Global financial markets are witnessing instability. With crude oil prices pressuring the rupee and global interest rate trajectories remaining uncertain, bond yields have seen a rise in recent days. In an exclusive interview, Marzban Irani, Chief Investment Officer – Debt at LIC Mutual Fund, shares his insights on how these macroeconomic changes impact local bond markets, what index inclusion means for long-term capital and why short-term accrual-focused investment strategies are a safe choice for retail investors seeking stability in their portfolios. Some edited excerpts.
Q. Global bond yields remain volatile amid changing expectations of a US Fed rate cut. How do you see this impacting India’s debt market and bond yields going forward?
Marzban Irani: The Indian debt market is going through a particularly difficult period, made up of a mix of global and domestic challenges. The ongoing conflict involving Iran has been the most disruptive. This has pushed Brent crude oil prices to $109.91/bbl, resulting in the rupee weakening to a record low of 96.35 per US dollar. This makes the rupee Asia’s worst performing major currency so far in 2026, with a ~6.7% YTD decline and raising inflation fears both domestically and globally. To understand where we stand, let’s look at some key statistics:
- India 10-year G-Sec yield: It has increased sharply from ~6.60% in early 2026 to 7.11% (as of May 19, 2026) and is its highest level since May 2024.
- US 10-year Treasury yield: This has increased from ~4.17% in early 2026 to 4.60% (as of May 19, 2026), reflecting persistent inflation concerns.
- US Fed Funds Rate: currently 3.75%Consensus estimates point to a modest year-end easing rate of ~3.46%. However, overnight index swap (OIS) markets have begun pricing in the possibility of a rate hike rather than a cut, given that US headline CPI estimates 3.3% per annum For 2026.
- India’s Inflation (CPI): Bloomberg estimates this at about 2.04% year-on-year, but the recent rise in domestic fuel prices (petrol and diesel hiked for the second time in a week as of May 19) is expected to push this number higher in the near term.
- RBI Repo Rate: At 5.25%, the Reserve Bank of India provides a limited buffer against external pressures.
When the value of the rupee depreciates like this, it becomes less attractive for foreign investors to invest in Indian bonds when they take into account changes in the currency value. This has increased the pressure of increasing global production. With the Strait of Hormuz still closed and no near-term resolution to the Iran conflict in sight, domestic bond yields are likely to come under pressure. A meaningful rally in Indian bonds hinges on either a reduction in geopolitical tensions or a decisive change in the Fed’s policy stance.
Q. With expectations of a softening interest rate cycle building, which fixed income strategies look more attractive, term, accrual, or corporate bond funds?
Marzban Irani: Yields for all types of Indian sovereign bonds due 2026 have increased significantly. To give you a clear picture, here’s how much government bonds are paying by May 19, 2026:
On an absolute basis, interest rates have peaked at the short-to-medium end of the curve, particularly in the 3-month to 3-year segment. This makes them highly attractive for strategies that focus on earning regular interest income (earnings). Given the limited near-term scope for a material decline in yields (given the macro backdrop described above), duration funds carry meaningful mark-to-market risk and are not recommended at this time.
From the accrual approach, the following categories emerge:
- Liquid and Overnight Funds: These can help you capitalize on the current high short-end rates with minimal term risk.
- Short Term (LD) and Money Market (MM) Funds: These provide relatively attractive returns with limited sensitivity to yield curve movements.
- short term bond fund: These can offer a balance of stable interest and security, making them suitable for an investment horizon of 1 to 3 years.
- Banking and PSU (BPSU) Fund: These invest in high quality government and bank-backed bonds. They have attractive spreads on government securities, offering relatively favorable risk-adjusted returns in the current environment.
Caution should be exercised in duration funds. For long-term interest rates to come down and bond prices to rise, we need to either reduce global inflation or end the Iran conflict, neither of which appear imminent.
Q. India’s inclusion in global bond indices is expected to bring continued foreign inflows. How transformative could this be for the domestic bond market in the medium term?
Marzban Irani: More immediately, the macro environment complicates the foreign flow narrative. The 5-day moving average of net foreign inflows into Indian bonds has fallen to just $2.1 million, well below the 20-day average of $47.2 million, as rupee weakness and rising yields have made foreign investors hesitant. Actually, foreign portfolio investors (FPIs) have withdrawn money ₹There has been an outflow of Rs 2.19 lakh crore from Indian equities through the secondary market so far in 2026, adding to the pressure on the currency and broader markets.
To attract back foreign capital, India is reportedly considering reducing the withholding tax on bond income of foreign investors from 20% to 5%, a move recommended by the RBI and under active consideration by the Finance Ministry. However, experts have warned that tax cuts alone may not be enough to revive flows in the current environment. Separately, the government has clarified that it is not considering a cut in capital gains tax for FPIs at this stage.
In the medium term, the fundamental forces of India’s bond market remain intact:
- India’s continued inclusion in global bond indices (JP Morgan GBI-EM, Bloomberg EM Local Currency Index) is expected to bring in a steady stream of foreign funds as global fund managers are rebalancing allocations to include India.
- If the Iran dispute is resolved and the rupee stabilises, Indian bonds will look more safe and profitable for foreign investors.
- The potential tax rationalization, if implemented, would align India’s bond market with global norms and reduce the cost of foreign participation.
The transformative potential of index inclusion remains important over a 2 to 3 year horizon, but to show benefits in the near term, we need geopolitical stability and a stable rupee.
Q. Despite global instability and crude oil fluctuations, the rupee has remained relatively stable. What is your view on INR, and how does currency movement impact debt investment strategy?
Marzban Irani: The basis of stability of the rupee is no longer there. INR declined sharply, reaching a record low of 96.40 per USD on May 18, 2026, its seventh consecutive day of decline and is now Asia’s worst performing major currencies in 2026With an overall decline of about 6.7% YTD.
The main reasons for the weakness of the rupee are:
- Rising crude oil prices (~$109.91/bbl) are pushing up India’s import bill and widening the trade deficit.
- Foreign investors are withdrawing their money From both equity and debt markets.
- Strong US dollar amid Fed rate expectations.
- RBI’s limits on currency security. India’s foreign exchange reserves have declined by about $38 billion since March, limiting the central bank’s ability to aggressively defend the currency.
For a bond investor, a fall in the value of the rupee has the following effects:
- This reduces currency-adjusted returns for foreign investors, reducing demand for domestic bonds.
- This increases imported inflation, which may delay any rate easing cycle from the RBI.
- For domestic investors, this makes a strong case for short-term, accumulation-oriented strategies that are less sensitive to fluctuations caused by global events.
- This makes global investments more expensive, reducing the attractiveness of global fixed income as a diversifier.
Q. Debt mutual funds are witnessing renewed investor interest as yields remain attractive compared to recent years. Is this an ideal phase for investors to increase allocation towards fixed income?
Marzban Irani: As part of a disciplined asset allocation framework, it is always prudent to keep a fixed income allocation in the portfolio and the current yield environment makes the case even more attractive. With 10-year-old G-sec 7.11% And with short-to-medium term yields rising meaningfully from their 2025 lows (the 10-year was at ~6.30% in May 2025), full accumulation levels are now attractive on a historical basis.
Here is the recommended approach to investing in the current environment:
- Focus on 3 months to 3 years segment. Interest rates in this band are peak and can offer relatively attractive offers with limited term risk.
- favorite categories are Liquid, short term, money market, short-term and banking and PSU funds. All of these provide competitive accumulation without significant mark-to-market exposure.
- Avoid aggressive term bets. The future path of long-term yields remains uncertain given global inflation dynamics and the Iran conflict.
- Investors with tenures of 1 to 3 years can lock in current yields through short-to-medium term products, benefiting from both accumulation and potential capital appreciation if yields are moderate over time.
Q. With equity markets witnessing intermittent volatility, are you seeing a change in investor preference towards debt and hybrid strategies for portfolio stability?
Marzban Irani: Equity and debt play fundamentally different roles within a portfolio. These roles should not be compared, especially during periods of short-term market stress.
For equity investors, the advice is to stay invested and avoid the temptation to cash out based on interim volatility.
For investors looking to add stability to their portfolio, the current environment supports the following:
- hybrid strategies (Balanced Advantage or Dynamic Asset Allocation Funds) which can intelligently shift between equity and debt based on valuations.
- accumulation-oriented debt fund As a complement to equities, it provides protection against equity volatility.
- maintenance strategic asset allocation The current widespread uncertainty makes market timing particularly dangerous, rather than making reactive strategic changes.
Source: Bloomberg
SEBI Reg: LIC Mutual Fund | Registration Number: MF/012/94/5
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