Should fixed-income investors prepare for an opportunity in India bonds? Here's what LGT Wealth's Chirag Doshi expects

Mint

4 days ago

The Reserve Bank of India's August 2025 policy review might have delivered a predictable outcome, but beneath the surface lies a market quietly bracing for interesting moves.
The Monetary Policy Committee (MPC) kept the repo rate at 5.50%, retained a neutral stance, and reaffirmed that future policy will be guided by data.Inflation is behaving, but the RBI isn't declaring victory just yet. Headline CPI cooled to 2.1% in June—its lowest in over six years—helped by falling food prices.
The central bank trimmed its FY26 inflation forecast to 3.1% (from 3.7% earlier), though it still sees a mild uptick to 4.4% in Q4 FY26 due to base effects and possible food price volatility. Core inflation remains steady at around 4.4%, a reminder that underlying demand remains healthy.
Growth projections were left unchanged, with FY26 GDP growth at 6.5% and quarterly estimates showing little change. Services and domestic consumption remain robust, but the RBI flagged global trade frictions, commodity swings, and currency volatility as potential spoilers.
Liquidity, however, remains an unsung hero. Banking system surplus liquidity has been hovering around ₹ 3 lakh crore a day on average since the previous policy, ensuring smooth transmission of the 100-bps worth of rate cuts delivered since February. That abundant liquidity is also creating fertile ground for spread compression—a theme that could become more important as the year progresses.
The bond market greeted the policy with restrained movement. The 10-year G-Sec yield continues to trade in a tight 6.20%–6.40% band. Traders are comfortable playing the range for now, but the curve's slope still rewards investors in the medium-term bucket (3-7 years), where carry is solid and duration risk manageable.
For many institutional investors, AAA-rated corporate bonds remain the go-to segment. Spreads over sovereign bonds in the 5–10-year range are still in the 50-80 bps zone—attractive for high-quality paper. Supply is healthy, thanks to steady issuance by top-tier corporates, while bank funding costs remain sticky enough to keep bond market funding relevant.
Core portfolios in the current environment are generally anchored in high-quality investment-grade bonds, yet selective opportunities are being identified in the high-yield credit space. In a liquidity-rich market, well-researched AA and strong A-rated issuers are seen to offer a meaningful pickup over AAA paper. The emphasis is placed on companies with predictable cash flows, strong asset backing, and a proven record of refinancing ability.
At present, certain non-bank financials, renewable energy firms, and infrastructure-backed structures are delivering 250-350 bps above comparable AAA/AA yields. This is not, however, a blanket endorsement to pursue yield indiscriminately - rigorous credit evaluation, tight covenants, and continuous monitoring remain essential. With system liquidity likely to compress spreads over time, early positioning in carefully vetted credits is viewed as a means to enhance portfolio returns without materially increasing risk.
A few themes stand out for fixed-income investors: Balanced duration – Keep core exposure in the belly of the curve for carry, adding longer maturities opportunistically on yield spikes. Quality bias – AAA and strong AA remain the anchor; use high-yield credits as a tactical satellite allocation. Liquidity advantage – Ample liquidity is supportive, but monitor RBI's active management, which could tighten conditions at the margin. Global watch – The U.S. rate path will influence EM flows; a softer Fed later in the year could reinforce rupee stability and support local bonds.
This is not a market racing ahead—it's one quietly offering opportunities to those willing to mix patience with selectivity. The August MPC outcome reinforces a steady-handed RBI, an anchored yield curve, and a backdrop of abundant liquidity. For investors, that translates into a bond market where quality carry is still king and select high yield—chosen with care—can play a supporting role in boosting returns.
If inflation stays benign and global rates soften, 2025 could shape up to be a rewarding year for fixed income, not through dramatic policy shifts, but through disciplined positioning and intelligent credit selection.
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.