India's fixed-income markets are shifting focus from policy actions to supply-demand dynamics and liquidity management, with market experts anticipating an extended pause on interest rates. According to Puneet Pal, Head of Fixed Income at PGIM India Mutual Fund, bond markets will be driven primarily by supply pressures, liquidity constraints, and global developments rather than near-term policy changes.

RBI Liquidity Operations and Yield Outlook

The Reserve Bank of India is expected to conduct incremental open market operations worth ₹1.50-2.00 trillion over the coming months to address persistent liquidity tightness caused by continued foreign exchange intervention. Despite these measures, supply pressures are likely to maintain a steep yield curve structure.

Pal notes that supply-demand dynamics remain unfavorable, with the benchmark 10-year government bond yield expected to trade within the 6.45% to 6.75% range in the near term.

Investment Strategy Recommendations

PGIM India recommends a selective approach to duration management with defined investment horizons. The strategy focuses on corporate bond funds with portfolio maturity up to five years while maintaining tactical positioning through dynamic bond funds.

Key Investment Guidelines:

• Corporate Bond Funds: Portfolio maturity up to 5 years
• Minimum Investment Horizon: 12-18 months for duration strategies
• Money Market Instruments: Attractive for maturities up to 1 year
• Approach: Tactical duration management through Dynamic Bond Funds

Money market yields for maturities up to one year appear attractive on a risk-reward basis, making them suitable for investors with shorter time horizons.

Supply Pressures Drive Market Volatility

Bond yields have increased at the start of the year as supply considerations dominated the final quarter. This occurred despite RBI announcing ₹2.00 trillion of OMOs and USD/INR buy-sell swaps for liquidity injection.

State government borrowing exceeded market expectations, with the actual auction calendar reaching ₹4.99 trillion compared to the anticipated ₹4.50 trillion, leading to renewed pressure particularly at the longer end of the curve.

Money Market Stress and Banking Liquidity

Money market conditions have tightened significantly, reflecting stress in banking system liquidity as credit growth continues to outpace deposit growth. The rupee's decline past 90 per dollar amid heavy RBI intervention has added additional pressure.

Money Market Developments:

• One-year certificate of deposit yields: 6.90-6.95% (up 20-25 basis points since end-December)
• Shorter 2-3 month CD yields: Also elevated
• Factors: High loan-deposit ratios, tight interbank liquidity, uneven liquidity distribution

Pal cautions that the sharp rise in money market yields could further distort monetary transmission, which is already being impacted by higher long-term yields.

Economic Indicators and Global Context

On the macroeconomic front, HSBC Manufacturing and Services PMIs showed moderation, with the composite index easing to 57.80 from 58.90 in the previous month. Markets await clarity on potential inclusion of Indian government bonds in the Bloomberg Global Aggregate Index, which could provide short-term support if confirmed.

Foreign portfolio investors returned to Indian bonds with approximately USD 400.00 million of inflows, while equity outflows continued. The overnight indexed swap curve remained range-bound with yields up 2-3 basis points across tenors.

The outlook suggests policy rates will remain on an extended pause while bond markets continue grappling with supply pressures and liquidity constraints. Success in this environment requires disciplined duration management, defined investment horizons, and selective exposure across corporate bonds and money market instruments.

Reserve Bank of India Deputy Governor Shirish Chandra Murmu warned that rapid digitalisation is fundamentally altering the regulatory landscape, compressing the time available for financial oversight and demanding more agile responses to emerging risks. Speaking at the College of Supervisors' global conference in Mumbai, Murmu emphasized that regulatory processes must evolve to address the accelerated pace of digital transformation in the financial sector.

Compressed Time Dimension Creates Regulatory Urgency

Murmu highlighted how digitalisation has fundamentally changed the temporal aspects of financial regulation. "Digitalisation has compressed the time dimension in finance... narrowing the time available between early warning and realised impact," he stated. This compression requires regulatory frameworks to shift towards more proactive approaches while maintaining prudential standards. "Regulatory processes must evolve towards proactive detection and agile interventions without sacrificing prudence and quality of judgement," Murmu emphasized.

Five Critical Challenges for Digital-Era Regulation

The RBI Deputy Governor outlined five major challenges that regulators face in the current digital environment:

Blurred Boundaries and Fragmented Oversight

Murmu cautioned that digitalisation is creating significant challenges in regulatory coordination and oversight. "Many financial activities are now being unbundled and delivered through non-financial platforms... no single authority has a comprehensive, end-to-end view of the entire activity chain," he noted. This fragmentation poses risks to effective supervision and requires enhanced coordination among regulatory bodies.

Balancing Regulatory Frameworks

The Deputy Governor addressed the delicate balance required in modern regulatory approaches. He indicated that prescriptive rules risk becoming obsolete as technologies evolve rapidly, while principle-based frameworks can lead to uneven application across different entities and situations. "The challenge lies in calibrating regulation to have clarity without rigidity and flexibility without ambiguity," Murmu explained.

Systemic Risks and Cybersecurity Concerns

Murmu emphasized the emergence of new systemic risks from technological innovations. "Fragility can emerge without any single entity appearing vulnerable... regulators must look beyond entity-level soundness to systemic effects," he warned, specifically mentioning concerns about cloud computing and decentralised finance systems. Additionally, cybersecurity remains a critical priority as "financial institutions process vast amounts of sensitive information, making them attractive targets for cyberattacks." The challenge, according to Murmu, is "to promote innovation while enhancing safeguards" in the digital financial ecosystem.