Short-duration and accrual strategies better positioned amid abundant liquidity, says Devang Shah of Axis MF

In an exclusive interaction with ETMarkets, Devang Shah, Head – Fixed Income at Axis Mutual Fund, said that amid abundant liquidity and a lower interest rate environment, short-duration and accrual-based strategies are better placed to deliver yield and near-term capital appreciation.

While the recent rating upgrade provides a sentiment boost, Shah believes its impact on corporate bonds and foreign inflows will be incremental rather than transformational.

He added that the structural rally in long bonds has largely played out, making tactical allocation and disciplined portfolio positioning crucial for fixed income investors. Edited Excerpts –

Q) Could this rating upgrade lead to a re-rating of Indian corporate bonds, and if so, which segments or sectors are likely to benefit the most?

A) The rating upgrade is marginally positive for the bond market as it boosts investor sentiment. However, it is not expected to drive significant inflows into the government bond /corporate bond market directly.

Indian corporates were already operating at investment-grade levels, so the incremental benefit in terms of reduced borrowing costs is limited.

For corporate borrowers who significantly raise funds offshore, the upgrade will reduce borrowing costs by approximately 20-25 basis points, providing some relief.

Still, the overall impact is expected to be incremental rather than transformational

Q) What changes can fixed income investors expect in foreign capital flows into India’s debt market after this upgrade?

A) Foreign capital flows into India’s debt market are expected to see a positive but moderate impact following the rating upgrade. While the upgrade provides a positive sentiment boost, the real drivers of demand-supply dynamics lie elsewhere.

One of the ongoing concerns includes weak incremental demand due to structural changes. Additionally, the OMO programs that were major liquidity providers last year have largely paused, and FPIs experienced net selling recently.

These demand-side factors have contributed to greater supply-demand mismatches in the bond market despite the upgrade.

Thus, while foreign inflows may increase gradually with improved market sentiment, they are unlikely to surge dramatically immediately post-upgrade.

Investors should also note that liquidity conditions in the system remain strong, supporting short-term duration assets more than long-duration bonds, and that broader macroeconomic factors like fiscal consolidation and inflation trajectories will more strongly influence foreign participation over the medium term.

Q) After the status quo policy from the RBI do you see further rate cuts in the rest of FY26 and why?
A) We align with the central bank’s current policy stance. Given the absence of significant economic vulnerabilities and considering the cumulative 100 basis points rate reduction already implemented, the RBI is well-positioned to maintain a neutral approach.

With operative rates already eased by ~150 bps, any further cuts may be limited to just one more or two at best in case the growth surprises on downside.

In our view, we are at the far end of the rate cut cycle and an additional 25 basis points rate cut would have had limited incremental impact under prevailing liquidity conditions.

That said, we continue to believe that interest rates are likely to remain lower for an extended period.

Q) How should investors position themselves in the fixed income portfolio amid rate cut and geopolitical concerns?
A) The implications of elevated tariffs warrant careful evaluation, with key macroeconomic variables—such as currency dynamics, capital flows, and evolving trade relationships—requiring close monitoring.

As rightly noted by the Governor, monetary policy transmission operates with a lag and must be allowed to fully play out. While interest rates are likely to remain lower for an extended period, the structural rally in long bonds appears to have largely played out.

That said, tactical opportunities offering 10–15 basis points may still emerge intermittently. Against a backdrop of abundant liquidity and lower rates, clients may consider to seek yield and near-term capital appreciation in short-duration and accrual-based strategies.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)