Indian government bonds gained on Thursday, with yields easing amid reports of potential tax relief measures for debt investors. However, expectations of a possible repo rate hike by the Reserve Bank of India (RBI) capped gains in bond prices.
India’s benchmark 6.48% 2035 bond yield declined by 2 basis points (bps) to 7.0033%. The US 10-year Treasury yield eased to 4.48%. move inversely to prices.
According to a Reuters report, the Indian government is considering scrapping capital gains tax on foreign portfolio investments (FPIs) in government securities, a move expected to bolster foreign inflows into the domestic debt market.
Foreign investors have net purchased $1.4 billion worth of Indian bonds so far this year, even as from Indian equities stood nearly $28 billion.
Market participants will now focus on the RBI policy decision to be announced on Friday, amid a challenging macroeconomic backdrop, clouded by concerns over the potential impact of the on India’s growth and inflation dynamics.
Nearly 80% of economists surveyed by Reuters expect the RBI’s Monetary Policy Committee (MPC) to maintain the repo rate at current levels of 5.25%, although a growing minority anticipates a 25-bps rate hike.
Additionally, the surprise rate hikes in Emerging Market (EM) economies like Indonesia, Philippines and Sri Lanka have raised hopes among a section of the market that the could tighten policy to support the rupee.
The Indian rupee has depreciated by more than 5%, while the the benchmark 10-year bond yield has risen 34 bps since the US-Israeli war on Iran began on February 28.
Meanwhile, hopes of a broader US-Iran peace deal increased after a ceasefire agreement between Israel and Lebanon.
also found support from softer crude oil prices, with Brent crude falling 0.9% to $96.97 per barrel.
Bond market strategy ahead of RBI policy
Bond markets are increasingly pricing in inflationary pressures and potential fiscal implications if the US-Iran war persists. However, analysts remain divided over the likelihood of an RBI repo rate hike on June 5.
Puneet Pal, Head- Fixed Income, PGIM India Mutual Fund expects to hike policy rates by 25 bps to 5.50%.
He expects the benchmark 10-year bond yield to trade in a broad range of 6.85% to 7.25% over the next one month.
“A lasting ceasefire or end of hostilities in the Middle East will be the key determinant of the short term evolution of the yield curve, given its impact on inflation, fiscal deficit and GDP growth,” said Pal.
Vineet Agrawal, Co-founder of Jiraaf, expects no change in the repo rate, but believes the RBI’s commentary on inflation, liquidity, and future policy flexibility will be more critical.
“ are entering the RBI policy with a cautious but constructive bias. With the 10-year yield above 7%, investors are already pricing in higher inflation risks and a greater chance of a rate hike in the coming months,” said Agrawal.
He advised bond investors against aggressively increasing portfolio duration.
“A balanced strategy would be to stay invested in high-quality bonds, prefer short- to medium-duration papers, and use any yield spikes to gradually lock into attractive accrual opportunities. Corporate bonds with strong credit profiles can offer a meaningful spread over government securities, but credit selection remains critical,” he added.
Agrawal noted that while the medium-term outlook for bonds remains constructive if inflation moderates, near-term volatility driven by policy guidance and global yields is likely to persist.
In the current environment of heightened uncertainty, Vishal Goenka, Co-founder of IndiaBonds, recommends a defensive positioning on the five-year segment of the government bond yield curve, as it is likely to be least impacted by any RBI policy move.
“Additionally, 2–3 year AA- and A-rated corporate bonds offer a relatively defensive positioning, given their comparatively lower sensitivity to government bond price movements,” Goenka said.
Hitesh Suvarna, Economist at JM Financial believes there is no space for policy tightening at this juncture, as uncertainty around the resolution of the West Asia crisis has created headwinds for growth.
“The evolving El Nino conditions, heatwave and below-normal monsoon will be inflationary; however, considering inflation will not decisively breach the 6% mark, it will not compel the RBI to hike policy rates. We expect 20 bps upward revision in RBI’s inflation projection to 4.8% in FY27 while growth is expected to be lowered by 10 bps to 6.8%,” said Suvarna.
He added that markets will closely monitor the RBI Governor’s commentary, following which bond yields could harden toward the 7.2%–7.3% range, while pressure on the rupee may persist as supply disruptions in the Middle East remain unresolved.
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