Why are short-term bonds in demand? Bondbazaar's Darak breaks it down

Bond market investors are looking beyond short-term geopolitical noise, anchored by strong domestic fundamentals, surplus liquidity, rate cuts and a dovish RBI

Bond yields on the 10-year Government securities have declined gradually so far in calendar year 2025. Despite inflation-related uncertainty due to the US President's tariff policies, SURESH DARAK, founder, Bondbazaar, tells Nikita Vashisht in an email interview that debt market investors remain constructively positive on bond market outlook. Edited excerpts:

How do you assess H1-2025 for bond markets and what does H2 look like?

Corporate Bonds and Sovereign Bonds witnessed a decline in yields in the first half of calendar year 2025 (H1-CY25). While 10-year Gsec declined 42 basis points in H1, the Corporate Bonds declined by ~70 bps - 90 bps during the period.

 

Given that the Reserve Bank of India (RBI) is expected to pause further rate cuts in H2-CY25, the 10Y G-Sec yields will likely remain steady. Further, Global index inclusion of Indian bonds in FTSE Emerging Markets Government Bond Index (EMGBI), along with easing norms on foreign investment in Indian government bonds, will aid bond markets in H2.

How are bond markets assessing the inflationary impact of US President Donald Trump's tariffs?

The market mood is cautiously constructive. Participants are looking beyond short-term geopolitical noise, anchored by strong domestic fundamentals, surplus liquidity, rate cuts and a dovish RBI. As long as inflation stays tame and global yields don’t spike, Indian bonds are expected to stay stable.

 

Banks, mutual funds, insurers, and EPFOs are absorbing supply across the curve. Also, the rupee has remained range-bound in the past 1 month.

Have you seen any change in investors' approach with the RBI frontloading interest rate cut? Is it time to focus on short-duration bonds?

With the RBI frontloading rate cuts, the investors are turning towards short-duration bonds. These bonds are less sensitive to rate changes, making them a safer bet if the RBI decides to change the repo rates in the future to curb inflation. Investors are now focused on optimizing carry, rather than chasing duration-led price gains. The front end of the curve offers the most efficient yield-to-risk profile.

Foreign holdings of G secs nearly doubled to ₹3 trillion at the end of March 2025. Do you see the trend sustaining?

The doubling of foreign holdings of Indian Government Securities (G-Secs) was driven by anticipation of global bond index inclusion (FTSE & JP Morgan), dovish RBI stance, and a stronger macro stability.

 

The trend is expected to sustain because of structural inflows, expected post-index inclusion in FTSE’s EMGBI (from September 2025) and the recent easing of norms by Sebi on the foreign investment in Indian government bonds.