Indian bonds currently appear neutral and less attractive compared to the equity market, and their historical performance during previous rate cut cycles, highlighted a report by SBI Mutual Fund. The report noted that as markets anticipate a softening of interest rates, bond yields indicate that they are likely to decrease in the future. This shift in monetary policy has created a favorable environment for Indian bonds, especially government bonds.
“From a valuation perspective, Indian bonds appear neutral and less attractive relative to the equity market and its historical performance during the rate cut cycle,” the report said.
It further added that “Our view is that Indian bonds, particularly government bonds, are in good shape at this juncture, representing a confluence of factors affecting India’s composition and global highs in policy rates”.
It also added that a significant rally in bond yields was seen following India’s inclusion in the FTSE Emerging Markets Global Bond Index, and a change in the policy environment. Bond yields rose 5 basis points after the announcement, reflecting positive market sentiment.
In addition, crude oil prices reached around USD 77 per barrel, easing some inflationary pressures and supporting bond markets. The report noted that the supply-demand dynamics of government bonds is also favorable, positioning them well for future growth.
According to the report, the corporate bond market is facing a different situation, where the yield curve shows volatility due to pressure from the credit deposit ratio. This shift offers attractive returns to the short-term corporate bond segment, while investors increasingly focus on building long-term positions in government bonds to benefit from the ongoing deflationary cycle.
“The corporate bond curve has been inverted given the pressures from the credit – deposit ratio at the beginning. This shows good bearing in the short-term segment while the focus is on the construction period with government bonds” added the report.
Overall, the structural factors in the report point to a positive outlook for Indian bonds as global policy rates approach a peak, making government bonds an ideal option for investors looking for stable returns.
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