India’s debt market is gaining global traction, with long-duration government securities (G-Secs) emerging as a top pick. Vivek Paul, head of portfolio research at BlackRock Investment Institute, tells Mahesh Nayak that Indian yields appear fairly valued and are expected to remain stable over a five-year horizon. Excerpts:
What macroeconomic trends make India’s long-term G-Secs an attractive bet?
We favour Indian G-Secs due to their stable yields and attractive valuations, driven by several structural and macroeconomic trends in India. Demographic advantage and digital transformation support long-term investor confidence. The benign inflation outlook, with the CPI being projected at 2.5% in 1HFY26, and fiscal consolidation – fiscal deficit target of 4.4% – add to its appeal. In contrast, rising long-term yields in the US, fuelled by anticipated inflationary pressures and higher borrowing costs, diminish the attractiveness of its government bonds. Given that the RBI is flexible on rates and govt capex is strong, we remain bullish on India’s prospects.
How do you reconcile India’s fiscal consolidation path with the relatively high duration risk embedded in long-term bonds?
While Indian bonds have higher maturity than some regional peers, the fiscal consolidation path appears to be perceived as achievable by the market.
How do you evaluate the risk-reward profile of the 10–30 year G-Sec curve? Will you be a buyer in 40- and 50-year papers, and why?
India’s relatively-high real yields among emerging markets (EMs) present an attractive risk-reward profile for the 10–30-year G-Sec curve. The steepness of the 10-30 curve, coupled with the drop in hedge costs, makes long-term G-Secs appealing. The policy rate is now 100 bps lower, and the long end of the yield curve has historically flattened after rate cuts. So, even longer-maturity bonds could also be attractive, especially if the current favourable conditions persist. We see current levels of longer-dated Indian yields broadly in line with where we anticipate them to be in five years, presenting an opportunity.
To what extent does the deepening debt market influence your conviction at the long-end?
The increasing depth and liquidity in the Indian debt market bolster our conviction in the long end. Improved portfolio flows, net FDI and better current account data contribute to a more stable and liquid market environment. Additionally, the RBI’s actions and the government’s fiscal discipline enhance market confidence, making long-term G-Secs an attractive investment.
How do you see foreign flows into long-duration instruments, given India’s inclusion in more global bond indices?
The inclusion of India in more global bond indices is likely to boost foreign flows into long-duration instruments. Such moves would increase the visibility and attractiveness of Indian G-Secs to international investors, leading to higher demand and potentially lower yields. This increased foreign participation would further deepen the market and enhance liquidity, making long-duration instruments even more appealing.
What risks could temper your outlook for long-tenure Indian G-Secs?
Key risks include unexpected inflation spikes, global rate volatility and adverse domestic policy changes. While the current inflation outlook is benign, any significant deviation could impact bond yields. Additionally, global rate volatility, particularly in major economies, could influence investor sentiment and capital flows. Domestic policy shifts, such as changes in fiscal discipline or unexpected RBI actions, could also pose risks to the long-term G-Sec market.
How do Indian gilts stack up against US Treasuries or other ‘AAA’ EM sovereigns in terms of duration-adjusted returns?
Indian gilts offer competitive duration-adjusted returns compared to US Treasuries and other ‘AAA’ EM sovereigns. The relatively-high real yields, stable macroeconomic environment and supportive fiscal policies make Indian G-Secs an attractive option for long-term investors. While US Treasuries have historically been considered a safe haven, we anticipate that longer-dated US yields need to rise from current levels, presenting a valuation headwind over the longer term. The higher yields on Indian G-Secs provide a compelling risk-reward profile, especially in a diversified portfolio.