Summary of this article
Bond yields are easing after the RBI’s dovish policy, improving outlook for debt investors.
HDFC Mutual Fund favours short-to-medium duration funds.
Stable inflation and surplus liquidity support further easing in yields.
The past few days have brought a pleasant change for India’s bond market. Yields have begun drifting lower, liquidity feels comfortable again, and the RBI’s latest signals clearly point towards easier financial conditions. It’s a window that debt investors haven’t enjoyed in a while.
Given the current pleasant conditions, HDFC Mutual Fund believes investors may look at short-to-medium duration categories, particularly corporate bond-focused funds, depending on their risk appetite. The fund house sees the current backdrop as supportive for fixed-income investors, helped by steady macros and improving market sentiment.
This optimism is driven largely by the RBI’s recent monetary policy review. The central bank, in its December policy announcement, surprised the market with a 25-basis-point rate cut, upfront open market operations, and a USD 5 billion buy/sell swap. Its tone at the press conference was also dovish, which pushed the G-sec yield curve lower on strong trading activity.
The medium duration category of funds has delivered 7.74 per cent returns over the last one-year period. Short-duration funds have grown by an average of 7.26 per cent and low-duration funds by 7.27 per cent, as on December 10, 2025.
According to HDFC Mutual Fund, the RBI will stay data dependent, leaving room for one more rate cut if growth or inflation slows. The central bank also sounded more at ease with inflation, both headline and core, after adjusting for the nearly 50 bps impact of precious metals. It believes structural factors are helping keep inflation anchored even as growth remains resilient.
All of this supports a constructive medium-term outlook for fixed income. HDFC Mutual Fund expects inflation to average near the RBI’s 4 per cent target, while liquidity should stay in surplus. The Governor has repeatedly assured that the central bank will maintain enough liquidity to support the real economy.
India’s external sector adds further comfort. A manageable current account deficit, strong services exports, and healthy remittances, along with adequate forex reserves, keep external risks in check. The risk of significantly higher market borrowing is also low. Even if fiscal slippage occurs, it can be handled through short-term cash management bills or existing cash balances, with the government committed to its fiscal consolidation path.
Growth may have peaked in Q2 FY2026, HDFC Mutual Fund notes, and the sustainability of the post-GST rationalisation consumption boost is still uncertain. Expected rate cuts in the US over the next year could also give the RBI more room to ease, says the fund house.
With softening inflation, comfortable liquidity, and a proactive central bank, yields are likely to move lower. And as the RBI Governor pointed out, changes in short-term rates will eventually flow into long-term yields, creating selective opportunities even in long-duration bonds as spreads steadily compress.
