India’s bond spreads narrow as RBI charts its own course, says Mirae Asset’s Kruti Chheta

As the global markets digest the US Federal Reserve’s latest 25-basis-point rate cut, India appears to be charting its own monetary path. According to Kruti Chheta, Fund Manager and Fixed Income Analyst at Mirae Asset Investment Managers (India), the Reserve Bank of India’s proactive approach has already placed it ahead of the curve, helping the country maintain macroeconomic stability even as global uncertainties persist.

In an interview with Fortune India, Chheta explains how India’s bond spreads have compressed sharply, why inflation remains at the lower end of RBI’s comfort zone, and what investors should expect next on the policy front.

She also shares insights on the recent GST changes, foreign investor behaviour, and where the best fixed-income opportunities might lie over the next few years. Edited excerpts:

Q. The US Fed has cut rates by 25 bps. What kind of impact has it had on bond spreads?

While the US Federal Reserve remains a key anchor in global monetary policy, India’s macroeconomic stability has allowed the Reserve Bank of India (RBI) to adopt a more domestically focussed approach. The RBI initiated rate cuts well ahead of the Fed, prioritising growth over inflation concerns, which were already well-contained in India.

This divergence in policy stance has led to a significant compression in the yield spread between the Indian 10-year benchmark and the US 10-year Treasury—from historical levels of 450–500 bps to approximately 170–200 bps. That said, recent pressures stemming from tariff-related uncertainties and currency volatility have exerted upward pressure on domestic yields. The Fed’s latest 25 bps cut has not directly altered the spread but has created additional room for accommodative action.

Q. Can this rate cut have any adverse impact on FII inflows into India?

Despite concerns that lower US rates might dampen foreign interest in emerging market debt, India continues to attract robust foreign inflows. In August alone, foreign institutional investors (FIIs) added $1.6 billion worth of government securities (G-Secs), followed by an additional $964 million between September 1st and 24th. This sustained interest underscores India’s relative macroeconomic resilience and its appeal as a destination within the emerging market debt universe.

Q. Can we expect another rate cut from RBI next month? What is the terminal policy rate you see in India?

RBI has been proactive and delivered around 100bps of rate cuts already. While current low inflation and Fed rate cuts open a window for a domestic rate cut, there are certain factors that will be taken into consideration

The growth is expected to be revised up from the current 6.5% to ~6.7-6.8% as a result of frontloaded rate cuts, personal income tax cuts and GST 2.0 implementation

The inflation is low as of now; one year forward, it could be higher due to the low base this year

There is uncertainty over the quantum of the Fed rate cut as reflected in the divided Fed rate projection

Against this backdrop, the MPC has thus far maintained an inward-looking stance, prioritising domestic macroeconomic dynamics over global cues. Whether the committee chooses to pause and assess the impact of recent fiscal and monetary measures, or opts to accelerate growth through additional easing further, remains at its discretion. Either way, the case for rate cuts is now firmly on the table—whether in the upcoming policy in December or later.

Q. Inflation is now at the lower end of RBI's tolerance band of 4±2%. What do you believe caused this? Is it a supply glut or a contraction in demand?

India’s current inflation levels, at the lower end of RBI’s tolerance band (4% ± 2%), are largely attributable to subdued food prices, which constitute roughly 45% of the CPI basket. A favourable monsoon season has supported agricultural output, while lower global oil prices and deflationary pressures from Chinese exports have further contributed to disinflation. Although base effects may pose a risk to future readings, structural factors such as GST 2.0 implementation and continued softness in global prices are expected to keep inflation in check over the near term.

Q. The recent changes in the GST rate are seen as a boon for consumption. Can you quantify it—how much demand recovery do you see from this, especially in rural areas?

The revenue foregone due to the GST cut was estimated at around ₹2 lakh crore and can be considered a stimulus amount, likely adding 0.2-0.4% to GDP growth. Regarding the on-ground demand boost, it is too early to judge. Nevertheless, in the early few days, auto demand is strong. Rural India, too, seems to be doing well in the ongoing festive season. Overall, hope is high on a demand boost led by an income tax cut, liquidity boost, good monsoon, GST cut, and the 8th Pay Commission later.

Q. What kind of global debt funds are available for Indians to invest in? Which should they prefer?

Indian investors currently have access to select global debt funds, particularly those focussed on US fixed income markets. However, investing in such instruments requires a nuanced understanding of global interest rate cycles and currency risk. These funds can offer diversification benefits, but should be approached with a clear view of one’s risk tolerance and investment horizon.

Q. What kind of funds can deliver superior returns in the next 3-5 years?

Historically, rate cut cycles have played out over three-year periods, but the pace of monetary action has accelerated in recent times. Rather than attempting to time the market, investors should align their fund choices with their financial goals:

• For liquidity needs: Money Market Funds offer flexibility and low volatility.

• For capturing duration and spread opportunities: Short-Term and Corporate Bond Funds are well-positioned.

• For long-term investors seeking sovereign-backed exposure: Long Duration

Funds are attractive, especially as India’s interest rate trajectory is expected to structurally decline in line with its ascent as the world’s third-largest economy.

Q. What is your investment strategy right now? What duration are you focussing on?

Given the prevailing global uncertainties and currency volatility, our strategy remains conservative in the near term. We are currently positioned at the shorter end of the yield curve (1–3 years), which offers better visibility and lower duration risk. As macro conditions stabilise and the outlook for further rate cuts becomes clearer, we will look to opportunistically extend duration and reposition towards the longer end of the curve.