Global Landscape: Resilience Amidst Chaos
The year 2025 was described as a “year of chaos,” characterized by volatile tariff announcements and a roller coaster ride for equity and growth bond markets. Despite early fears that trade uncertainty would knock growth down, global growth remained resilient due to high fiscal spending by governments worldwide. While manufacturing activity moderated in the US and Eurozone, it was offset by strong activity in China, Korea, and Taiwan, largely driven by massive investments in Artificial Intelligence (AI) and semiconductor sectors
The US Federal Reserve cut rates to the 3.50%–3.75% range as expected but signaled that future cuts would be limited, with dot plots indicating only one rate cut ahead in 2026. Consequently, bond yields have risen across major economies (excluding Indonesia), driven by strong growth expectations and fiscal deficits rather than aggressive monetary easing
Domestic Developments
Agriculture and Credit Trends On the domestic front, the agricultural outlook is positive with Rabi sowing progressing well; wheat acreage is at 107% and oilseeds at 111% of normal levels, supported by healthy reservoir buffers. While central government receipts have declined due to tax cuts and slower nominal GDP growth, the government is expected to meet its fiscal deficit targets through expenditure rationalization and scheme reorientation
A critical trend for the banking sector is that credit growth (11.8%) continues to outpace deposit growth (9.4%). To bridge this gap, banks are aggressively issuing Certificates of Deposit (CDs), which has pushed one-year CD rates to approximately 6.9%
Outlook:
The End of the Rate Cut Cycle UTI Mutual Fund suggests that the best of the monetary easing cycle is behind us, and the RBI is likely to keep rates “lower for longer” to support growth rather than cutting aggressively. The Indian Rupee (INR) is expected to remain range-bound between 89.50 and 91.00 in the near term, as it is viewed as attractively valued relative to other currencies.
A notable shift is occurring at the long end of the yield curve, which has underperformed due to reduced demand from pension funds and insurance companies as they shift asset allocations toward equities
Investment Strategy for 2026
1. Hybrid Funds: Attractive due to positive carry available in the fixed income component and the benefit of automatic rebalancing.
2. Financials: The sector is well-positioned to benefit from the resumption of credit growth and the inherent leverage that allows earnings to grow faster than credit growth, helping lift nominal growth.
3. Large Caps: Preferred for lumpsum allocations due to more comfortable valuations
Focus on UTI Small Cap Fund
For investors navigating this environment, UTI recommends the following strategies based on investment horizons:
• 1 Year+ Horizon: Investors should focus on the short end of the yield curve (1 to 3 years) through short-term or corporate bond funds, as this segment offers attractive opportunities due to the steepness of the curve.
• 2 Years+ Horizon: Investors are advised to consider income plus arbitrage funds, which may offer better tax-efficient returns.
• Tactical View: Investors should remain cautious on long-duration funds given the supply-demand dynamics and the conclusion of the rate cut cycle
