Indian bond market strengthens as inflation eases and anticipated RBI rate cuts: Jefferies
NEW DELHI: The Indian bond market is gaining momentum due to lower inflation and expectations that the
Reserve Bank of India
will cut interest rates, according to a report by Jefferies.
The report indicates favourable conditions for domestic bonds, particularly appealing to long-term investors amid evolving global financial conditions.
India's consumer price inflation has shown a consistent downward trend.
The previous fiscal year recorded an average of 4.6%, while April 2025 witnessed a reduction to 3.2%, reaching its lowest point since July 2019.
The declining inflation trend has provided the RBI additional flexibility for interest rate adjustments, resulting in a 50 basis points reduction in policy rates. Jefferies anticipates further cuts of 75 basis points through 2025.
The ongoing rate reduction phase is increasing the attractiveness of Indian government bonds, particularly when assessed against developed economies such as the United States.
According to Jefferies, "While India 10-year rupee government bond has outperformed the US 10-year Treasury bond by 51% since April 2020 in US dollar terms. Indeed, it is no longer unthinkable that the ten-year Indian government bond yield will trade below the ten-year Treasury bond yield."
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The Indian rupee and positive performance of local-currency emerging market bonds globally are contributing to the optimistic outlook. A significant global sovereign bond portfolio monitored by Jefferies shows India's 15-year bond yielding 6.38%, representing the highest single-country allocation at 25%.
This demonstrates sustained trust in the Indian bond market during structural transitions away from G7 debt instruments.
Jefferies further said that "these bonds continue to outperform G7 government bonds, which is another sign of regime change from the Bretton Woods era, as is the growing evidence of supply concerns moving the long end of the US Treasury bond market".
The Indian bond market appears favourably positioned to gain from domestic rate reductions and international investment interest in emerging market debt, supported by decreasing inflation and attractive real rates. India continues to attract global investors seeking alternatives to G7 bonds, offering substantial yields, stable economic conditions, and potential currency value increase.
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