Debt Monthly for January 2026

Navigating 2026: India’s Bond Market in a Changing Global Landscape

The global economy is moving into a new phase. After a year of abrupt policy changes and rising trade barriers, tariffs are no longer temporary shocks but a lasting feature of global commerce. We believe, if 2025 was about shock and reaction, 2026 looks set to be about adjustment and adaptation.

As trade costs rise and partnerships become more selective, countries are rethinking how they can grow, trade, and attract capital. The United States has become the key reference point in this evolving trade order, with nations reshaping strategies around access and alignment. For India, this shift presents a mix of challenges and opportunities.

Looking Back

From an Indian market perspective, 2025 unfolded in contrasting phases.

The first half of the year was favorable for markets, with a stable rupee, record foreign exchange reserves, and sharp rate cuts supporting growth and easing financial conditions. Bond markets responded positively.

In the second half, external pressures intensified. Unfavorable trade developments weighed on the currency, reserves fell from their peak, and bond yields moved higher despite further rate cuts. The year ultimately highlighted a clear contrast—strong domestic fundamentals alongside rising global uncertainty—yet Indian assets remained resilient, supported by domestic demand and policy credibility.

2026: A Year of Balance with Strong Fundamentals but Noisy External Environment

India is set to enter 2026 with strong domestic fundamentals like healthy growth, low inflation, and financial stability, though market sentiment remains heavily influenced by global factors.

Currency volatility stood out in 2025, with the rupee underperforming peers, while reserves stayed comfortable. This underscores India’s resilience in absorbing external shocks.

Policy focus in 2026 is likely to shift from stimulus to calibration. With substantial fiscal and monetary support already delivered, room for further easing is limited. Stability will likely take precedence as policymakers navigate global uncertainty, with trade negotiations, particularly with the U.S. is likely to play a key role in shaping currency trends, capital flows, and exports.

We believe - These Five Themes Could Shape the Year Ahead

1. Growth Without Inflation Pressures: India is well-placed to sustain healthy growth without overheating. Structural factors, supply improvements, and benign price trends suggest inflation is likely to remain contained, assuming normal weather conditions and stable commodity prices. China’s excess supply flowing into global markets has also helped keep global inflation pressures in check. This gives policymakers breathing room, even as they manage statistical revisions (base effect fading out in FY 2027) and global risks. We estimate CPI inflation for FY27 at around 3.8%.

2. Limited Policy Ammunition: Fiscal headroom has narrowed following last year’s measures, particularly at the state level. Going forward, discipline will matter as much as support. On the monetary side, most easing is already behind us. While a final small rate cut cannot be ruled out, the broader expectation is a prolonged pause rather than a reversal.

3. Liquidity and Credit Dynamics: One of the key challenges heading into 2026 is ensuring sufficient liquidity in the banking system. Credit demand is likely to strengthen, while deposit growth remains steady, it is not accelerating. The central bank’s role in managing liquidity (through market operations - OMO and other tools) may be critical in ensuring policy transmission remains effective. We expect OMO to the tune of ~INR 50,000 cr closer to the end of FY 26 and ~INR 2-3 trillion for the remaining part of the calendar year 2026.

4. The Rupee Question: Currency performance remains the most watched variable. Historically, the rupee has gone through periodic phases of sharp adjustment followed by extended stability. Current valuations suggest much of the correction may already be behind us. A more stable phase could emerge if trade clarity improves and capital inflows strengthen. We believe in a favorable scenario, sentiment could even turn quickly.

5. Bond Supply and Yield Movements: Government borrowing is likely to stay elevated, especially at the state level. That said, central bank operations and the possibility of global index inclusion could support demand for central government bonds. We expect yields to remain range-bound, with bouts of volatility as markets assess the timing of future policy shifts. Overall, a supportive macro backdrop should keep repo rates steady for an extended period, reinforcing a range-bound outlook for bond yields.

What This Means for Fixed Income Investors

Every year brings its own surprises, and 2026 will be no exception. Trade dynamics, currency movements, and global policy shifts will continue to test market resilience. Yet, India’s economic framework which is built on disciplined policymaking, domestic demand strength, and financial system stability, provides a strong base to navigate these changes.

In an environment marked by uncertainty but underpinned by solid fundamentals, flexibility becomes more valuable than bold positioning.

An investment approach focused on steady income generation, combined with selective duration exposure when opportunities arise, appears prudent. Dynamic bond funds may be an appropriate fit for an evolving landscape like this.

Source: Reserve Bank of India (RBI), Ministry of Statistics & Program Implementation (MOSPI), Bloomberg

Disclaimer, Statutory Details & Risk Factors: The views expressed here in this article are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate, and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

Above article is authored by Quantum.

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