Navigating Market Turbulence and Resilience: Indian Fixed Income Year to Date

Indian fixed income has delivered modestly positive returns amid low inflation and robust growth, supported by steady FPI debt inflows and accommodative RBI policy. The central bank’s October 1 pause on a 5.50% repo rate maintains policy support, pending clarity on global trade headwinds, and positions itself for possible future easing.

Market performance (January – September 2025)

Treasury yields were on a volatile trajectory in 2025, starting the year at 6.76%, before embarking on a dramatic round trip that exposed the complex interplay between monetary policy and market dynamics. The 10-year G-Sec yield initially fell sharply to 6.24% on the back of the RBI’s aggressive easing cycle, which included 100 basis points of repo rate cuts and significant liquidity injections through CRR cuts. However, this decline proved to be temporary as interest rates subsequently rose back to 6.58% at the end of September, reflecting increased government borrowing pressure and supply concerns.

The chaotic nature of this interest rate movement reflects the tension between supportive monetary policy and fiscal reality. While the RBI’s early rate cuts in early 2025 were aimed at reducing borrowing costs in a context of declining inflation, the bond market’s response was hampered by large government borrowings totaling over ₹11.5 lakh crore for FY26. Supply pressures increased especially in the second half, with the government raising the share of 10-year bonds to over 28% of total loans and raising the weekly auction size to ₹32,000 crore.

The market’s initial optimism about rate cuts gave way to concerns about debt supply dynamics, liquidity absorption through Variable Rate Reverse Repo operations and global factors, including rising US Treasury yields. This created a challenging environment in which the traditional transmission of monetary policy was disrupted by supply-side constraints and changing investor sentiment.

Foreign portfolio investors remained net buyers of Indian debt throughout this turbulent period, with cumulative inflows of over ₹50,000 crore through September 2025. These substantial inflows were mainly through the Fully Accessible Route (FAR), driven by India’s inclusion in global bond indices and attractive real returns despite the volatility of returns. The FPI’s continued interest in Indian debt provided some stability to the market, even as domestic factors put upward pressure on interest rates.

Key performance drivers

1. Monetary easing: RBI cut the policy repo rate from 6.50% in January to 6.00% in April and further to 5.50% in August, making a cumulative cut of 100 basis points before pausing rates.
2. Low inflation: Headline CPI inflation fell to 2.07% in August, close to the lower tolerance range, due to favorable food and fuel prices.
   
   
3. Robust growth prospects: Real GDP growth rose to 7.8% in the first quarter of FY26, the fastest pace in seven quarters, with projections remaining above 6.5%.
4. Index embeds: The inclusion of Indian G-Secs in global indices has attracted structural inflows, increasing demand for longer-dated bonds.

Macroeconomic background

India’s macroeconomic situation shows strength:

• Grow: Strong domestic demand, investment activity and government spending support above-trend GDP growth.
• Inflation: Stable around 2% despite base effects and supply shocks, providing RBI policy flexibility.
• External: The current account deficit is manageable, supported by subdued oil prices and FPI debt inflows.

Risk factors for fixed income securities

• Supply-demand dynamics: The second half borrowing plan allocates 28.4% to ten-year bonds, creating concentrated supply pressure
  
  
• Global policy uncertainty: US tariff threats and trade tensions could trigger an outflow of FPIs
• Inflation peaks: Any reversal in food or fuel trends threatens to exceed the RBI’s tolerance limit, hindering further rate cuts.

Strategies for private investors

Positive about duration with tactical flexibility:

Supportive expectations for rate cuts, robust growth, low inflation and structural index flows provide a favorable backdrop for extending the duration of fixed income portfolios. Rather than focusing on specific maturities, investors should consider:

• Dynamic bond funds: These funds can tactically adjust portfolio maturity exposure to take advantage of shifting supply-demand conditions resulting from government borrowing schedules and index drawdowns.
• Duration of funds: Pure Duration strategies allow managers to target durations across the curve, taking advantage of rate cuts and structural inflows while controlling volatility.

Corporate bond funds:

High quality corporate bonds (AA and above) continue to provide attractive government bonds, complementing duration strategies such as Dynamic Bond Funds. Backed by improving balance sheets and stable spreads, these funds offer consistent income with limited credit risk.

This flexible approach allows fund managers to rotate between short, medium and long durations in response to evolving auctions, index flows and macro signals, maximizing carry and potential capital gains while managing risk.

RBI’s policy decision dated October 1, 2025

The RBI’s Monetary Policy Committee unanimously decided to keep the repo rate unchanged at 5.50% with a neutral stance, marking the second consecutive pause after three cuts totaling 100 basis points earlier this year. Governor Sanjay Malhotra cited the need to assess the impact of previous policy measures and wait for more clarity on trade-related uncertainties before charting the next course of action.

Key policy revisions:

• GDP growth: Revised upwards to 6.8% from 6.5% for FY26, reflecting strong domestic momentum.
• Inflation forecast: Reduced to 2.6% from 3.1% for FY26, driven by VAT rationalization and favorable food prices.
• Tax position: The current account deficit fell significantly to 0.2% of GDP in the first quarter of 2026 from 0.9% a year ago, supported by strong services exports and robust remittances.

Despite the pause, two MPC members favored a change in attitude to an accommodative policy, signaling a possible easing. Market expectations suggest the RBI could resume rate cuts in December if downside growth risks materialize and trade uncertainties subside, with projections of another 25 to 50 basis points of rate cuts this cycle.

(The author is Senior Vice President – AMC, PL Capital)