India's fixed-income market has experienced several restless weeks recently. Yields have moved unpredictably, and sentiment has shifted between optimism and caution. Yet, beneath the surface, the market has maintained remarkable order. This stability stems not from macroeconomic surprises but from three familiar factors: supply, liquidity, and expectations.
Government Bonds Find Their Range
Government bond yields have returned to the middle of their recent range after a brief period of volatility. The benchmark 10-year yield has struggled to sustain moves in either direction. This reflects a market caught between heavy supply considerations and a Reserve Bank of India that clearly dislikes excessive liquidity tightening.
The immediate trigger for the recent sell-off was the deferral of India's inclusion in a major global bond index. This forced some investors to reassess the timing of foreign inflows. However, the reaction proved telling. Yields rose, but no disorderly sell-off occurred.
RBI's Decisive Actions Provide Support
Market resilience owes much to the Reserve Bank of India's recent actions. Over the past month, the RBI has been quietly but decisively active. It has injected durable liquidity through open market purchases and longer-tenor foreign exchange swaps. The central bank has signaled its desire to maintain supportive financial conditions even as borrowing remains elevated.
This approach is not accidental. The RBI aims to ensure that supply pressure does not transform into broader credit condition tightening. This concern is particularly relevant when growth remains uneven and external risks persist.
Liquidity is currently doing more heavy lifting than policy rates. While the repo rate has already been reduced, the RBI's recent behavior suggests equal focus on money flow through the system. This bias has helped anchor the front end of the yield curve, even as the long end responds to borrowing expectations and global risk sentiment.
Corporate Credit Markets Shift Tone
Corporate bonds have largely followed government securities higher, but credit market tone has changed importantly. Spreads, especially in AAA-rated bonds, are no longer compressed to uncomfortable levels. Issuers are paying higher rates, and investors are once again receiving compensation for duration and credit risk.
In AA and lower-rated categories, spreads have widened further. This widening does not indicate stress but reflects investors becoming more discerning. This shift represents where the opportunity set has quietly improved.
Carry Returns to Center Stage
For much of last year, fixed-income returns were driven by duration and liquidity. Today, carry is reclaiming center stage. Select high-yield credit offers a margin of safety that was largely absent when spreads reached cyclical lows. These opportunities are backed by improving balance sheets, stable cash flows, and conservative structures.
Importantly, this is not about chasing yield indiscriminately. It involves recognizing that risk-reward in parts of the credit spectrum has reset in favor of investors willing to do thorough analysis.
The primary market remains open, but issuers no longer enjoy the luxury of aggressive pricing. This discipline is healthy. It ensures capital allocation to credits with resilience rather than just ratings. It also reinforces the case for active credit selection over passive exposure.
Budget and Policy Meetings Ahead
Looking ahead, the next inflection point arrives in February. The Union Budget will set the tone for the bond market well beyond its presentation day. Investors will focus on the fiscal glidepath for the coming year. Equally critical will be how the borrowing program is structured.
A credible step-down in the deficit, combined with a well-paced issuance calendar and active supply management, would significantly calm long-end nerves. The RBI's policy meeting soon after will then determine whether liquidity support continues at the same intensity. Even if policy rates remain unchanged, the direction of liquidity operations will matter far more for market pricing.
Market Outlook and Opportunities
Our expectation is for yields to remain range-bound in the near term. Volatility will likely be driven more by supply headlines than by macroeconomic shocks. In such an environment, government bonds offer stability, but returns are likely to be modest.
Credit, by contrast, offers differentiation. High-quality carry, selective exposure to higher-yielding credits, and disciplined maturity management appear better positioned to deliver consistent outcomes.
The bond market today is not flashing warning signs. It is flashing signals. For investors willing to listen carefully and act selectively, those signals are beginning to look constructive.
The author, Chirag Doshi, is the Chief Investment Officer at LGT Wealth India.
Disclaimer: This story is for educational purposes only. The views and recommendations above are those of individual analysts or broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions.
