Investors are positioning for a rally in Indian bonds, betting that the central bank will cut interest rates further this year to boost the economy.
SBM Bank (India) Ltd. predicts that the country's benchmark 10-year yield will fall to 6.4 percent by June. Trust Mutual Fund predicts a drop to as low as 6.25 percent by December. The yield stood at 6.69 percent on Friday.
Following its first easing in five years last month, the Reserve Bank of India is expected to cut another 25 basis points in April, with at least one more reduction this year, according to swaps pricing.
This, combined with its bond purchases to inject liquidity into the financial system, falling US yields, and reduced net borrowing by the government, will pave the way for a drop in yields.
"Even modest growth in demand from banks, insurance, and pension funds would lead to demand outpacing supply in the government bond market," said Pankaj Pathak, a fund manager at Quantum Asset Management Co. Pvt. Ltd. He believes the 10-year bond yield will fall below 6.5 percent in the second half of the year.
India's 10-year bond yields have fallen by about 18 basis points from their peak of 6.87 percent in January. Bond traders expect an extended rally in 2025, with last year's performance the best in four years. A drop in benchmark yields will not only reduce borrowing costs for the government, but will also allow the corporate sector to raise funds more cheaply to support India's massive infrastructure push. This is critical as the country's annual growth slows to a four-year low, just as US tariffs and global volatility are prompting investors to seek safer bets.
For the fiscal year that ends on March 31, the economy is predicted to expand by 6.5 percent. That is significantly less than the 8% rate needed to meet Prime Minister Narendra Modi's goal of turning his country into a developed one by 2047. Inflationary pressures are easing, allowing the RBI to cut interest rates to support growth. According to Bloomberg economists, consumer price gains will fall short of the 4% target in February.
"With the comfort of a more predictable inflation trajectory aligned with the target range, the need to support both consumption and investment-led growth will take center stage," said Mandar Pitale, SBM's treasury head.
The government's borrowing plan for the next fiscal year creates a favorable environment for bonds. While planned gross sales of 14.82 trillion rupees ($171 billion) are slightly higher than the current year, net borrowings are marginally lower.
While foreign inflows may slow as India's addition to JPMorgan Chase & Co.'s index is completed in March, the central bank is expected to continue buying bonds. Debt purchases this year, including two more operations due this month, total more than 2 trillion rupees.
Foreign flows "are likely to taper down in FY26 but will be substituted by RBI purchases through open market operations to provide primary liquidity to the system," said Jalpan Shah, head of fixed income at Trust Mutual Fund.
