India's fixed income market has shown resilience amidst global economic uncertainties in 2025. The market has navigated a landscape shaped by domestic policy adjustments and international market dynamics.
Market Performance and Influencing Factors
In 2025, government bond yields experienced volatility, reflecting the interplay of monetary policy and market dynamics. Starting the year at 6.76%, the 10-year G-Sec yield sharply declined to 6.24% following the Reserve Bank of India's (RBI) aggressive easing cycle, which included 100 basis points of repo rate cuts and liquidity injections. However, yields subsequently climbed back to 6.58% by the end of September, driven by government borrowing pressures and supply concerns. This movement highlights the tension between supportive monetary policy and fiscal realities.
The RBI's monetary policy decisions have significantly shaped the corporate bond market. After maintaining the repo rate at 6.5% for an extended period, the RBI signaled a potential shift in its stance as inflation pressures moderated. The Monetary Policy Committee (MPC) decided to keep the repo rate unchanged at 5.50% with a neutral stance, marking the second consecutive pause after three cuts totaling 100 bps earlier in the year. This decision was influenced by the need to assess the impact of previous policy actions and await greater clarity on trade-related uncertainties.
Growth and Size of the Indian Bond Market
India's bond market, encompassing government securities (G-Secs), state development loans (SDLs), and corporate bonds, stood at approximately ₹226.3 trillion (approximately USD 2.66 trillion) as of December 2024. This marks a more than threefold increase from ₹68 trillion in 2014. During the same period, corporate bonds grew from just under ₹16 trillion to ₹51.58 trillion.
Corporate bond issuances have seen a surge, reaching a record high of ₹9.3 trillion in FY25. During Q1 (April–June 2025), ₹2.79 trillion were raised by Indian corporates through private placements, and total issuances in FY26 are expected to be around ₹11 trillion. This reflects a growing comfort with the bond market as a long-term capital-raising mechanism.
RBI's Role and Policy Stance
The RBI's role has been crucial in maintaining stability. The central bank kept policy rates at 6.50% from May 2020 until February 2025, driven by strong domestic growth momentum and above-target inflation. The central bank has cut repo rates by 100 bps in 2025. The RBI also lowered inflation and growth forecasts for this fiscal year, given the potential negative impact from US tariffs on India's exports. An easier monetary policy could help mitigate the negative impact from external demand shocks.
Challenges and Opportunities
Despite the progress, India's bond market faces challenges such as low liquidity in secondary markets and concentration risk. Poor secondary market trading remains one of the most significant challenges, impeding price discovery and creating exit uncertainty, particularly for retail investors.
However, there are also several opportunities. The inclusion of Indian bonds in global indices like JP Morgan's GBI-EM index and FTSE's EMGBI is expected to trigger passive inflows. Domestic investors, from pension funds to family offices, are also increasing their allocations to bonds.
Strategic Recommendations and Outlook
For institutional investors looking to optimize their fixed-income portfolios, several strategic approaches merit consideration. These include a barbell strategy, allocating to both short-term and long-term bonds, and credit tiering, selectively adding exposure to AA-rated bonds from fundamentally strong issuers.
Looking ahead, several trends are likely to shape India's corporate bond market. These include the continued development of the yield curve, increased foreign investor participation, further integration of ESG considerations, growth in specialized debt instruments, and greater retail participation through mutual funds and exchange-traded funds.
The coming months will likely see Indian yields trade in a 6.35–6.55% corridor, with a potential drift toward 6.20% if a December rate cut materializes. For investors, this is less a time for chasing capital gains and more an opportunity to harvest carry with controlled duration exposure.
