The Indian bond market is currently exhibiting significant strength, fueled by a confluence of factors, most notably easing inflation and the Reserve Bank of India's (RBI) accommodative monetary policy stance. A recent report by Jefferies highlights the favorable conditions prevailing in the domestic bond market, making it particularly attractive for long-term investors navigating an evolving global financial landscape.
One of the primary drivers of this positive outlook is the consistent downward trend in India's consumer price inflation. Over the past fiscal year, the average inflation rate was 4.6%. In April 2025, it further declined to 3.2%, marking the lowest level since July 2019. This easing of inflationary pressures has provided the RBI with increased flexibility to adjust interest rates, leading to a 50 basis points reduction in policy rates already. Jefferies anticipates additional cuts of 75 basis points by the end of 2025.
This ongoing rate reduction cycle is enhancing the appeal of Indian government bonds, especially when assessed against developed economies such as the United States. Jefferies points out that India's 10-year rupee government bond has outperformed the US 10-year Treasury bond by 51% in US dollar terms since April 2020. They further suggest that it is increasingly plausible that the ten-year Indian government bond yield could trade below the ten-year Treasury bond yield. This would mark a significant shift, reflecting the growing confidence in the Indian economy and its bond market.
The strength of the Indian rupee and the positive performance of local-currency emerging market bonds globally are also contributing to the optimistic outlook. A significant global sovereign bond portfolio monitored by Jefferies has allocated 25% to India's 15-year bond, yielding 6.38%, representing the highest single-country allocation within the portfolio. This demonstrates sustained trust in the Indian bond market amidst structural transitions away from G7 debt instruments. Jefferies emphasizes that Indian bonds continue to outperform G7 government bonds, signaling a potential regime change from the Bretton Woods era, further supported by growing evidence of supply concerns impacting the long end of the yield curve.
The RBI's monetary policy decisions are playing a crucial role in shaping the bond market's trajectory. The central bank's commitment to maintaining macroeconomic stability, coupled with measures to ease liquidity constraints, is fostering a conducive environment for bond market participants. The decision to reduce the Cash Reserve Ratio (CRR) to 4% is injecting significant liquidity into the banking system, supporting credit flow across sectors. Furthermore, the RBI's projection of a 6.6% GDP growth for FY25 and a clear pathway to achieving the inflation target of 4% by FY26 are reassuring markets and bolstering investor confidence.
Looking ahead, the Indian bond market is expected to benefit from stable policy rates, enhanced liquidity, and expectations of moderating inflation and resilient GDP growth. Jefferies anticipates that the weakening US dollar will provide the RBI with additional room to lower interest rates, potentially by up to 75 basis points by the end of 2025. This easing of monetary policy, combined with the government's focus on fiscal discipline, is expected to further strengthen the Indian bond market and attract increased foreign investment.
However, the RBI remains cautious due to global uncertainties such as trade protectionism and geopolitical tensions, which pose risks to both growth and inflation, necessitating a balanced approach.
