Corporate bond curve in 3–6-year segment offers investment opportunity amid rate cut hopes: PGIM India MF

The 3–6-year segment of the corporate bond curve presents a favorable investment opportunity in the current interest rate environment, according to Puneet Pal, Head of Fixed Income at PGIM India Mutual Fund.

With the Reserve Bank of India maintaining an accommodative stance to support economic growth, the focus remains on ensuring effective transmission of policy rate cuts and keeping banking liquidity at comfortable levels.

PGIM India Mutual Fund expects average CPI inflation for FY26 to be approximately 50 basis points lower than the RBI’s projection, increasing the likelihood of further rate cuts. “Given these conditions, the 3–6-year corporate bond curve, particularly AAA-rated PSU bonds, looks attractive. The current spread of 60–70 basis points between 5-year PSU bonds and equivalent government securities is appealing, especially when banking system liquidity remains in surplus,” said Pal.
In addition to the 3–6-year corporate bond space, PGIM India MF sees a tactical opportunity at the longer end of the yield curve. “Yields on 30-year bonds have remained unchanged over the past year, creating potential for value buying,” Pal noted.

Investment Strategy: Short-term and dynamic bond funds

Investors are advised to continue allocating to short-term or corporate bond funds with portfolio maturities of up to six years, while remaining tactical with duration via dynamic bond funds.

Live Events

PGIM India recommends an investment horizon of 12–18 months. Money market instruments with up to one-year maturities also offer attractive risk-reward profiles, the fund house said.Looking ahead, PGIM India expects the 10-year benchmark bond yield to remain in the range of 6.10% to 6.50% over the next month.

Indian debt market update

Bond yields trended lower through July, driven by better-than-expected inflation data. The 10-year bond yield closed at 6.36% on July 18, down 2.5 basis points since the start of the month, while the long-duration segment outperformed as 30-year and 40-year bond yields fell by 10 basis points.

India’s June CPI inflation came in at 2.10%, below market expectations of 2.25%, driven largely by falling food prices. Core inflation (excluding food, beverages, and fuel) rose slightly to 4.4%. PGIM India expects FY26 CPI inflation to average around 3%, well below the RBI’s 3.7% forecast, raising the probability of another 25 basis points policy rate cut by December 2025.

WPI inflation declined to -0.13%, marking the lowest level since October 2023. Meanwhile, India’s goods trade deficit narrowed to USD 18.8 billion in June, supported by a sharp decline in oil and gold imports. The services trade surplus remained steady at USD 15.3 billion.

Monsoon conditions have also been supportive. Cumulative rainfall stood 12% above the long-term average as of mid-July, leading to higher sowing across key Kharif crops like rice, pulses, coarse cereals, and oilseeds.

International markets

Globally, bond yields continued to remain elevated as debt concerns dominated the narrative, along with the continued strength of the US economy.

The US benchmark 10-year bond yield ended the week at 4.42%, 19 basis points higher than the month’s starting level of 4.23%.

Long-end Japanese bond yields also rose, with the 30-year bond yield touching a high of 3.15%. Chinese CPI turned positive after five months, rising 0.1% year-on-year.

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

_{Images are for reference only.Images and contents gathered automatic from google or 3rd party sources.All rights on the images and contents are with their legal original owners.}