Indian Bond Market Poised for Growth Amid Easing Inflation

The Indian bond market is showing remarkable resilience and potential for growth, driven by a notable decline in inflation and anticipated interest rate cuts from the Reserve Bank of India (RBI), according to a report by Jefferies. This favorable climate is fostering an attractive opportunity for long-term investors, especially in an ever-evolving global financial landscape.

India's consumer price inflation has been on a declining trend, averaging 4.6% over the last fiscal year and hitting a low of 3.2% in April 2025, the lowest since July 2019. This downward trajectory in inflation affords the RBI increased latitude to reduce interest rates, with a 50 basis point cut already implemented and predictions of a further 75 basis points reduction by the end of 2025.

This anticipated rate-cutting cycle is elevating the allure of Indian government bonds, particularly in comparison to developed markets like the US. Significantly, the 10-year rupee-denominated Indian government bond has surpassed the US 10-year Treasury bond in performance by 51% in US dollar terms since April 2020.

The strength of the Indian rupee, coupled with the robust performance of local-currency emerging market bonds, is further boosting positive sentiment. A key global sovereign bond portfolio monitored by Jefferies includes India's 15-year bond featuring a yield of 6.38%, representing the largest allocation at 25%, underscoring confidence in the Indian bond market amid a structural pivot away from G7 debt instruments.

Jefferies notes that the outperformance of these bonds compared to G7 government bonds signals a shift from the Bretton Woods era, alongside growing supply concerns affecting the long end of the US Treasury bond market. With growing disinflationary pressures and appealing real rates, India's bond market is strategically positioned to capitalize on both domestic rate easing and international interest in emerging market debt.

Amid the search for alternatives to fluctuating G7 bonds, India stands out as a favorable destination, offering relatively high yields, a stable macroeconomic outlook, and potential currency appreciation.

(With inputs from agencies.)