Growth and inflation outlook

India’s GDP growth in this period is held at 6.5%. It is driven by rural demand, public investment, and a favourable monsoon.

FY26 inflation has been revised down from 3.7% to 3.1%. This is due to the lower food prices, resulting from better agricultural output and supply-side measures. However, the core inflation stayed above 4% due to strong gold prices. CPI inflation is likely to exceed 4% by the end of 2025, driven by past high inflation and increased demand resulting from policy measures.

Q1 FY27 estimate at 4.9% indicates that inflation is expected to edge higher in the near term.

Mutual fund industry outlook

Long-term Income Funds, Gilt Funds, and Dynamic Bond Funds face greater sensitivity to interest rate changes and global conditions. Although the economy is supported by government spending and rural demand, urban consumption and private investments show signs of slowing. At the same time, higher U.S. tariffs, trade tensions, and inflation risks can add pressure on long-term yields. Since most of the positives have already been priced in, the outlook for these funds remains uncertain.

Conversely, Liquid Funds are expected to give stable returns whereas Ultra-short and Money Market Funds remain attractive. Short Duration Funds look positive for investors with a matching horizon, while Medium Duration Funds are suitable for a 2–3 year horizon. However, Credit Risk Funds carry higher risks due to recent defaults.

Key Takeaways

India’s bond yields are expected to stay on the higher side as the easing cycle ends, with term premiums facing upward pressure. The short to medium end of the yield curve looks more attractive.

Although India’s macro fundamentals remain strong, risks like sudden inflation and geopolitical tensions mean the bond market should be approached carefully. In the medium term, markets are expected to remain range-bound.

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