Stars aligning in favour for Indian bonds to extend rally into 2025

RBI's rate cuts anticipated from early next year on slowing economic growth, continued index-inclusion-related foreign inflows and strong demand from local pension and insurance companies

By Subhadip Sircar

 

Indian bonds are set for the best year in four and investors expect more gains on a combination of policy drivers and resilient domestic demand.  

The central bank’s rate cuts anticipated from early next year on slowing economic growth, continued index-inclusion-related foreign inflows and strong demand from local pension and insurance companies are likely to further burnish the appeal of sovereign notes. 

 

Quantum Asset Management forecasts the yield on the benchmark 10-year bond to fall as much as 50 basis points by mid-2025, while Trust Mutual Fund sees the rate sliding toward 6.25 per cent-6.5 per cent over the next year and a half. 

 

While a resurgent dollar and higher Treasury yields have dented the appeal of emerging-market assets in recent weeks on concerns about US President-elect Donald Trump’s policies, Indian bonds have remained largely insulated.

 

Even as “there are headwinds from a stronger dollar and higher US Treasury yields, the ongoing bond index inclusion flows are likely to provide sustained solid passive support to Indian bonds,” Barclays Plc strategists including Mitul Kotecha wrote in a note. 

 

The yield on the 10-year bond fell by nine basis points on Friday to close at 6.74 per cent, a few basis points lower than early November when the US election results were announced. 

 

Bonds rallied on Friday after data showed India’s gross domestic product grew at its slowest pace in almost two years, stoking hopes of liquidity-easing measures or interest-rate cuts by the central bank. 

 

That’s not to say the market has been free of volatility. Yields rose to 6.87 per cent on Nov. 22, the highest in more than two months, as some global investors chose to cash in until further clarity on Trump’s policy. The rush of inflows driven by the nation’s inclusion in JPMorgan Chase & Co.’s flagship index is also taking a breather. 

 

Notwithstanding the short-term swings, 10-year yields are down more than 40 basis points this year, the most since 2020. That happened as local bonds received about $15 billion of foreign inflows during the period, aided by the JPMorgan gauge addition.  

India’s index-eligible bonds are also due to find a place in other global indexes, including those of FTSE Russell from next year, potentially attracting more foreign inflows. 

 

While the Reserve Bank of India is likely to keep its policy rate unchanged on Dec. 6, traders will watch for cues on when it will start cutting rates. The RBI changed its policy stance to neutral in its most recent rate decision in October. 

 

Swaps are pricing in 50 basis points of rate cuts by June 2025, said Pankaj Pathak, a fixed-income fund manager at Quantum Asset. Bonds are likely to gain on the easing and higher foreign inflows, he said.