Rate Path In Focus
The Reserve Bank of India may not be done tightening yet. Archit Shah, chief investment officer at Zurich Kotak General Insurance, said the central bank could deliver another 50-75 basis points of repo-rate hikes if inflation remains sticky and external pressures from crude oil and global yields persist. In that scenario, the policy rate could move into the 5.75-6% range, extending the adjustment cycle for India's fixed-income market and keeping bond investors on guard.
Shah's view reflects a broader market concern that the RBI is still balancing domestic price stability against a fast-changing global backdrop. With commodity prices volatile and developed-market yields rising sharply, India's monetary authority faces a narrower policy corridor than it did earlier in the cycle. Even if inflation moderates from recent peaks, the combination of imported inflation, currency sensitivity and capital-flow uncertainty could keep the central bank biased toward further tightening.
For bond markets, the implication is straightforward: the near-term environment remains hostile to aggressive duration bets. Shah's message is that investors should resist the temptation to call a peak too early. Instead, he argues for patience, noting that the adjustment in yields may not be complete until the RBI gains clearer evidence that inflation is easing decisively and that global rate pressures are no longer feeding into domestic financial conditions.
Duration Needs Patience
Shah's caution on duration is especially relevant for portfolios that had positioned for a quick policy pivot. Duration, which measures sensitivity to interest-rate changes, tends to suffer when yields rise and price volatility increases. In the current setting, even a modest upward surprise in policy rates or inflation data can trigger outsized mark-to-market losses, particularly in longer-maturity securities.
That is why Shah is advocating a more defensive, income-oriented approach. He recommends carry and roll-down strategies, which seek to earn returns from coupon income and the natural movement of bonds down the yield curve as they age. In a market where outright price gains may be limited, these strategies can help investors generate steadier returns while reducing exposure to abrupt yield spikes.
The advice also underscores a shift in how fixed-income managers are thinking about risk. Rather than relying on directional bets, investors are being pushed toward relative-value positioning, shorter duration buckets and instruments that can better withstand policy uncertainty. The emphasis is on preserving capital first and chasing yield second.
Liquidity And Correlation Risks
Shah also flagged a less visible but increasingly important risk: rising correlation across asset classes and thinner liquidity in stressed markets. When equities, bonds and other risk assets begin moving in the same direction, diversification benefits weaken. That makes portfolio construction more difficult, especially for institutions that rely on fixed income as a stabilizer during periods of market stress.
Liquidity risk is equally important. In a rising-rate environment, the ability to exit positions without significant price impact can deteriorate quickly, particularly in less-traded segments of the bond market. For investors holding longer-duration paper or lower-liquidity instruments, the combination of higher yields and wider bid-ask spreads can amplify losses and constrain rebalancing options.
The broader message from Shah is that the bond market is entering a phase where discipline matters more than conviction. If the RBI does indeed hike by another 50-75 basis points, the market will likely have to reprice the terminal rate higher and accept that policy may stay restrictive for longer than many had expected. That would keep pressure on bond valuations in the near term, even as it may eventually create more attractive entry points for investors willing to wait.
For now, the playbook is cautious. Investors are being urged to focus on carry, manage duration tightly and avoid assuming that the worst of the rate cycle is already behind them. In Shah's assessment, the next leg for bonds will be shaped less by optimism and more by the RBI's response to inflation, crude and the global yield backdrop.