RBI ‘opens floodgates’: Why Dhawal Dalal may now be the best entry point for debt investors in two years

The June MPC meeting has launched a multilateral push to attract foreign debt capital to India, scrap withholding tax, remove capital gains tax for FPIs and ease ECB norms. Dhaval Dalal of Edelweiss MF says the combined effect could meaningfully reduce short-term rates by September and target maturity funds are the smartest way to ride this wave.

Liquid Fund Return, FY26

~6.5%
A benchmark for comparison

Period fund operations
Cash down

All period funds underperformed

Target window for effect
30 Sep

Deadline for capital inflow

What RBI has actually done
The June Monetary Policy Committee meeting went ahead with the rate decision. The Reserve Bank of India, working with the Government of India, removed the withholding tax and capital gains tax structures that had long deterred foreign portfolio investors from India’s debt market. Further, RBI proposed to increase FCNR(B) deposit limit and allow central public sector enterprises to raise funds through external commercial borrowing route.

“These two measures combined have the potential to bring in a significant amount of debt capital by September 30, and provide a significant liquidity injection for banks that are struggling to raise deposits,” says Dalal.

The logic is straightforward: banks are running very high credit-deposit ratios. The rise in foreign debt capital eases that pressure, accelerates deposit growth and creates conditions for a gradual decline in the short end of the yield curve – a direct tailwind for fixed income investors over the next 12 to 24 months.

Why period funds are discouraged, and what comes next

FY26 was a disappointing year for debt investors who moved away from liquid funds. Liquid and money market funds gave fair returns, but funds of all durations — corporate bond funds, banking and PSU debt funds and long maturity products — underperformed cash. After two years of bond market volatility, investor confidence in period plays is understandably low.

Dalal accepts hesitation but cautions against letting past performance dictate future decisions. The atmosphere has changed. However, it is equally clear that the path forward will not be a simple, uninterrupted decline in bond yields. Investors should expect continued volatility despite the broad direction being favorable.

Now the case of Target Maturity Funds

The broker’s top recommendation for investors willing to take that “leap of faith” is target maturity funds — and the logic is compelling. These funds invest in a fixed basket of bonds and hold them to maturity, providing predictable, high-quality returns for investors who stay the course. Volatility is much less important along the way when endpoint returns are largely locked in.

• Target maturity of 1 year
• 3-5 years tenure
• Options up to 10 years
• AAA CPSE Bonds
• AAA NBFC paper

The market currently offers target maturity funds across a wide range of maturities — from one year to ten — and across asset quality tiers, from AAA-rated CPSEs to AAA NBFCs. This gives investors the flexibility to match the duration to their own financial horizon while remaining in high-quality paper. For anyone with a 12- to 24-month outlook, brokers believe this is the current cycle’s fixed income opportunity.