2025 was a rough year for fixed-income investors. FD rates plummeted with each rate cut from the RBI, and bond market yields were volatile. The only safe havens that worked were gold and silver. But the precious metal rally forces investors to seek safety in other places. After all, it’s not normal for gold or silver to double in such short spans of time.
In this month’s outlook, we’ll take a look at:
- What the RBI did in 2025?
- Why were bond markets volatile?
- How to position safe investments in 2026?
This outlook will prepare you to manage risk and create wealth.
What did the RBI do in 2025?
A quick look at RBI actions:
- System Liquidity moved from deficit to surplus
- Repo rate cuts of 1.25%
- OMO Bond Purchases to infuse liquidity and create demand
- CRR cuts of 1.00% to keep liquidity stable
- Rupee liquidity interventions through swaps and not defending a specific level
The RBI played a crucial role in 2025. To start off with, they announced liquidity measures that brought system liquidity from deficit (towards the end of 2024) into surplus. Excess system liquidity makes the transmission of rate cut actions smoother. Next, the RBI cut interest rates – the interest rate movements were calibrated and spread out. The first rate cut of 0.25% came in February, the next in April, a mega rate cut of 0.50% in June, and the final cut of 0.25% in December. The RBI also conducted OMO Purchases through the year, infusing liquidity into the market and tempering some of the supply pressures in the government bond market. When the RBI was not cutting the repo rate, it ensured that system liquidity was not under pressure by reducing the CRR (Cash Reserve Ratio) in a phased manner by 1.00%. Last, but not least, the RBI allowed the rupee to find its level. It didn’t interfere with rupee valuations or market forces, which resulted in some depreciation.
Transmission into the banking system through loans and deposits has been swift compared to the transmission into the bond market. In fact, homeowners and savers have felt their EMI burden and interest-earning capacity fall. Meanwhile, bond market participants have been on a roller coaster ride. If we look at the 10-year Government Security, yields moved down only ~19 bps compared to rate cuts of 125 bps.
Why were government bond markets volatile?
Bond market volatility can be attributed to:
- Excess borrowing on the long end of the curve
- FII selling through 2025
- Negative sentiment around a lack of a trade deal
- Concerns about the government’s fiscal management based on GST and personal tax changes
The RBI did a fair amount of heavy lifting in terms of reducing interest rates and keeping liquidity levels comfortable. India’s macros were on a solid footing: with inflation expectations falling continuously, growth numbers beating expectations by a wide margin, fiscal discipline maintained, and trade deficits at manageable levels. So, why did bond markets react badly to all the good news?
There are three parts to this story: the first has to do with supply dynamics, the second with FIIs, and the third with sentiment. State and Central Governments were heavy borrowers in the long end of the curve. This disrupted the supply-demand dynamics. When demand falls, prices fall – this hurts existing bondholders and provides an opportunity to average down. FII activity in the bond market has gone unnoticed: they were heavy sellers pulling out almost 20,000 Crores from Indian Bonds in 2025. FII selling in the early part of December coincided with a sharp devaluation in the rupee. This resulted in a spike in bond yields. Heavy FII selling occurred in the run up to the mega rate cut in June, as they believed the cycle would turn shortly. Lastly, bond market sentiment has been weak. Policy moves like the Budget Tax Cut, GST Rationalisation, etc., created concerns around fiscal management. From a relative valuation standpoint, equity markets were coming off a high base of performance, gold and silver shone brilliantly through 2025, and bonds were volatile. Naturally, debt fell out of favour.
- Look outside of “pure” fixed-income options
- Manage risk from performing asset classes
- Re-enter fixed-income strategically
The advantage that mutual fund investors have today is that conservative fixed-income investments can be packaged to deliver better post-tax returns than fixed deposits. Hybrid funds can contain a mix of debt, arbitrage, and equity securities – this improves taxation and enhances returns. Looking outside pure play fixed-income options like debt funds and fixed deposits may improve both returns and tax efficiency. This is the need of the hour as FD rates and short-term debt yields have declined in the rate cut era.
The single biggest move that can secure your portfolio from underperformance involves rebalancing. Every investor needs to manage risk from performing asset classes like small & midcaps, precious metals, and hot global themes. Booking profits means enjoying them and creating liquidity for the next set of winning ideas. Celebrate your successes with profit booking and prepare for the next level.
If you’re in the lower tax brackets, a pure play fixed-income strategy makes sense. Take advantage of government savings schemes that beat traditional bank FD rates. And get ready to re-enter debt mutual funds as yields expand. The idea is to layer a portfolio as market volatility builds.
Watch “Fixed Income- January 2026” Video Here- https://youtu.be/T7HDKkKUqmA
Here are the key takeaways from our blog that will help you manage risk, returns, and expectations:
- Beat market volatility with a layered investment strategy
- Explore hybrid fund options that suit your investment horizon
- Take profits off winning asset classes
