The Indian bond market is expected to experience a muted start to the third quarter of 2025, influenced by a combination of domestic and global factors. While the market has shown resilience in recent months, several trends suggest a cautious outlook for the near term.

Factors Contributing to a Muted Start:

• Global Volatility: The global financial environment remains volatile, marked by trade tensions, geopolitical uncertainty, and fluctuating commodity prices. These external developments can impact investor sentiment and lead to fluctuations in capital flows, affecting the Indian bond market.
• Inflation and Interest Rates: While India's consumer price inflation has shown a downward trend, reaching 3.2% in April 2025, concerns remain about potential upside risks to inflation, particularly from energy prices. The Reserve Bank of India (RBI) has initiated a rate cut cycle, reducing policy rates by 50 basis points. However, the pace and magnitude of future rate cuts are uncertain and will depend on inflation trends and economic growth.
• Liquidity Conditions: Systemic liquidity, which had been in surplus, has experienced moderation due to dollar outflows and increased currency in circulation. While the RBI is expected to manage liquidity through various measures, including variable rate repos (VRRs) and forex swaps, liquidity conditions could remain tight in the short term.
• Yield Curve Dynamics: The yield curve, which reflects the relationship between bond yields of different maturities, is expected to steepen. Short-term yields are likely to fall more rapidly than long-term yields due to expected rate cuts. This could lead to increased volatility and uncertainty in the bond market.
• FPI Flows: Foreign Portfolio Investor (FPI) flows into Indian debt have been volatile. April 2025 saw significant outflows due to a narrowing yield premium, rupee depreciation, and rising U.S. yields. Resumption of FPI flows is crucial for a more pronounced decline in bond yields.

Recent Trends and Developments:

• Resilience in May 2025: Despite global volatility, the Indian government bond market remained relatively stable in May 2025. This was supported by the RBI's record surplus transfer and strong GDP growth in the final quarter of FY25.
• Decreasing Risk Premium: The risk premium on India's government bonds decreased to 182 basis points as of May 30, 2025, signaling growing investor confidence in India's macroeconomic stability.
• RBI Policy and Liquidity Measures: The RBI has been actively managing liquidity through open market operations (OMOs) and other measures. The central bank has also adjusted its monetary policy stance from "accommodative" to "neutral".
• Attractive Yields: Indian government bonds continue to offer attractive yields compared to developed economies. As of June 2025, the 10-year government bond yield stands at around 6.38%.

Expert Views and Forecasts:

• ICRA expects the 10-year G-sec yield to trade between 6.65% and 6.90% in the near term.
• Bank of Baroda Research expects the 10-year benchmark government bond yield to trade in the 6.30%-6.35% range over the next 30 days.
• Standard Chartered expects the 10-year IGB yield to trade in the range of 6.25%-6.50% over the next 6-12 months.
• Trading Economics' global macro models and analysts expect the India 10-Year Government Bond Yield to trade at 6.36 percent by the end of this quarter.

Overall Outlook:

The Indian bond market is expected to see a muted start to Q3 2025. While factors like easing inflation and potential rate cuts provide some support, global volatility, liquidity concerns, and yield curve dynamics could weigh on market sentiment. Investors are advised to remain cautious and monitor key economic indicators and policy developments. High-quality corporate bonds may offer better risk-adjusted returns.