Indian Bonds Climb as US Treasuries Point to Rate Cuts

Indian government bonds climbed for a third consecutive session, tracking the rally in US Treasuries, as dovish signals from the Federal Reserve reignited hopes of a global rate-cutting cycle. The 10-year benchmark G-Sec yield slipped below 7.10%, reflecting bullish sentiment among both domestic and foreign investors.

With softening inflation trends globally and an economic slowdown taking hold in key Western economies, bond traders are recalibrating their expectations. In India’s case, the rally is further reinforced by stable macros, contained inflation, and an improving fiscal outlook.

Global Cue: Fed Minutes Signal Dovish Tilt

The latest Federal Reserve minutes released earlier this week revealed growing internal consensus toward a potential rate cut later this year—if inflation continues to decline and labor market tightness eases. The bond market swiftly priced in at least two 25-bps cuts by the end of 2025.

This triggered a sharp drop in US Treasury yields:

• 10-year US Treasury yield fell to 4.28%, its lowest in nearly two months.

• 2-year yield, which is more rate-sensitive, dropped below 4.70%.

• Futures markets now reflect a 65% probability of a September cut.

As global fixed-income investors sought refuge in safer, high-yielding emerging market debt, India’s bonds became a key beneficiary—especially with the impending inclusion into global bond indices.

🇮🇳 Indian Bond Market Reacts Positively

Back home, the yield on the benchmark 10-year 7.26% 2033 G-Sec eased to 7.08%, down nearly 8 basis points over the week. Shorter-tenure bonds also saw aggressive buying, with the 5-year G-Sec yield at 6.89%, reinforcing the steepening bias in the yield curve.

Key drivers of the rally:

• Global tailwinds: US Treasury yields drive global bond flows and currency moves.

• Falling inflation expectations: April CPI at 4.83%, with core inflation around 3.2%.

• RBI’s patient stance: Despite no rate cuts, liquidity management is easing.

• JP Morgan bond index inclusion: Passive flows expected to accelerate by June.

Dealers at major private banks confirmed that institutional buying has picked up, particularly in the 7-15 year segment, which is most aligned with global index criteria.

FPI Flows: Foreign Appetite Returns

Foreign Portfolio Investors (FPIs) have already poured in over ₹28,000 crore into Indian debt since April, according to NSDL data. With falling hedging costs and a stable rupee, India’s fixed income looks increasingly attractive.

“What’s working in India’s favor is a unique mix—controlled inflation, strong FX reserves, and upcoming index inclusion,” says Ravi Ghosh, Fund Manager, Templeton Emerging Markets Fixed Income.

Compared to other EMs like Brazil or South Africa, where political risks and inflation volatility remain elevated, India is offering superior risk-adjusted returns.

Additionally, the fully accessible route (FAR) securities continue to see aggressive participation as they are eligible for index inclusion and offer better liquidity.

RBI Policy: Still in Wait-and-Watch Mode

While global central banks inch closer to rate cuts, the Reserve Bank of India (RBI) has maintained a neutral-to-cautious stance. Governor Shaktikanta Das has reiterated that the central bank will prioritize anchoring inflation before considering any rate action.

However, recent commentary suggests that the door is open for easing later this year if food inflation behaves and growth remains steady.

RBI Policy Snapshot:

• Repo rate unchanged at 6.50% for six consecutive meetings

• Inflation projected at 4.5% for FY26

• GDP growth seen at 7%, giving room for policy support if needed

• System liquidity returning to surplus after a tight March quarter

Market participants are now penciling in a 25 bps cut in Q4 FY25, assuming inflation continues to trend lower.

Bond Yield Curve: Signs of Steepening Emerge

The bond yield curve, which had flattened significantly during the early part of the year, is now showing signs of steepening as long-duration yields fall faster.

• 10–5 year spread widened to 19 bps, from 8 bps a month ago

• Liquidity surplus has pulled down overnight rates, improving carry trade economics

• Traders are rotating into longer maturities expecting price gains from rate cuts

This shift also indicates growing confidence in policy stability, lower inflation volatility, and favorable external conditions.

Government Borrowing: Comfortably Absorbed

One major concern earlier this year was the ₹14.13 lakh crore gross borrowing plan by the Indian government in FY26. Analysts feared bond supply glut could weigh on prices.

However, auctions have seen robust demand across maturities, and the borrowing program is being smoothly absorbed by banks, insurers, and now increasingly by FPIs.

Recent weekly auctions saw cut-off yields lower than expected, highlighting underlying strength in demand. State development loans (SDLs) are also witnessing improved pricing, reducing stress on sub-sovereign borrowing costs.

Intermarket Linkages: INR, Equity, and Bonds in Sync

The bond rally has coincided with a resilient Indian rupee, trading in the 82.80–83.40 band against the US dollar. Low volatility in the currency has improved the hedge-adjusted returns for foreign bond investors.

Indian equities are also riding the global risk-on sentiment, with the Nifty 50 reclaiming 22,600+ levels. This synchronized move across asset classes highlights India’s appeal as a macro-stable destination amid global uncertainty.

Expert View: Is This the Start of a Bull Run?

“We believe the bond market is entering a bullish phase, driven not just by global cues but domestic consolidation. Expect the 10-year yield to test 6.95% by Q3 if rate cut expectations build further,”
— Sonal Jain, Chief Fixed Income Strategist, Emkay Global

“For investors with a 2–3 year view, Indian bonds offer strong capital appreciation potential. Real rates remain positive and fiscal risks are fading.”
— Mehul Savla, Founder, RippleWave Investments

These views suggest the current rally isn’t just a knee-jerk reaction to Fed commentary—but a reflection of long-term conviction.

Risk Factors to Watch

While the mood is bullish, investors should stay alert to key downside triggers:

• US data surprises: Sticky inflation or labor strength could delay Fed cuts

• Oil prices: Brent crude above $90 could reverse inflation gains

• Geopolitical shocks: Escalations in Middle East or Taiwan Strait

• Domestic food inflation: A weak monsoon could derail RBI’s comfort

Bond market rallies are fragile and quickly unwound if expectations shift sharply.

What’s Next? Strategy Going Forward

For domestic investors:

• Accumulate long-duration funds gradually

• Lock in yields before RBI signals a cut

• Consider tax-efficient options like debt mutual funds or Gilt ETFs

For foreign investors:

• Focus on FAR-eligible securities

• Monitor currency hedging cost trends

• Stay tuned to index inclusion flows and tranche timelines

The Indian bond market has entered a sweet spot—benefiting from macro tailwinds, global liquidity, and an improving fiscal setup.

Indian Bonds Shine on Global Radar

As US Treasuries continue to reflect a softening Fed outlook, the ripple effect on global bond markets has reached Indian shores with full force. The gains in Indian bonds are not isolated—they’re part of a broader trend where rate-sensitive assets are being repriced.

For now, the path of least resistance for Indian yields appears downward, unless global shocks intervene. The macro fundamentals are aligned, investor appetite is robust, and RBI has room to maneuver in the coming months.

India's fixed income story is quietly gaining momentum—and if global rate cuts materialize, the next chapter could be even more bullish.