High global yields are beginning to cast a shadow on India's government bond market. Rajeev Radhakrishnan, Chief Investment Officer for fixed income at SBI Mutual Fund, recently pointed out that rising interest rates across developed markets are making Indian government securities less attractive to foreign investors. This shift in sentiment comes at a time when the Reserve Bank of India’s monetary policy is also sending mixed signals, creating more uncertainty for debt investors.
According to Radhakrishnan, the recent policy measures taken by the Reserve Bank of India have created an unexpected response in the market. While the central bank cut the repo rate and even lowered the cash reserve ratio, the market's reaction was not entirely favorable. Instead of pushing yields down as expected, the shift in policy stance introduced a wave of uncertainty that partially offset the benefits of rate cuts. Yields on short term bonds actually rose slightly, signaling reduced confidence in the effectiveness of the central bank’s transmission strategy.
He believes that the RBI’s communication could have been clearer. Investors are currently unsure whether the operating interest rate target lies closer to the Standing Deposit Facility or somewhere between SDF and the repo rate. Given the current liquidity surplus, overnight rates are trading below the SDF, creating ambiguity that further affects investor behavior. Clarity on this front, along with the frequency of future variable rate reverse repo auctions, is essential to restore confidence in the bond market.
In terms of forward guidance, Radhakrishnan does not foresee any further rate cuts in the near term. He suggests that the central bank is likely to stay on hold for the remainder of the fiscal year unless economic growth takes an unexpected downturn. The impact of global factors is becoming increasingly visible, with rising bond yields in the United States and other major economies attracting capital away from emerging markets like India. Foreign portfolio investors have already begun withdrawing funds, driven by a desire to book profits and shift toward more favorable risk adjusted returns in developed economies.
Over the past few months, foreign investments into Indian bonds had increased as investors positioned themselves ahead of India's inclusion in the JP Morgan Emerging Market Bond Index. However, that trend has slowed down now that much of the potential capital gain has been realized. With policy room shrinking at the domestic level and no immediate triggers for gains, fresh inflows are unlikely to pick up without a significant global shift.
Radhakrishnan expects yields on the 10 year Indian government bond to remain steady around current levels. The market is likely to stay range bound unless a major economic surprise triggers a breakout in either direction. Traders are cautious, and any small dip in yields is likely to trigger profit booking. He believes the current range of four to five basis points around the six point three percent level will hold for the foreseeable future.
He also addressed the impact of India’s inclusion in global bond indices, saying it has created structural demand for Indian debt among institutional investors who track these benchmarks. While this has been a positive development, he cautioned that the real benefit will be spread out over time and will depend heavily on the broader global interest rate environment. At the moment, emerging markets as a whole are struggling to attract capital, and India is no exception.
The discussion also turned toward green bonds and ESG linked debt instruments in India. Radhakrishnan admitted that demand remains tepid, with domestic investors largely indifferent to the category. Issuers have not found the pricing attractive enough to make large scale issuances, and without stronger incentives or a dedicated pool of capital aimed at sustainable investments, growth in this segment will be slow. He believes the market for ESG bonds will only take off once investors are actively encouraged or mandated to support such instruments.
In summary, India’s bond market is currently navigating a complex mix of domestic policy ambiguity and external pressures from global yield trends. Until the international environment becomes more supportive or domestic policy signals become clearer, foreign appetite for Indian bonds will likely remain muted.
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