future rate cuts, barring just one which is expected in December. SDL (State Development Loans) spreads have widened significantly due to market dislocation particularly after a hawkish August MPC commentary and excess supply in the longer end. However, lower than expected supply in Q3 provides a tactical opportunity to play for spread compression.

 

How do you view the G-Sec borrowing calendar for H2FY26? Are there any risks to the demand-supply balance for bonds?

The G-sec calendar for H2FY26 provided the much-needed relief to the market which was reeling under pressure with excess duration supply. RBI and the central government have been proactive in taking market feedback and altering the supply in the longer end. The demand supply situation remains in balance.

 

With the RBI proposing to ease ECB norms and unwind caps, how do you expect external flows and foreign investor behaviour to impact domestic debt yields and credit spreads? 

The proposed ECB reforms are likely to bring in higher US dollar inflows and provide domestic corporates to raise debt at a cheaper cost, bringing their overall cost of funding lower. This should help the credit spreads in the domestic markets to ease slightly.

 

In the current market scenario, which fixed income categories offer the most attractive risk-reward trade-off for investors?

Money market funds, low duration funds, short duration funds, and banking and PSU debt funds may be suited well from a risk reward trade-off for investors. However, investors must consult their financial advisors in case of any doubts.

 

What is your outlook on the USD-INR over the next 6-12 months? And, will RBI continue to intervene, or will it let INR slip further to help exporters in light of tariff woes? 

Indian rupee (INR) typically depreciates around 2.5-3 per cent a year over a longer term. A softer domestic growth, impending US Fed rate cuts and an unclear tariffs situation might keep the rupee under pressure. RBI will only intervene in case of excess volatility. So, we can expect it to further depreciate from the current levels. INR will likely trade in 87.50-89.50 range with RBI intervention expected as and when volatility increases on either side.