G-Secs may retain the shine in 2025, but equities likely to slow down, say fixed-income experts

The Monetary Policy in 2024 remained tight with high real rates.

The year gone by saw India's benchmark stock exchanges soaring around 8 percent, but the earnings may slow down in 2025 in the face of unabated geopolitical concerns and an anticipated hit to equities from the tariff plans awaiting to be unleashed by US President-elect Donald Trump.

The spotlight, therefore, could now be on the debt market, which too yielded around 8 percent returns last year.

In a world of volatile equity markets and diminishing returns from traditional assets like real estate and gold, fixed-income investments stand out for their stability and predictability.

2024: A year of fixed-income stability

Following rate hikes in prior years, the Reserve Bank of India (RBI) maintained a steady rate policy in 2024, creating a calm interest rate environment. Investors earned steady returns as well as saw capital appreciation during year. The 10-year government security (G-Sec) yield reflected this stability, starting the year at 7.18 percent and closing it at 6.75 percent level.

“India's inclusion in the JPMorgan Global Bond Index (GBI-EM) and Bloomberg's index in 2024 marked a significant milestone, propelling the country into the global investment spotlight. The subsequent inclusion in the FTSE Russell index, scheduled for September 2025, is poised to further solidify India's position as an attractive destination for foreign portfolio investment,” said Vishal Goenka, co-founder of IndiaBonds.com.

2025: What's on the cards? 

The Monetary Policy remained tight with high real rates through 2024. While central banks around the world began reducing rates from the second half of the calendar year, in India, higher and sticky food inflation kept the headline inflation elevated, leaving the Monetary Policy Committee (MPC) cautious in providing any form of policy accommodation.

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The MPC, however, changed the policy stance to ‘neutral’ giving it more flexibility towards further policy actions and reduced the cash reserve ratio to infuse primary liquidity into the system. Geopolitical tensions and inflationary pressures are likely to keep on influencing global markets.

“We envisage 2025 as constructive for Indian fixed-income markets. The policy makers will have to address the slowing growth momentum through 2025. While the direction of the fiscal policy is likely to remain on a path of prudence, any form of accommodation to aid growth will have to be done by the monetary policy,” said Jalpan Shah, head of fixed income at TRUST Mutual Fund.

According to experts, the RBI has some space of policy easing through a 50-75-basis point interest rate cuts in the year. “The reduction is likely to benefit interest rates across the government securities as well as the corporate bond curve,” Shah said.

Suresh Darak, who founded Bondbazaar, said 2025 is poised to mark a technological revolution in the bond market, driving greater transparency in the secondary market for institutional investors. “A robust secondary market historically fuels substantial growth in the primary market, as was witnessed in equities. The bond market could experience a similar trajectory,” he said.

Bond market: The road ahead

India's fiscal deficit for the financial year 2025 is projected at 4.9 percent of the GDP. Continued fiscal discipline may stabilise the yields. Further, inflation is cooling globally but remains a key concern domestically, influencing the RBI's monetary policy stance.

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According to Abhijit Roy, chief executive officer of GoldenPi, the current 10-year government bond yield is in the range of 6.8-7 percent. “The yield stabilisation depends on inflation and rate cut possibilities. Further, the demand is supported by domestic institutions like insurance firms, pension funds, and growing retail participation,” he said.

Where to park your money?

As per Roy, fixed-income assets, especially government bonds, remain attractive with 6.8-7 percent yields compared to volatile equity returns.

Edelweiss Mutual Fund expects bullishness in government securities (IGBs) to continue in 2025 as growth will take precedence over inflation. The fund house suggests that IGBs and AAA-rated CPSE bonds maturing in 5 to 15 years look attractive from at least two years of investment horizon.

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Experts also suggest that investors should look for opportunities to earn relatively higher returns from high quality bond portfolios.