Indian bonds are under pressure due to the Middle East conflict, which has pushed up the prices of crude oil. Rising prices of this key commodity are a major factor behind inflation, which could drive the RBI to cut rates.
However, in these challenging times for bonds, there are still options and avenues for the retail investor to benefit.
“The biggest external factor for right now is crude oil,” says Bharath Rathore, Executive Director, Anand Rathi Wealth Limited. Historically, a $10 per barrel rise in crude can increase retail inflation by around 0.2% and wholesale inflation by nearly 0.5%, which usually pushes bond yields higher as markets price in inflation risks.
Current geopolitical tensions involving the US-Iran situation and risks around the Strait of Hormuz could keep volatile. Domestically, markets are also tracking possible RBI rate hikes beginning June 2026, against the dollar, food inflation risks linked to El Niño, government borrowing levels and potential FPI outflows.
For now, bond markets are likely to remain sensitive to both global energy prices and domestic inflation trends, while any ease in these pressures could help improve stability in yields going forward, according to experts.
“Indian bond yields are likely to remain elevated through Q3, with the 10-year G-Sec yield broadly in the 7.0%-7.25% range,” says Saurav Ghosh, co-founder of Jiraaf. The move above 7% is important because it suggests that Indian bond traders are pricing in a possibility of a rate hike.
For India, the key risk is imported inflation. If crude prices remain high, the rupee weakens, and food inflation from a weaker monsoon remains sticky, the RBI may have to prioritise inflation control over growth support.
Which bonds to invest in now?
The external news for may sound daunting; there are still definite ways and categories for the investor to benefit from bonds at elevated yields.
“With the 10-year G-Sec yield at around 7.12%, the most attractive segment is 3 to 5 year government securities, where you lock in solid yields without taking on the price risk that comes with longer maturities,” says Rathore.
“We have three categories emerging right now and a clear way to participate,” says Harsha Vardhana VM, Group CEO, Atom Financial Services.
The most attractive are the State Development Loans (SDLs). The spread between the SDL and G-Sec has widened to almost 100 basis points, which is a five-and-a-half-year high. (A yield spread denotes the difference between two interest-bearing instruments). SDLs are quasi-sovereign in nature with no default history, thus providing excellent risk-adjusted value.
For most investors, the cleanest way to participate is through Target Maturity Funds, Vardhana advises, as they have SDL-heavy portfolios maturing in 2029-2032, where investors at current entry yields are likely to get 7.2-7.5% if held to maturity.
The sweet spot of the yield curve is in the 3-7 year G-sec and PSU bond space. “Banking and PSU Debt Funds offer near-sovereign quality at a 30-50 bps premium over G-Secs with manageable duration risk. HNI clients can also directly access listed PSU bonds of , , and on exchange platforms at 7.3-7.8%,” he notes.
The 3-5 year bucket of AAA-rated corporate bonds yields 7.5-8.5% with virtually no credit risk, opines Vardhana. The instruments of choice here are Corporate Bond Funds and listed NCDs of top-rated NBFCs & PSUs, with leading funds posting 3-year CAGRs of 8.0-8.4%. A yield of 7% or more on sovereign or quasi-sovereign paper at current levels represents a generational entry point in fixed income.
Ghosh recommends a laddered portfolio across high-quality maturities is better suited to the current environment, as it balances yield capture, liquidity, and reinvestment risk.
“Our guiding principle for retail investors right now is this—please favour accrual over duration and quality over yield-chasing in the current environment,” says Vardhana. Long-duration and gilt funds are already down around 1.4% in the past three months, as they suffer mark-to-market losses in a rising yield environment. That is not the place for retail money at the moment.
For investors with a horizon of 1-3 years, Vardhana recommends Short Duration Funds. These funds invest in bonds with maturities of 1-3 years, so they are constantly rolling into higher-yielding new paper as older bonds mature. This is a “roll-up yield” dynamic that boosts returns organically as rates remain elevated. The best funds in this group have produced three-year CAGRs in the 7.0%-7.6% range. For people with under 12 months or who want near-zero volatility, Money Market Funds at 7.0-7.5% are the right parking space, according to him.
He further recommends corporate Bond Funds, which invest a minimum of 80% in AAA-rated paper, as suitable for investors with a 3-year-plus horizon. These offer yield spreads of 50-100 bps over G-secs with very low credit risk and returns of 8.0-8.4% over three years from top funds.
(maturing in 2028-2030) allow investors to lock in current high yields with predictable, near-certain returns if held to maturity—”fixed deposits with better tax efficiency”.
Sophisticated investors with a 5-year view might consider a slot for Dynamic Bond Funds. They are defensively positioned now but will pivot to capture capital gains when the rate cycle eventually turns.
“My single piece of advice to clients would be, don’t let the noise of near-term volatility mask what is really a structural entry point in Indian fixed income,” says Vardhana. The 10-year sovereign instrument, with a 7% yield, relative to the repo rate of 5.25% and long-term inflation expectations of 4–4.5%, implies a real yield of about 2.5–3%. “That is historically attractive for an investment-grade sovereign.” When geopolitical tensions eventually ease, bonds will rise, and investors already positioned in quality fixed income will benefit from both accrual income and capital appreciation.
“In my experience, the best fixed-income vintages are always purchased when the noise is loudest, and the noise is very loud right now,” says Vardhana.
(Manik Kumar Malakar is a freelancer. He tracks bond and equity markets along with personal finance stories.)
Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.