Time to Bond: Why you should lock in & load up on fixed income assets now

Expect bond yields to decline further and thus, support bond prices.

2024 was the comeback year for bonds. The benchmark Crisil Composite Bond index was up ~9 percent, delivering the best returns since 2020 and marginally underperforming equities — the Nifty was up 10 percent. The Reserve Bank of India (RBI) keeping the  repo unchanged for all of 2024, slowing growth in H2, and favourable bond-demand supply balance supported bond performance.

Looking ahead, the outlook for bonds in 2025 is positive for the following reasons:

Favourable macroeconomic environment:  India’s economic growth is expected to recover from the cyclical slowdown seen over the last few quarters. The 2025 union budget provided a much-needed fillip to consumption through a sizeable tax cut (0.3 percent of GDP), while maintaining its focus on the key policy targets fiscal consolidation and public sector capex, which support India’s medium-term growth outlook.

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As for inflation, that could trend lower from the current levels driven by a decline in volatile food prices thanks to an improved harvest outlook,  and likely government policy interventions to manage supply-side concerns. Inflationary pressures are expected to remain muted in the coming months due to lower commodity prices and a modest increase in core inflation.

Easing financial conditions: the growth-inflation dynamic, along with the government's fiscal prudence, gives RBI room to ease the repo rate. In its latest monetary policy meeting in February 2025, the RBI commenced its rate-easing cycle with a 25 basis point (bps) rate cut — the first in nearly five years.

The central bank is expected to slash rates by another 25-50 bps in the coming 6-12 months. Historically, bonds have done well around the RBI’s easing cycles. Further, since the start of 2025, the RBI has conducted various operations like open-market bond purchases, variable repo rate (VRR) auctions, and USD-INR buy-sell swaps. These measures have boosted liquidity in the banking system and are likely to help in transmission of rate cuts.

Bond demand-supply: the government bond demand-supply balance is positive because of a lower net-borrowing target for FY26, robust tax collections, and strong FII flows into bonds (ever since India's inclusion in the global bond indices). These structural tailwinds are likely to support bond prices in the medium term.

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Bonds provide stability: bonds act as a strong anchor to one’s portfolio providing stable income, and more importantly, acting as a hedge during periods of heightened market volatility or growth slowdown. Further, bond returns are likely to be less volatile in this easing cycle as the starting yield is higher compared to previous cycles, and the terminal policy rate is also higher due to inflationary pressures, which would limit the central bank’s ability to ease rates sharply.

Therefore, bond yields are expected to decline further as prices go up. The benchmark 10-year Indian Government Bond (IGB) is expected to trade at around 6.25-6.50 percent over the coming 6-12 months. Bonds are likely to outperform cash as declining yields, especially at the short-end of the yield curve, are likely to raise re-investment risk for cash and cash-like instruments.

Investors can take advantage of the environment by:

Increasing the duration of their bond investments: historically, long-maturity bonds outperform in periods of declining interest rates as they help mitigate the risk of reinvesting at lower rates. Indeed, the prices of such bonds are expected to appreciate over the next 9-12 months as interest rates fall, creating an opportunity for capital gains. The yield will still provide adequate compensation for extending the maturity in fixed income allocations.

Adding high-quality corporate bonds: the yields on high-quality, or AAA, corporate bonds are attractive, with their spreads similar to government bonds. Typically, in a rate-cut cycle, AAA corporate bonds outperform government bonds. Further, India’s corporate profitability remains robust with muted asset quality concerns, supporting a compression of spreads, leading to appreciation of bond value.

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Diversify with multi-asset strategies: dynamically managed multi-asset strategies with exposure to major asset classes (equity, debt,  commodities, etc) improves portfolio diversification and risk-adjusted returns.

Overall, the risk-reward ratio remains favourable for bonds. Given the stability bonds provide as an asset class, investors should look to lock-in attractive yields.

The author is Director and Head, Investment Products and Strategy, Standard Chartered Wealth, India

Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.