Sovereign upgrade, index flows and GST reform create a strong bond market backdrop: Chirag Doshi, LGT Wealth India

Time of India

20 hours ago

India's bond market is entering a supportive phase, buoyed by a rare confluence of tailwinds.
The recent sovereign rating upgrade by S&P, coupled with ongoing index inclusions and the
government
's push for
GST reform
, is setting the stage for lower yields, stronger foreign participation, and improving credit dynamics.
According to
Chirag Doshi
, CIO–Fixed Income at LGT Wealth India, these factors are creating a constructive backdrop for government securities as well as high-grade corporate bonds, with banks, top-tier NBFCs, and infrastructure financiers likely to be the early beneficiaries. Edited Excerpts –
Kshitij Anand: Let us understand the impact of the India's sovereign rating update that happened. Yes, it was quite a surprise last weekend, but we have been upgraded from BBB minus to BBB. And how could it impact the yield on government securities in the short to medium term?
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Chirag Doshi:
Two things are visible already. First, the immediate action or reaction from the market side was a dip in the government bond yields as the markets priced in a lower sovereign risk premium after the upgrade happened by S&P and which moved India to BBB from BBB minus on August 14th.
The 10-year yield softened by roughly 7 basis points around the announcement, though they have retraced back now, but which reflects improved confidence and the prospect of a deeper foreign participation that you may see in India, that is for short term.
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But in the medium term, the upgrade alongside the ongoing index inclusion that is already there should anchor the term premia lower and this also is subject to the fiscal glide path staying credible from the government side.
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Kshitij Anand: And could this rating upgrade lead to a re-rating of Indian corporate bonds? And if so, which segment or sectors or if you want to probably stick to the corporate bond market on that?
Chirag Doshi:
I think a sovereign upgrade typically relaxes the sovereign cap for high quality issuers. We have already seen S&P has upgraded 10 financial institutions, including SBI and HDFC Bank post the upgrade. So, right after the sovereign action, we have seen that these upgrades have come.
The immediate beneficiaries are, in my view, banks, top tier NBFCs, and quasi sovereigns in the infrastructure financing space where spread should compress fastest as offshore and onshore investors will start reassessing the risk.
More broadly, the IG corporates, the investment grade bonds with robust balance sheets should see lower funding costs and better secondary market liquidity with this.
Kshitij Anand: What specific factors are creating special opportunities in the bond market right now?
Chirag Doshi:
So, I see a confluence rating upgrade plus index flows. So, the S&P move coincides with the India's phased JPMorgan emerging market bond inclusion and Bloomberg's emerging market local inclusion for the FAR bonds.
So, structural drivers of steady foreign demand for government bonds, that combination supports price resilience and lowers the hurdle for duration for bond markets in India. Plus, the
GST
reform impulse.
We heard the prime minister signalled a review and rationalisation of the GST and the government is proposing cuts towards a two-rate structure, which could be 5% and 18%.
Markets have already responded positively, the consumption boost can lift corporate earnings and improve the credit metrics in majority of the sectors, basically consumer durables, financials, which can create value in high grade corporate bonds where the access to the bond markets will be easy and at a cheaper cost for them because of this impulse.
And some macro tailwinds, I guess, inflation just at an eight-year low in July and RBI has already begun their easing cycle, we have already seen 100 basis points of cut delivered by them, a supportive backdrop for fixed income.
And I think if disinflation persists and growth holds, then there is further room for the policy support which will happen from RBI side, which again will reward the bond markets in India and of course, duration.
And the corporate bond yields have risen more than G-Sec when the talk of the lowering of GST has happened because it may impact fiscal. But if government manages to maintain that, we will see that these credit spreads in AAA, AA bonds will also start compressing.
Kshitij Anand: And how are you positioning duration in the current interest rate environment?
Chirag Doshi:
Unbalanced but constructive, I think at the core I want to hold longer dated government bonds, not very far longer dated, but on the belly of the curve, which will capture the potential for price gains if the easing cycle extends, which in my view should, complemented by a short- to medium-term investment grade corporate bonds for carry and lower volatility.
So, with the 10-year oscillating between 6.35 to 6.45 zone, I believe that this exposure will benefit the curve.
And without over concentrating risk at one point of the curve, I think the corporate bonds will help the portfolio or the investments have a greater carry.
Kshitij Anand: And what about strategy, are you favouring a barbell kind of a strategy, a bullet strategy, or a more neutral approach to manage the duration risk?
Chirag Doshi:
I am leaning towards a barbell kind of a strategy right now, short end for liquidity and carry and long end for duration or convexity, especially when policy is on a hold after a cut.
The
US Federal Reserve
likely to cut rates in September. So, a pure bullet risks missing either the carry at the front and the convexity at the back. So, a barbell lets you harvest both and rebalance quickly as data evolves. So, if there is something wrong with the view, we can be nimble and quickly we change allocations.
Kshitij Anand: But you did talk about the rate cuts at this point in time, but let us get your perspective as to do you see a rate cut in the next 12 months and how is that shaping your strategy?
Chirag Doshi:
So, our base case is 25 to 50 basis points of additional easing over the next one year, which is, of course, contingent on inflation normalising and the external backdrop staying manageable, which in my view should evolve in the way.
Economists are now expecting the RBI to hold the near term after the June cut with another reduction in the rates later this year, which is possible.
That view justifies keeping meaningful duration via the medium to longer end G-Secs and selectively extending in the higher grade corporates while avoiding excessive curve risk.
Kshitij Anand: And also, from a larger perspective, how does global central bank's action influence Indian bond yields and investor sentiment in the short to medium term perspective as well?
Chirag Doshi:
They effect in two ways, rates and risk appetite. Markets are pricing in a
Fed
cut in September while the ECB is pausing after a year of easing. So, if the Fed starts to ease, the global term premia should compress.
So, which will help our yields. Conversely, any hawkish surprise or tariff driven volatility can tighten the global financial conditions and briefly cheapen risk assets.
And energy matters too. Brent has softened into the mid-60s, which is a tailwind for India's inflation and current account. So overall, India's upgrade and reform momentum makes us relatively more resilient within the emerging market basket.