Global financial markets are witnessing volatility. With crude oil prices putting pressure on the rupee and global interest rate trajectories remaining uncertain, bond yields have shown and upward trend on the recent past. In an exclusive interview, Marzban Irani, Chief Investment Officer – Debt at LIC Mutual Fund, shared his insights on how these macroeconomic changes impact local bond markets, what index inclusion means for long-term capital and why accrual focussed investment strategies for shorter durations are a safer choice for retail investors seeking stability in their portfolios. Some edited excerpts.Marzban Irani, Chief Investment Officer – Debt at LIC Mutual FundQ. Global bond yields remain volatile amid changing US Fed rate-cut expectations. How do you see this impacting India's debt market and bond yields going forward?Marzban Irani: The Indian debt market is going through a particularly difficult phase, shaped by a mix of global and domestic challenges. The ongoing conflict involving Iran has been the biggest disruptor. It has pushed Brent crude oil prices up to $109.91/bbl, which in turn weakened the rupee to a record low of 96.35 per USD. This makes the rupee Asia’s worst-performing major currency so far in 2026, with a fall of ~6.7% YTD and stoking inflation fears both domestically and globally. To understand where we stand, let’s look at some key figures:India 10-year G-Sec yield: This has jumped to 7.11% (as of May 19, 2026) up sharply from ~6.60% at the start of 2026 and at its highest level since May 2024.US 10-year Treasury yield: This has risen to 4.60% (as on May 19, 2026) up from ~4.17% at the start of 2026, reflecting persistent inflation concerns.US Fed Funds Rate: Currently at 3.75%, with consensus estimates pointing to a year-end rate of ~3.46% a modest easing trajectory. However, Overnight Index Swap (OIS) markets have increasingly begun pricing in the possibility of a rate hike rather than cuts, given that US headline CPI is estimated at 3.3% YoY for 2026.India’s inflation (CPI): Bloomberg estimates it at around 2.04% YoY, but the recent hikes in domestic fuel price hikes (petrol and diesel raised for the second time within a week as of May 19) threaten to push this number higher in the near term.RBI Repo Rate: At 5.25%, the Reserve Bank of India offers limited buffer against external pressures.When the rupee loses value like this, investing in Indian bonds becomes less attractive to foreign investors when they account for currency value changes. This adds to the pressure from rising global yields. With the Strait of Hormuz still closed and no near-term resolution to the Iran conflict in sight, the upward pressure on domestic bond yields is likely to persist. A meaningful rally in Indian bonds remains dependent on either a de-escalation in geopolitical tensions or a decisive shift in the Fed’s policy stance.Q. With expectations of a softer interest rate cycle building, which fixed-income strategies look more attractive duration, accrual, or corporate bond funds?Marzban Irani: Yields have risen materially across the board for all types of Indian sovereign bonds in 2026. To give you a clear picture, here is how much government bonds are paying as of May 19, 2026:On an absolute basis, the short-to-medium end of the curve specifically the 3-month to 3-year segment has seen interest rates peak. This makes them highly attractive for strategies that focus on earning regular interest income (accrual). Given the limited near-term scope for yields to decline materially (given the macro backdrop described above), duration funds carry meaningful mark-to-market risk and are not recommended at this juncture.From an accrual standpoint, the following categories stand out:Liquid and Overnight Funds: These can help you cash in on the current elevated short-end rates with minimal duration risk.Low Duration (LD) and Money Market (MM) Funds: These offer relatively attractive returns with limited sensitivity to yield curve movements.Short-Term Bond Funds: These may offer a balance of steady interest and safety, making them suitable for a 1-to-3-year investment horizon.Banking & PSU (BPSU) Funds: These invest into high-quality government and bank-backed bonds. They have attractive spreads over G-Secs, offering relatively favourable risk-adjusted returns in the current environment.Duration funds should be approached with caution. For long-term interest rates to come down and bond prices to rise, we need either global inflation to ease or the Iran conflict to end, neither of which appears imminent.Q. India's inclusion in global bond indices is expected to bring steady foreign inflows. How transformative could this be for the domestic bond market over the medium term?Marzban Irani: In the immediate term, the macro environment has complicated the foreign inflow narrative. The 5-day moving average of net foreign inflows into Indian bonds has dropped to just $2.1 million, well below the 20-day average of $47.2 million, as the rupee’s weakness and rising yields have made foreign investors hesitant. In fact, Foreign Portfolio Investors (FPIs) have pulled out over ₹2.19 lakh crore from Indian equities through the secondary market so far in 2026, intensifying pressure on the currency and broader markets.To attract foreign capital back, India is reportedly considering reducing the withholding tax on foreign investors’ bond income from 20% to 5%, a move recommended by the RBI and under active consideration by the Finance Ministry. However, experts caution that a tax cut alone may not be sufficient to revive inflows in the current environment. Separately, the government has clarified it is not considering a cut in capital gains tax for FPIs at this stage.Over the medium term, the basic strengths for India’s bond market remains intact:India’s ongoing inclusion in global bond indices (JP Morgan GBI-EM, Bloomberg EM Local Currency Index) is expected to bring in a steady stream of foreign funds as global fund managers rebalance allocations to include India.If the Iran conflict resolves and rupee stabilises, Indian bonds would look safer and profitable for foreign investors.Potential tax rationalisation, if implemented, would further align India’s bond market with global norms and lower the cost of foreign participation.The transformative potential of index inclusion remains significant over a 2-to-3-year horizon, but for the gains to show in the near term, we need geopolitical stability and a stable rupee.Q. The rupee has remained relatively stable despite global volatility and crude oil fluctuations. What is your outlook on the INR, and how does currency movement influence debt investment strategy?Marzban Irani: The premise of rupee stability no longer holds. The INR has depreciated sharply, hitting a record low of 96.40 per USD on May 18, 2026 its seventh consecutive day of decline and is now Asia's worst-performing major currency in 2026, with a total drop of about 6.7% YTD.The main reasons for rupee weakness are:Elevated crude oil prices (~$109.91/bbl) are increasing India’s import bill and widening the trade deficit.Foreign investors are pulling their money out from both equity and debt markets.A stronger US dollar amid repriced Fed rate expectations.RBI’s limits on defending the currency. India’s foreign exchange reserves have eroded by nearly $38 billion since March, limiting the central bank’s ability to defend the currency aggressively.For a bond investor, a depreciating rupee has the following implications:It reduces the currency-adjusted returns for foreign investors, lowering demand for domestic bonds.It raises imported inflation, which could delay any RBI rate easing cycle.For domestic investors, it makes a strong case for shorter-duration, accrual-oriented strategies that are less sensitive to the ups and downs caused by global events.It makes global investing much more expensive, reducing the attractiveness of global fixed income as a diversifier.Q. Debt mutual funds are seeing renewed investor interest as yields remain attractive compared to recent years. Is this an ideal phase for investors to increase allocation towards fixed income?Marzban Irani: As part of a disciplined asset allocation framework, having a fixed income allocation in the portfolio is always prudent and the current yield environment makes the case even more compelling. With the 10-year G-Sec at 7.11% and short-to-medium tenor yields having risen meaningfully from their 2025 lows (the 10-year was at ~6.30% in May 2025), absolute accrual levels are now attractive on a historical basis.Here is the recommended approach to invest in the current environment:Focus on the 3-month to 3-year segment. Interest rates in this band have peaked and may offer relatively attractive carry with limited duration risk.Preferred categories are Liquid, Low Duration, Money Market, Short-Term and Banking & PSU funds. All of these offer competitive accrual without significant mark-to-market exposure.Avoid aggressive duration bets. The future path for long-end yields remains uncertain given global inflation dynamics and the Iran conflict.Investors with a 1-to-3-year horizon can lock in current yields through short-to-medium duration products, benefiting from both accrual and potential capital appreciation if yields moderate over time.Q. With equity markets witnessing intermittent volatility, are you seeing a shift in investor preference towards debt and hybrid strategies for portfolio stability?Marzban Irani: Equity and debt serve fundamentally different roles within a portfolio. These roles should not be compared, particularly during periods of short-term market stress.For equity investors, the advise is to remain invested and resist the temptation to redeem based on interim volatility.For investors looking to add stability to their portfolios, the current environment supports:Hybrid strategies (balanced advantage or dynamic asset allocation funds) that can tactically shift between equity and debt based on valuations.Accrual-oriented debt funds as a complement to equity, providing a cushion against equity volatility.Maintaining strategic asset allocation rather than making reactive tactical shifts the current macro uncertainty makes market timing particularly hazardous.Source: BloombergSEBI Reg: LIC Mutual Fund | Reg No: MF/012/94/5Disclaimer: This content is for informational purposes only and does not constitute investment advice. 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