What to anticipate from the fixed income market in 2026?

The year 2025 was marked by significant events, such as the introduction of tariffs by the US government and uncertainty surrounding the trade deal between India and the US. The Reserve Bank of India (RBI) implemented multiple rate cuts totaling 125 basis points. As the new year approaches, experts predict that 2026 will be just as eventful.

Veteran fund managers like Akhil Mittal, Senior Fund Manager at Tata MF, Mayur Chauhan from Quantum AMC, Prashant Pimple, the CIO at Baroda BNP Paribas MF, Pratik Shroff from LIC MF, and Puneet Pal, the Head of Fixed Income at PGIM India MF, as well as representatives from Axis MF and Franklin Templeton MF, share their insights on the upcoming year.

The events to watch closely in 2026, according to these experts, include Union Budget 2026 and the liquidity infusion measures by RBI, such as open market operations (OMOs). Prashant emphasized keeping an eye on domestic inflation, growth trajectory, the Indian rupee movement against the US dollar, and the State Development Loan (SDL) auction calendar. Pratik noted the anticipated inclusion of Indian bonds in the Bloomberg Global Bond Index as a potential game-changer in addressing the demand-supply mismatch.

Looking ahead, Akhil anticipates market stabilization and yield reductions once the Indian Rupee stabilizes, supported by low inflation that could pave the way for policy easing. He believes RBI will maintain surplus liquidity, leading to lower yields over the next two quarters, barring any significant macroeconomic risks.

Axis MF’s annual outlook foresees a stable interest rate cycle, sustained liquidity normalization, and the anticipated inclusion of Indian debt securities in the Bloomberg Global Aggregate Index contributing to a flatter yield curve in 2026. The fund house also expects RBI’s OMOs to address the supply-demand gap efficiently.

Despite a positive outlook on Indian fixed income markets, Franklin Templeton MF expressed concerns about tariffs impacting exports and labor-intensive sectors. Although inflation has remained low, the current account deficit widening due to tariffs could result in a balance of payments net deficit of 1% of GDP in FY26.

Mayur anticipates continued surplus liquidity from RBI’s rate cuts, with a front-loaded approach through OMOs likely leading to a range-bound bond market. Prashant remains optimistic about the debt market outlook in 2026, citing that negative factors are already reflected in yields, with a noticeable INR depreciation without significant fundamental deterioration suggesting the potential for increased foreign inflows. He expects another eventful year for Indian fixed income markets in 2026.