The benefits of investing in bonds are pretty clear – they offer you fixed, regular returns and, most importantly, are essential for diversification of your financial portfolio. Given the ongoing equity market volatility and geopolitical threats like tariffs, one should think of increasing allocation to direct bonds. Until 2-3 years ago, it was not easy for everyone to access and invest in the bond market. With the advent of tech-enabled SEBI-regulated Online Bond Platform (OBPs) now, one can invest in a few clicks and minutes.
In the past couple of months, the government bond markets have sold off after the last RBI turbo-charged 0.50% rate cut. However, things have changed a lot for India recently, which makes a compelling case for more interest rate cuts likely, and one can make solid low low-volatility returns through bonds. Let’s take a look:
Economic Growth
It is evident that growth has slowed in the economy, as reflected by the decline in credit offtake at banks. To counter this, the government has implemented Income Tax cuts in the Union Budget and now GST rate reductions to spur consumption. The focus for policymakers has clearly shifted toward reviving growth.
Inflation
With CPI at 1.55%, and GST cuts contributing to lowering inflation—even offsetting the impact of US tariffs—inflation appears under control for now.
Ratings Upgrade
India recently received a sovereign credit rating upgrade from S&P to BBB, its first in 18 years. This is significant, as it improves India’s position in global asset allocation, making it more attractive on risk-return metrics. Foreign inflows into fixed income should follow soon, as India is a favoured investment destination among emerging markets.
US Fed Greenlight
India held rates steady at the last policy meeting after frontloading cuts in June. However, recent comments from Fed Chair Jerome Powell have led markets to price in a near-certain 0.25% rate cut at the upcoming Fed meeting on September 17. This effectively greenlights global policymakers, and India is expected to follow suit at the RBI’s MPC meeting on October 1, especially as synchronised moves reduce pressure on the INR.
Fiscal Slippage
Some recent bond market weakness is attributed to concerns around fiscal slippage following the GST rate cuts. However, the fiscal impact is expected to be modest, with a potential revenue hit of around ₹48,000 crore. Given the size of the Indian economy, this is relatively minor, and fiscal prudence remains a key focus for the government.
Wide Rate Gaps
With government bonds yielding 6.0%–6.7% across 2–10 year maturities, they are becoming more attractive than traditional fixed deposit rates. The possibility of capital gains on further rate cuts adds to their appeal. Also, with the overnight repo rate at 5.5%, the 10-year bond yield at 6.5% appears too wide—offering a compelling opportunity for investors.
What should an investor do?
A standard allocation of 20% to bonds in any financial portfolio is a must for optimisation, reducing volatility and diversification. One can look to increase this allocation to 30-35% in light of the above-mentioned reasons.
Within the bond portfolio, a barbell strategy could be ideal, where one should invest in 10-year+ long-term government bonds for potential capital gains and 2-3 year short-term high-yield corporate bonds for earning higher returns of 9-12%.
What are the risks of investing in bonds?
No financial investment is without risks, and the only thing ‘risk-free’ is a central government bond. It is important that investors read about the company which is the bond issuer, including credit ratings reports.
Credit ratings have 10 categories from AAA down to BBB- and offer higher returns as you go down the credit ratings. Individual investors shouldn’t buy BBB-rated bonds. This kind of investing should be mostly left for sophisticated investors.
It is also strongly advised to invest only in listed bonds, as these have an additional layer of safety through mandatory disclosures that companies have to make. Also, one can approach SEBI for grievances. Another important thing investors should keep in mind is to buy only from SEBI-registered platforms as they are regulated, and once again, an investor has the right to approach the regulator in case of any concerns.
Conclusion
Fixed-income instruments such as bonds are really a must in every portfolio for optimised performance. Interest rate cycles move in years, and India remains in a downward cycle. Hence, the current sell-off in government bonds is an opportune time to invest in this asset class after investors have done their own due diligence.
(The author is Co-founder, IndiaBonds)
Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
