Trading strategy to future outlook: LGT Wealth's Chirag Doshi points out four key things for Indian bond investors

Mint

17 hours ago

India's fixed-income market is entering a defining phase. With inflation comfortably within the RBI's target band and growth on track, the current setup presents a compelling opportunity for investors to lock in attractive real yields with a prudent mix of quality and risk.
Macro indicators continue to paint a favourable backdrop. Headline inflation has cooled to ~3%, GDP growth is tracking around 6.5%, and the Reserve Bank of India has front-loaded policy easing, cutting the repo rate by 100 bps so far in 2025 to 5.50%. A sharp reduction in the cash reserve ratio (CRR) has further eased systemic liquidity. While the RBI's stance has turned neutral, the overall tone remains accommodative.
The government bond yield curve has flattened at the long end but remains steep in the 3- to 7-year segment. As of early July, the 5-year G-Sec trades near 6.00%, while the 10-year benchmark hovers around 6.30%. State Development Loans (SDLs), offering a 25–30 bps premium, remain attractive for incremental yield without compromising credit quality.
We continue to find value in the 5–7-year part of the curve, where investors can capture both decent carry and roll-down potential. Long-duration positions are best approached selectively, especially considering global cues and potential domestic supply pressures.
In the corporate bond market, shorter maturities (up to 5 years) dominate new issuance as issuers and investors both gravitate toward lower duration amidst falling rates. AAA-rated NBFCs and PSUs are raising capital at 6.60–6.80% for 5-year tenors—offering spreads of around 80–100 bps over corresponding G-Secs.
For investors comfortable with slightly higher risk, selectively allocating to well-researched high-yielding credits in the A to A- category can meaningfully enhance portfolio carry. The key here is to remain cautious, focus on issuers with strong cash flows, seasoned promoters, and transparent governance, and avoid overexposure to any single name or sector.
In this phase of the cycle, we recommend a laddered portfolio approach that combines duration and credit quality thoughtfully. The objective should be to build a robust carry while maintaining resilience against unexpected macro shifts.
Liquidity sleeve (0–1 year): Deploy into liquid and ultra-short funds or short G-Secs for parking and capital preservation.
Core carry (3–7 years): Focus on 5–7-year G-Secs and AAA-rated corporates to optimize yield and manage duration risk.
Yield enhancement (2–4 years): Add select high-yielding A/A- rated bonds in moderation for portfolio lift, with strict attention to credit selection and size limits. The RBI's August policy review, which could provide clarity on the pace and extent of further easing.
Inflation trajectory, particularly in food prices post-monsoon.
Global rate trends and commodity prices, especially crude oil.
Government borrowing calendar and potential changes to the fiscal glide path.
Any of these factors could influence bond yields, particularly at the long end of the curve.
With policy easing largely behind us and inflation under control, fixed income investors are well-placed to lock in real returns that look increasingly attractive on a risk-adjusted basis.
The opportunity is not about chasing yield, but about building carry, layering quality, and being intentional with credit. At this juncture, prudently structured portfolios—anchored in core quality, with calibrated exposure to high-yielding credits—can deliver consistent performance through the cycle. The bond market, in short, is offering a window worth stepping into—cautiously, but confidently.
The author, Chirag Doshi, is the CIO at LGT Wealth India.
Disclaimer: This story is for educational purposes only. The views and recommendations above are those of individual analysts or broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions.