The report from the Axis Mutual Fund said that RBI is likely to maintain liquidity at around 1.25/1.75 per cent of net demand and time liabilities, even as the best of surplus liquidity is over for Indian markets.
Following the rate cut in December 2025, the RBI is likely to maintain an extended pause, keeping interest rates lower for longer amid a favourable macro environment, it said.
The fund house said that liquidity was in surplus from April 2025 after the RBI infused Rs 12 trillion via OMOs and cash reserve ratio cuts, and December policy measures which are also expected to keep liquidity positive through March 2026.
A stable rate cycle, sustained liquidity normalisation and probable inclusion of Fully Accessible Route government bonds in the Bloomberg Global Aggregate Index will likely flatten the yield curve in 2026, the report added.
"With the curve-flattening theme gaining traction, we expect long bonds at 7.25-7.40 per cent yields to provide meaningful protection in the current environment," it noted.
The fund house recommended a barbell strategy combining short‑tenor bonds for liquidity and long‑duration government bonds for tactical gains, offering both steady accrual and potential upside.
Two-year AA corporate bonds for accrual and long tenure government bonds for duration is the preferred strategy, it suggested.
Another recent report from HSBC Mutual Fund said that the 2–3-year corporate bonds and 7–12-year segment in Indian Government Bonds (IGBs) are expected to offer attractive yields in 2026.
The expected open market operations could tilt the demand‑supply equation for central government securities in a favourable manner, the fund house said.
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