LGT Wealth India's Chief Investment Officer (CIO) of Fixed Income, Chirag Doshi, is advising Indian bond investors to consider purchasing 5-10 year notes, anticipating potential rate cuts by the Reserve Bank of India (RBI). This recommendation is based on current macroeconomic factors and expected policy adjustments that could make these bonds particularly attractive.

RBI Rate Cut Expectations

The primary driver behind Doshi's recommendation is the expectation of future rate cuts by the RBI. Several sources suggest that the RBI is likely to implement further rate reductions in the coming quarters. The RBI has already reduced the key interest rate (repo rate) by 25 basis points each in February and April, bringing it down to 6%. Moreover, the Monetary Policy Committee (MPC) has shifted its stance from neutral to accommodative, signaling an easing bias in upcoming policy cycles. Market analysts widely expect the RBI to continue on its easing path throughout 2025. Some anticipate another 25-50 basis points of rate cuts over the course of the year.

Favorable Macroeconomic Conditions

Several macroeconomic factors support the possibility of RBI rate cuts. Inflation has been moderating, with consumer price inflation (CPI) falling to 3.2% in April 2025, the lowest level since July 2019. The RBI has revised its inflation projection for FY26 downwards to 4.0% from 4.2%. This drop in inflation provides the RBI with more room to lower interest rates to stimulate economic growth. The Indian bond market is showing signs of strength, driven by easing inflation and expectations of more interest rate cuts from the Reserve Bank of India (RBI).

Why 5-10 Year Notes?

Doshi recommends bonds in the 5-10 year segment because they offer "a good balance of carry and capital appreciation potential". This maturity range typically provides a higher yield compared to shorter-term bonds, while also being less sensitive to interest rate changes than longer-term bonds. As interest rates fall, bond prices rise, and longer-duration bonds generally experience greater price appreciation. By investing in medium-duration bonds, investors can potentially benefit from both the yield and the price appreciation resulting from rate cuts.

Diversification

Doshi advocates for a diversified approach to fixed-income investments. He suggests allocating a portion of the portfolio to government bonds, state development loans, and high-rated corporate bonds. This diversification strategy helps to balance liquidity, capital appreciation, and yield stability. For those with a higher risk tolerance, Doshi suggests considering 10, 15, and 20-year government bonds, which offer higher potential returns if rates decline.

Expert Opinions

Other experts also share a similar outlook on the Indian bond market. Bank of Baroda analysts expect the 10-year benchmark government bond yield to trade in the 6.30%–6.35% range in the near term, citing dovish monetary policy cues from the RBI and improving domestic liquidity conditions. They also suggest that a resumption in Foreign Portfolio Investor (FPI) inflows could further amplify the downward trend in yields.

Potential Risks

While the outlook for Indian bonds appears positive, investors should be aware of potential risks. Geopolitical tensions, global trade tensions, and volatility in commodity prices could impact the bond market. For example, rising geopolitical tensions between India and Pakistan have previously driven bond yields higher. Additionally, global trade tensions and potential U.S. slowdown could also affect market dynamics.

Conclusion

LGT Wealth's Chirag Doshi's recommendation to invest in 5-10 year Indian government bonds is based on the expectation of further RBI rate cuts, supported by favorable macroeconomic conditions such as moderating inflation. While there are potential risks to consider, the current environment appears conducive to bond investments, particularly for medium-duration government securities. This strategy allows investors to lock in current yields and benefit from potential capital appreciation as interest rates decline.