Global shifts may have limited impact on India bonds: Rahul Goswami

There is a high probability of two more rate cuts by the Reserve Bank of India (RBI) in 2025–26, given the stable headline consumer price inflation and the central bank’s renewed focus on growth, says Rahul Goswami, chief investment officer and managing director, India fixed income, Franklin Templeton. In an email interaction with Abhishek Kumar, Goswami says monsoon trends, geopolitical developments, movements in yields in developed markets, and commodity prices will be key factors influencing bond yields going forward. Edited excerpts:

 

Indian bond yields have mostly remained immune to global headwinds so far. Can this be sustained? 

Prudent macroeconomic policies, a stable interest rate regime with a dovish bias from the RBI, and softer inflation are among the factors supporting Indian bond yields.

 

Other contributors include ample liquidity from the RBI, inclusion of Indian bonds in global bond indices, and strong domestic demand. A favourable current account balance and lower global energy and commodity prices have also helped pull capital towards India’s fixed income space.

 

However, monsoon patterns, geopolitical events, movements in developed market yields, and commodity price trends will continue to influence yield movements.

 

Do you see the surge in US yields hurting overseas demand for Indian bonds? 

Geopolitical shifts and changes in interest rates in major developed markets may temporarily alter the relative appeal of Indian bonds for foreign investors. However, India’s improving macroeconomic and credit profile, along with higher real yields, continue to support long-term foreign portfolio investment.

 

With India offering attractive real rates backed by credible government policies and sound macros, we expect overseas demand to remain steady, especially as global investors diversify into emerging markets with strong underpinnings.

 

Do you expect more rate cuts? If so, what quantum? 

In the current rate-cut cycle, we’ve already seen two reductions of 25 basis points (bps) each. Given the current trajectory of consumer price inflation and the RBI’s shift to a growth-focused, accommodative stance, we see a high probability of two more cuts of 25 bps each in this financial year. However, this will depend on how global commodity and energy prices behave.

 

Is this an opportunity to lock in higher yields? 

The current environment is favourable for short- and medium-duration investments, given the expected dovish monetary policy backdrop. While we believe we are mid-cycle rather than nearing the end of the easing phase, markets tend to price in rate cuts in advance. This makes it essential for investors to be mindful of valuations, which can become stretched as the cycle progresses.

 

Given the RBI’s accommodative stance and inflation close to the monetary policy committee’s target, we believe the risk/reward equation is still supportive of short- and medium-duration strategies, especially those focused on high-credit-quality portfolios.

 

What is your view on corporate bonds and state development loans (SDLs)? 

In corporate bonds, we continue to prefer a steepening yield curve strategy, favouring high-quality issues up to the five-year maturity mark. Spreads in this segment remain above multi-year averages, offering appealing valuations.

 

A supportive liquidity environment, dovish monetary policy, a potential pickup in private capital expenditure, and improving credit profiles of borrowers are likely to aid corporate bond portfolios. Regulatory revisions giving foreign portfolio investors greater flexibility also sustain the investment case.

 

We are constructive on SDLs as well, given stable macro conditions and disciplined state borrowing. Spreads over government securities (G-secs) are currently attractive.

 

Improving state fiscal metrics and limited supply pressures further enhance their relative value proposition for high-quality duration exposure. We’ve taken a tactical approach by adding duration via SDLs. Their higher spreads over comparable G-secs, along with their sovereign backing, make them compelling from a risk/return standpoint.

 

Which schemes would you recommend to investors with a two-/three-year horizon? 

Given the current interest rate environment and macro backdrop, a corporate bond fund that allocates at least 75 per cent to sovereign and AAA-rated securities, with active, flexible duration management, could be a good option.

 

A banking and public sector debt fund, which also maintains high credit quality, may offer a similarly balanced risk/reward profile.

 

That said, individual risk appetites vary, and seeking the advice of a financial advisor is advisable before making investment decisions.