The jury is divided on whether or not the RBI’s December meeting will spell a rate cut. On one hand, the Fed is sounding more hawkish. On the other hand, October inflation numbers came in at near-zero levels, opening up more policy space for the RBI to cut rates. When there’s no consensus on the direction of rates, deciding on a course of action is key.
In this month’s outlook, we’re going to look at building a playbook for a low-interest-rate environment, what’s top of mind for central banks, and how to prepare portfolios for 2026.
Will the RBI cut rates this month?
The RBI Governor hinted at ample policy space to lower interest rates further. In fact, minutes from the last two meetings indicate that the committee has been on the fence about cutting interest rates. Lower inflation prints and a higher outlook uncertainty favour a lower repo rate. Yet, Q2 GDP numbers in at 8.20% and the Fed sounding more hawkish has tilted the probabilities.
What is clear is that we’ve moved from whether the RBI will cut rates to when the RBI will cut rates. The neutral policy stance signalled to some participants that the RBI was done cutting rates. Now, it’s clear that the stance was another method to preserve optionality. Inflation numbers have been coming in lower, and even if growth looks strong, uncertainty persists. India is yet to ink out a trade deal with the US. US economic data is murky with the government shutdowns and reporting delays. While the Fed sounds hawkish now, Jerome Powell is on his way out, and his successor is likely to adopt a more dovish stance.
What we know is that rate cuts are very much on the table for India. It’s either now or later, not now or never.
A Playbook For A Lower Interest Rate Environment
Fixed-income investors have a new challenge on their hands. The cycle has shifted into a lower interest rate regime. Yields on fixed-income assets have dropped through 2025. If you’re looking to renew your fixed deposits, the pre-tax returns under 2 years are all below 7%. Even market-linked yields on the short end of the curve have reduced.
How can investors practise being safe without compromising on returns?
Add Duration
Adding duration at this point offers adequate safety. Rate cut transmission is underway, and there’s visibility of further rate cuts. The fiscal situation looks to be on track, and macros have never been in a stronger position. Inflation is under control, growth is promising, and liquidity has improved. Only the rupee has lost some ground. Index inclusion could be another driving factor for long-term assets to deliver better returns.
Focus on the Short End
If the volatility that duration brings doesn’t suit your portfolio, then stick to the short end. It doesn’t pay to be return conscious in a low-return environment. Accrual strategies with an AA profile offer a 7.50% return, indicating that the risk-reward is not great. Sticking to 1-year FDs or money market funds gives you the freedom to reinvest at better yields 12-18 months down the line.
Hybrid Solutions
For those who are weary of equity market valuations, hybrid solutions might be the sweet spot. Hybrids can add value to investors: proving to be more tax-friendly and allowing for asset allocation. Suitable categories include arbitrage, income + arbitrage, equity savings, and conservative hybrid funds. So an investor must identify products based on their investment horizon, risk profile, and asset allocation requirements.
Talk to an expert to find the right fit!
In a low-interest-rate environment, investors must forego returns for liquidity, move from conservative asset choices to more aggressive ones, and choose how to play safe assets.
Preparing for 2026
As far as 2026 goes, multi-asset investing will continue to shine. An investor who allocates to fixed income today brings both stability and performance to the table. A lower return from fixed income may even outshine the kind of returns made from aggressive portfolios. Cyclically, even fixed income can outperform equity.
Portfolios built for 2026 would have some exposure to duration, ample liquidity, and equity portfolios would be large-cap oriented. Entering 2026 with a safer and more stable allocation would prepare investors for an interesting investment year.
