Bandhan AMC’s Suyash Choudhary on RBI rate hikes, bond yields, and debt strategy

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As the Reserve Bank of India (RBI) moves into a rate-tightening cycle, Suyash Choudhary, head of fixed income at Bandhan AMC, explains what higher interest rates mean for savers and investors.

In a conversation with Mint , he discusses the expected rate trajectory, portfolio duration, global bond allocation and why investors should prioritise quality over high yields in fixed income.

Market interest rates do not always move in tandem with RBI policy decisions. Even when the RBI was cutting rates previously, market bond yields in India were rising due to broader macroeconomic factors. The RBI is normalizing policy in response to global and domestic pressures. Globally, there is intense competition for capital, driven by massive AI technology spending in developed markets, which has pushed up global bond yields. Additionally, rising geopolitical risks and higher energy costs are adding to inflationary pressures.

We believe the RBI is embarking on a broader tightening cycle, with total rate hikes potentially reaching 100 to 125 basis points. This could push the repo rate to around 6.25% to 6.50% by the end of the cycle. Fortunately, bond markets have already priced in a significant portion of this move.

For a saver, rising bond yields are actually positive news. The primary goal of fixed-income investing is to earn a ‘real return’, which means your investment returns beat expected inflation so that your purchasing power is protected. Higher interest rates increase the real income your savings can generate.

There is a common misunderstanding that debt mutual funds become riskier when rates rise because their daily unit prices, or net asset values (NAVs), fall. When interest rates rise, existing bond prices fall, lowering the NAV. However, the overall portfolio yield continuously rises as new, higher-yielding bonds are added.

If you hold a direct fixed deposit or bond, you experience the same effect as an invisible ‘opportunity loss’ because you have locked your money in at a lower rate instead of capturing the higher yield. As long as your money is in actively managed funds or short-term instruments, rising rates can ultimately work in your favour.

Currently, we recommend keeping portfolio duration low, meaning investors should avoid locking into long-term bonds too early. If you hold medium- to long-duration products, ensure they are actively managed so the fund manager can adjust the portfolio as rate cycles evolve.

For passive or retail investors managing their own allocations, sticking to very short-term options, such as money market funds, makes the most sense right now. We are still in the middle of India’s rate-adjustment cycle, so it is wiser to wait for bond yields to rise further before committing to long-term fixed-income products.

Investors must first understand the fundamental role of debt in a portfolio.