India’s fixed-income market has had a restless few weeks. Yields have moved in fits and starts, sentiment has swung between optimism and caution, and yet—beneath the surface—the market has remained far more orderly than the headlines might suggest. The reason lies less in macro surprises and more in a familiar trio: supply, liquidity, and expectations.
Government bond yields have gravitated back toward the middle of their recent range after a brief bout of volatility. The benchmark 10-year has struggled to sustain moves in either direction, reflecting a market caught between heavy supply considerations and an RBI that is clearly uncomfortable with liquidity tightening too much.
The immediate trigger for the recent sell-off was the deferral of India’s inclusion in a major global bond index, which forced some investors to reassess the timing of foreign inflows. But the reaction was telling: yields rose, but there was no disorderly sell-off.
RBI action
That resilience owes much to the Reserve Bank of India’s actions. Over the past month, the RBI has been quietly but decisively active—injecting durable liquidity through open market purchases and longer-tenor FX swaps, and signalling that it wants financial conditions to remain supportive even as borrowing remains elevated. This is not accidental. The RBI is trying to ensure that supply pressure does not morph into a broader tightening of credit conditions, especially when growth remains uneven and external risks persist.
Liquidity, after all, is doing more of the heavy lifting than policy rates at this stage. While the repo rate has already been reduced, the RBI’s recent behaviour suggests it is at least as focused on how money flows through the system as on whether another cut is delivered immediately. That bias has helped anchor the front end of the curve, even as the long end continues to take cues from borrowing expectations and global risk sentiment.
Corporate bonds have largely followed government securities higher, but the tone within credit markets has changed in an important way. Spreads, especially in AAA, are no longer compressed to uncomfortable levels. Issuers are paying up, and investors are once again being compensated for duration and credit risk. In AA and below, spreads have widened further—not because of stress, but because investors have become more discerning.
This is where the opportunity set has quietly improved.
For much of the last year, returns in fixed income were driven by duration and liquidity. Today, carry is reclaiming centre stage. Select high-yield credit—backed by improving balance sheets, stable cash flows and conservative structures—offers a margin of safety that was largely absent when spreads were at cyclical tights. Importantly, this is not about chasing yield indiscriminately. It is about recognising that the risk-reward in parts of the credit spectrum has reset in favour of investors willing to do the work.
The primary market remains open, but issuers no longer have the luxury of aggressive pricing. That discipline is healthy. It ensures that capital is allocated to credits with resilience rather than just ratings, and it reinforces the case for active credit selection over passive exposure.
Outlook ahead
Looking ahead, the next inflexion point is February. The Union Budget will set the tone for the bond market well beyond the day of presentation. Investors will focus on the fiscal glidepath for the coming year, but just as critically, on how the borrowing programme is structured. A credible step-down in the deficit, coupled with a well-paced issuance calendar and active supply management, would go a long way in calming long-end nerves.
The RBI’s policy meeting soon after will then determine whether liquidity support continues at the same intensity. Even if policy rates remain unchanged, the direction of liquidity operations will matter far more for market pricing.
Our expectation is for yields to remain range-bound in the near term, with volatility driven more by supply headlines than by macro shocks. In such an environment, government bonds offer stability, but returns are likely to be modest. Credit, by contrast, offers differentiation. High-quality carry, selective exposure to higher-yielding credits, and disciplined maturity management look better positioned to deliver consistent outcomes.
The bond market today is not flashing warning signs. It is flashing signals. For investors willing to listen carefully—and act selectively—those signals are beginning to look constructive.
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.
