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

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.

The RBI recently hiked interest rates. What does this mean for Indian investors, and how do you view the move?

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.

As interest rates rise, how should savers interpret higher yields?

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.

How should investors position their debt portfolios in the current rate cycle?

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.

How should someone starting out with debt investments approach asset allocation and fund selection?

Investors must first understand the fundamental role of debt in a portfolio. Equity is meant for long-term growth, while fixed income is meant to provide stability, regular income and safety during market downturns.

Many investors make the mistake of hunting for the highest possible yield in debt funds by investing in lower-rated corporate bonds. This defeats the core purpose of fixed income. Chasing credit risk adds hidden danger to the part of your portfolio meant to protect you. During market stress, you need high-quality buffers. Beginners should focus on high-quality, short-duration fixed-income options that offer strong risk-adjusted protection rather than simply chasing yield.

What is a reasonable debt allocation for a long-term investor?

When evaluating your debt allocation, you must look at your total net worth holistically, including assets outside mutual funds, such as Provident Fund savings and bank fixed deposits. As a general baseline, holding an overall ratio of around 40% in fixed income and 60% in growth assets such as equities makes sense. Since a large portion of your debt allocation may already be in retirement funds or bank deposits, your requirement for debt mutual funds could be lower, which is completely fine.

Should Indian investors consider US debt funds for diversification?

US dollar bond yields have risen significantly, making them look attractive globally. However, Indian investors must remember that their living expenses and financial liabilities are denominated in Indian rupees. Buying US debt introduces currency exchange-rate risk, which adds an element of speculation. While a small allocation can serve as a secondary diversification tool if you have seamless access, it should remain a strictly controlled, minor portion of your overall wealth.

Which global and domestic macroeconomic cues are you keeping a close eye on?

We are tracking two major pressure points. The first is US Treasury bond yields. With US yields hovering near 5%, the floor return for global capital has shifted upwards. This makes global investors less eager to deploy capital into emerging markets such as India, even though our domestic economy remains fundamentally sound.

The second is broad-based commodity-price inflation across energy and food, driven by geopolitical conflicts and weather disruptions.

What is one timeless lesson from your more than 20 years of experience across market cycles that retail investors can apply?

Always evaluate every investment on two dimensions: risk and reward. Most retail investors focus exclusively on returns, often looking backwards at recent performance. Instead, you should determine your natural risk appetite and how much drawdown or fluctuation you can comfortably handle without panicking.

Remember that your perceived risk tolerance expands when markets are booming and shrinks during downturns. Staying faithful to your baseline risk comfort across changing market cycles is key to long-term investment success.