Investors can take a tactical call on gilt funds due to attractive spreads, believes Vikas Garg, head- fixed income at Invesco Mutual Fund. He tells Christina Titus that the yield curve is expected to steepen further and 10-year benchmark yield to trade in the range of 6.60%–6.80%. Excerpts:
How do you see the bond market performing going ahead?
Fiscal supply has gained clarity now, with markets fully pricing it in alongside the end of the rate cut cycle. Going forward, long-end yields will face supply pressure but could ease with OMOs—I expect Rs 3-4 lakh crore in FY27. The short-end will likely fall on liquidity and demand. The yield curve may steepen further driven by short-end rally. We expect the 10-year yield to trade between 6.60%–6.80% over the next few months.
How do you assess rate cut transmission in the bond market?
Transmission has been disrupted in the bond market and, it will depend on the RBI’s liquidity management going ahead. The one-year certificate of deposits (CD) rate is at 7% despite a 125 bps rate cut. Money markets still need 25–50 bps of transmission to fully reflect rate cuts.
State bond supply adds to market concerns, pushing total supply to around Rs 30 trillion in FY27—a hefty absorption challenge for domestic participants, especially without further rate cuts. We are cautious on the demand-supply dynamics. The RBI could ease long-end yield curve pressure by shifting the G-sec borrowing mix toward shorter tenors and encouraging states to do the same.
When global yields are higher, can we expect FPIs to come back?
Globally, every market faces unique dynamics, with many grappling under fiscal pressures. What India does offer to the global investors in that backdrop is a relatively lesser volatile market. Historically, Indian yields have been one of the least correlated with the global yields compared to many other emerging markets though they have grown more sensitive amid intense rupee pressure over the last six months.
With strong domestic macro fundamentals and a stabilising rupee, the Indian market should attract more inflows.
The Indian bond market was decoupled from global yields. Do you think that narrative is changing now?
A goldilocks-like situation insulated the Indian market from global factors over the past two years. However, we are increasingly tied to global dynamics as yields turn volatile and most central banks end their rate cut cycles.
Globally, fiscal expansion in many countries increased supply, alongside volatile yields from paused rate cuts and escalating geopolitics, created an unfavorable backdrop. Domestically, supportive factors persist but not as strong as they were 2.5 years ago, with fiscal consolidation slowing, higher state deficits, and possible end of rate cut cycle.\
Do you see a scope for further rate cut?
Our base case is that the RBI may not do any more rate cuts. In FY27, new CPI series inflation could hover around 4.20%–4.25%, above the 4% target, reducing the need for more easing. Even if there is one more rate cut, there will not be any meaningful impact, especially due to weaker transmission.
As the rate cut cycle ends, where do you spot opportunities now?
The 5–10 year G-Sec yield curve looks most attractive, buoyed by expectations of OMOs and increased demand. On corporate bonds, we are bullish on the 1–4 year segment, where spreads over G-Secs are attractive. For those who want to avoid volatility risk and G-sec exposure, money market or low-duration funds suit best. One can take a tactical call on gilt funds due to attractive spreads. Over the next 3-4 months, there could be yield compression, and one can make capital gains.