LGT Wealth's Chirag Doshi recommends India bond investors to buy 5-10 year notes amid RBI rate cut expectations
As we approach the middle of 2025, the global bond market is flashing mixed signals. While the U.S. Federal Reserve remains cautious, waiting for clearer signs before making any moves, bond yields in major markets like Japan and the UK are climbing. Japan's super-long bond yields have reached multi-decade highs, stirring concern over long-term fiscal pressure. Meanwhile, the European Central Bank is expected to cut rates again in early June, bringing its deposit rate to 2% — but may pause soon after, hinting that the easy money cycle is nearing its end.
In contrast, India's fixed-income markets are offering something rare these days: Stability.
Fresh GDP data released on 30 May 2025 confirms India's economic resilience. Growth for the January–March quarter came in at a strong 7.4%, lifting the full-year FY25 number to 6.5%. That keeps India firmly in the lead among the world's major economies.
Inflation, too, is cooperating. Retail inflation (CPI) dropped to 3.16% in April, its lowest level in over six years, and now sits well below the Reserve Bank of India's (RBI) 4% target. With inflation under control and growth steady, markets are widely expecting the RBI to cut rates by 25 basis points in its 7 June meeting. That would take the repo rate to 5.75%, adding to the two rate cuts already delivered earlier this year.
The RBI's recently released Annual Report reinforces this outlook. It notes that inflation is likely to remain under control through FY26, aided by better food supply and normal monsoons. Importantly, the central bank also transferred a record ₹ 2.69 trillion surplus to the government, thanks to higher interest earnings and forex gains — giving it even more room to manage liquidity effectively.
Government bond yields have softened in response. The benchmark 10-year bond is trading around 6.25%, and yields on 5 to 7-year bonds have fallen more sharply, driven by strong demand from mutual funds and long-term investors.
The rally isn't limited to sovereign paper. Corporate bond issuance in April hit a record ₹ 98,700 crore, with May showing similar momentum. Top-rated public sector issuers are now able to raise 5-year money below 7%, while spreads for high-grade NBFCs have narrowed by 20–25 basis points in just two months.
Looking ahead, global index inclusion continues to be a supportive tailwind. After entering the JP Morgan index last year, India is set to join the FTSE bond index in September, which could bring in $20–40 billion of passive foreign inflows. That should help keep bond demand strong and yields anchored.
With inflation under control, rate cuts likely, and bond inflows set to rise, the case for locking in medium-duration yields is strong. Bonds in the 5 to 10-year segment offer a good balance of carry and capital appreciation potential. If RBI cuts another 25–50 basis points this year, 10-year yields could ease toward 6.0% by December.
Credit spreads are also starting to look attractive. While top-rated borrowers have already benefited from falling yields, quality AA and AA+ issuers may still see spreads compress further. For investors with a slightly higher risk appetite, this could be the right time to add select high-grade credits to portfolios.
In a world where central banks are pulling in different directions and global bond markets are swinging on every new data point, India stands out for its macro stability and improving interest rate outlook. For fixed income investors, especially those looking at medium-term opportunities, India offers a rare combination of high real yields, strong growth, and a supportive policy backdrop.
Now may be a good time to gently lean into duration and selectively capture spreads — before the rest of the world catches up.
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.
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