Fixed income is the unglamorous half of a portfolio that most equity focused investors in India ignore. That is a mistake, and October 2026 is a good month to see why. On 7 October the RBI raised the repo rate by 25 basis points to 5.50%, its first hike since February 2023, and the 10 year government bond yield rose to around 7.2%, its highest in more than two years. Every long bond and long duration debt fund in the country lost value that week.
Understanding what drives bond returns, and how bonds behave when rates move, is essential for anyone building a multi asset portfolio. Here is the mechanics: yield, duration, credit risk and liquidity, and the products you can actually buy.
RBI repo rate after the 7 Oct 2026 hike
RBI monetary policy statement, 7 Oct 2026
10 year government bond yield, around the decision
Market data, first week of Oct 2026
CPI inflation, August 2026
MOSPI
Minimum bid for government securities on RBI Retail Direct
RBI
- Repo cut to 6.25%
The first cut in nearly five years starts an easing cycle.
- Cut by 50 basis points to 5.50%
After a further cut in April, a larger move.
- Cut to 5.25%
The low point of the cycle.
- Hike to 5.50%, stance "calibrated tightening"
Oil above $100, a weak rupee and firmer inflation turn the cycle.
Repo rate decisions of the RBI's Monetary Policy Committee. Bond prices rose through the cuts and fell as the hike approached.
Types of fixed income instruments in India
Yield to maturity: the single most important bond metric
Yield to maturity is the annual return you earn if you buy a bond today, hold it to maturity and reinvest the coupons at the same rate. It is the bond equivalent of CAGR, and it lets you compare bonds with different coupons and prices.
Two relationships every fixed income investor must know:
- Yield and price move in opposite directions. When yields rise, existing bonds with lower coupons are worth less, so their prices fall. This is arithmetic, not opinion.
- Longer bonds move more. The sensitivity of price to yield is called duration. A one percentage point rise in yield takes roughly 1% off a one year bond and about 7% off a ten year bond.
- 1 year bond−0.94%
- 3 year bond−2.61%
- 5 year bond−4.04%
- 10 year bond−6.74%
- 30 year bond−11.10%
Price change of a 7.2% coupon bond, bought at par, when its yield rises from 7.2% to 8.2%. Half yearly coupons. Calculation by RupeeCase.
Put October 2026 into the calculator. A 25 basis point rise on a portfolio with seven years of duration costs about 1.75%, ₹17,500 on ₹10 lakh, in days. That is not a loss if you hold the bond to maturity; you still earn the yield you bought at. It is very real if you need to sell, or if you own a long duration debt fund, which is valued at market prices every day.
Credit risk and liquidity
Government bonds carry interest rate risk but no credit risk. Corporate bonds carry both. A higher yield on a corporate bond is payment for the chance that the issuer pays late or not at all, and for the difficulty of selling it in a hurry.
India learned this sharply in 2018 and 2019, when a large infrastructure lender and then a large housing finance company defaulted. Several credit risk debt funds had to segregate the bad paper into side pockets, and investors who had chased an extra two or three points of yield lost far more than that on the affected portion. The lesson is old and still ignored: in fixed income, extra yield without extra risk does not exist.
MythGovernment bonds are risk free, so a gilt fund cannot lose money.
FactThey have no credit risk, but plenty of interest rate risk. A long gilt fund can fall several percent in weeks when yields rise, as it did around the October 2026 hike.
RBI Retail Direct: direct access for individuals
Since November 2021 RBI Retail Direct lets individuals open a gilt account with the RBI and buy government securities directly, in auctions and in the secondary market:
- No brokerage and no fund management fee.
- Non competitive bids in primary auctions from ₹10,000; you get the auction's cut off yield.
- Central government bonds, treasury bills and state development loans.
- Coupons and maturity proceeds go straight to your linked bank account.
Hold to maturity or a fund?
You know the return on day one
- Yield locked at purchase
- Price swings do not matter if you hold
- Interest taxed at your slab every year
- Selling early can be hard and costly
Diversified, valued daily
- No maturity unless it is a target maturity fund
- NAV moves with rates every day
- Gains taxed at slab when you redeem, for units bought after Mar 2023
- Easy to buy and sell in any amount
How bonds are taxed
Interest on bonds and government securities is taxed at your slab rate each year. Debt mutual fund units bought on or after 1 April 2023 are taxed at your slab rate whatever the holding period. Listed bonds sold after 12 months are taxed at 12.5% as long term capital gains, and unlisted bonds and debentures are taxed at slab rates. The after tax yield, not the headline yield, is what you compare with a fixed deposit.
Fixed income in a systematic multi asset portfolio
| Role | Instrument | Duration | When it helps |
|---|---|---|---|
| Cash and buffer | T bills, liquid and overnight funds, liquid ETFs | Up to 1 year | Money waiting to be invested; emergencies |
| Defensive ballast | Short government and AAA bonds | 1 to 3 years | When equity risk is high; low price swings |
| Rate view | Long government bonds, gilt funds | 7 years and more | When you expect yields to fall; painful when they rise |
Common mistake: buying yield, not return
The common mistake is choosing the debt product with the highest yield on the screen. The yield ignores credit losses, liquidity and tax. A 9% corporate bond taxed at 30% yields 6.3% after tax and carries default risk; a 7.2% government bond held to maturity carries none.
A worked comparison makes the first point concrete. ₹10 lakh in a 9% corporate bond pays ₹90,000 a year; at a 30% slab you keep ₹63,000. ₹10 lakh in a 7.2% government bond pays ₹72,000; you keep ₹50,400. The corporate bond is ahead by ₹12,600 a year, about 1.3% of your capital. One default in that issuer, even with half recovered, wipes out roughly forty years of that extra income. The extra yield is real; so is the price of it.
The second mistake is buying a long duration fund for money you need in a year. Duration is the right tool for a rate view over years, not for a parking place. Match the duration to the date you need the money.
How this shows up in RupeeCase
The multi asset strategies on RupeeCase hold a debt sleeve alongside equity and gold, through exchange traded instruments: a liquid fund ETF and a government bond index ETF appear in the published holdings of Dynamic Asset Allocator, whose rule shifts part of the portfolio between equity and debt by regime. Allcap Multi Asset keeps its sleeves fixed at 80% equity, 10% debt and 10% gold, reset at every rebalance, which is the rebalancing idea of Module 4.3 applied across asset classes. Everything sits in your own demat, and each factsheet shows the sleeves and the model's falls. Figures are model, back tested.
Questions readers ask
Why do bond funds fall when the RBI raises rates?
Higher policy rates usually push market yields up, and when yields rise the prices of existing bonds fall. Funds holding longer bonds fall more, because their duration is higher.
Is RBI Retail Direct safe?
It is run by the RBI, and government securities carry no credit risk in rupees. Prices still move with interest rates if you sell before maturity.
Are debt funds still tax efficient?
Units bought on or after 1 April 2023 are taxed at your slab rate on redemption, like a fixed deposit's interest, but only when you redeem. That deferral is the remaining advantage.