This month’s theme is to lower your expectations. Whether you’re an equity, fixed-income, or multi-asset investor – it’s time to reset expectations. The investment environment has become far more challenging. So, investing must slow down and become more risk conscious. In this outlook, we’ll analyse the RBI’s actions, the risks of chasing performance, and product choices.
RBI Actions
As the Indian economy shifts into lower gear, the RBI and the government have been stepping up their game. The RBI has done its fair share of heavy lifting after the government announced tax cuts in the Union Budget. The tax cuts were aimed at boosting the consumption side of the GDP equation. Meanwhile, the RBI has followed a multipronged approach.
The RBI’s first goal was to address the liquidity crunch in the financial system. Towards this end, the RBI cut the cash reserve ratio (CRR) requirement in December, infused liquidity through OMO bond purchases, and slashed interest rates by 0.50%. System liquidity has gone from negative to positive since 2024.
The next goal was to bring growth back. Monetary policy transmission from the RBI’s rate cuts is underway. Banks slashed deposit rates in April and borrowing costs across the curve have come down. The RBI has been encouraging banks, NBFCs, and MFIs to lend more. The central bank has relaxed restrictions, leaving more room for credit growth.
Reviving growth has been at the forefront of policymaking, yet the RBI is also responsible for maintaining financial stability. The latest dividend transfer to the government has economists divided. While the 2.69 Lakh crore transfer is no small sum, the debate arises because the potential was 3.5 Lakh Crores. The RBI chose to reduce the transfer amount by increasing its contingency buffers. This shift to risk management signals that the RBI prefers to adopt a conservative approach in an uncertain environment.
Chasing Performance:
When it comes to product choices, investors are conditioned to chase performance. We find comfort in proven track records and are mistrustful of strategies that have nothing to show yet. While this mental model works in a lot of fields, it fails in investing. Investing is always forward-looking, there is an element of the unknown, and the data clearly shows that chasing performance is underwhelming. The idea is to pay attention to both past performance and performance potential.
In that context, while fixed income has delivered stellar returns in the last year, there is merit in allocating to debt today. First, there’s still room for performance with the prospect of mark-to-market gains from rate cuts and policy transmission. Second, fixed income can still preserve and protect portfolios against market volatility. Lastly, debt gives investors room to breathe. Equity markets have been on a rollercoaster ride through 2025. Debt allows us to systematically and opportunistically participate in markets.
3 Ways To Make Fixed Income A Winning Investment
- Take A Duration Call: When Interest Rates Move Down, Bond Prices Move Up
- Preserve & Protect Against Market Volatility:
- Systematic & Opportunistic Investing
Product Choices
With the tariff game, geopolitical tensions, and global policy divergence: slow and steady wins the race. In fixed income, quality is always a safe bet. With duration calls, entry-level valuations matter: with rate cuts and transmission underway, investors must assess the risk-reward equation before investing. With yields declining, a shift towards credit will occur as investors seek to meet their return expectations. In the end, expecting less could serve us more.