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

Summary

Bandhan AMC’s Suyash Choudhary explains how rising rates affect savers, why investors should keep debt portfolio duration short, and how to balance yield, credit quality and currency risk.

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.