​India’s fixed-income in a rare sweet spot—benign inflation, strong flows, easing bias: Chirag Doshi

India’s fixed-income market is entering a unique phase where multiple factors are aligning in its favour.

With inflation staying well below the RBI’s 4% target, steady passive inflows expected from India’s inclusion in global bond indices, and room for policy easing amid slowing global growth, the backdrop looks supportive for debt investors.

Chirag Doshi, CIO–Fixed Income at LGT Wealth India, believes these conditions place Indian bonds in a “rare sweet spot” for medium-term allocations. Edited Excerpts –

Q) Will GST 2.0 have an impact on India’s fixed-income markets?

A) GST 2.0 is more than just a tax reform—it’s an economic signal. By rationalising slabs to two primary rates (5% & 18%), zero-rating health and life insurance, and introducing a 40% bracket for luxury and sin goods, the government is clearly aiming to boost consumption and improve compliance efficiency.

From a fixed-income perspective, the effects could be meaningful:

• Lower compliance burdens and faster refunds free up corporate liquidity.
• Improved cash flows can strengthen credit quality across sectors.

• A consumption boost without significant fiscal slippage could support growth without stoking inflation.

The government pegs the revenue impact at ₹48,000 crore, but markets are reading this as a manageable fiscal adjustment rather than a structural risk. That’s why we’re seeing talk of a relief bias for bonds, particularly after the August yield spike.

Investor takeaway:
• Near term: If companies pass on GST-led price savings, we could see bond yields in the 3–10 year segment ease further.
• Medium term: Investors should track whether the price pass-through happens and watch FY26 borrowing updates closely.

Bottom line: GST 2.0 doesn’t directly change bond math, but by supporting consumption and softening inflationary expectations, it creates a friendlier environment for duration strategies.

Q) With the U.S. imposing new tariffs and global trade tensions rising, should Indian fixed-income investors be worried?
A) We need to separate global noise from domestic fundamentals. Yes, U.S. tariffs on Indian exports—textiles, pharmaceuticals, IT services—can add mild imported inflation pressures and influence currency flows. But the reality is, India’s macro cushion is stronger today than it has been in years.

• CPI inflation has fallen to 1.6% in July 2025, the lowest in nearly a decade.
• RBI has already cut 100 bps this year, signalling confidence in domestic price stability.
• Our FX reserves remain robust at ~$690 billion, offering insulation from external shocks.

If trade tensions escalate and trigger currency volatility, we may see temporary swings in bond yields, but the structural trajectory of India’s fixed-income markets remains intact.

Strategy: Use global risk-off episodes as opportunities to add quality duration at attractive levels rather than reacting to every headline.

Q) U.S. bond yields remain elevated. Are we entering a “higher-for-longer” regime globally, and what does this mean for India?
A) The U.S. narrative is dominated by sticky inflation and fiscal stress, so a higher-for-longer rate regime looks increasingly likely there. But India’s context is very different.

We’ve already seen a 100 bps easing from the RBI this year, and with inflation anchored below 2%, the domestic rate cycle has peaked and turned. India is not walking the same global path.

How to position:

• Core allocations: Focus on 3–7 year G-Secs and AAA-rated PSU bonds. These provide the sweet spot for carry while limiting duration risk.
• Tactical allocations: Keep an eye on 7–10 year maturities—add selectively on spikes in yields to capture potential capital gains.
• Liquidity sleeve: Retain short-duration funds to stay nimble in volatile phases.

This barbell approach allows investors to benefit from India’s easing bias while staying flexible in the face of global uncertainty.

Q) Japan’s bond yields have hit multi-decade highs. Should Indian investors be concerned about global capital flows?
A) Japan’s 10-year bond yields crossing 1.6%—the highest since 2008—has made global headlines, but for India, the direct impact is limited.

Yes, higher Japanese yields could reduce outbound allocations by large institutional investors, creating short-term tightening in global liquidity. But India has two powerful buffers:

1. Strong domestic demand for G-Secs and AAA PSU bonds, driven by local banks, insurers, and pension funds.
2. Global bond index inclusion, which is anchoring long-term foreign flows into India.
If anything, we see short-lived sentiment swings rather than structural risks to Indian debt markets.

Q) Will rising developed-market yields dent foreign inflows into India’s debt markets, especially after index inclusion?
A) India’s phased inclusion in the JPMorgan GBI-EM index (completed in mid-2025) and Bloomberg EM index (currently underway) is a game-changer. We’re looking at $25–30 billion of passive benchmark-driven inflows over the next year.

Of course, higher DM yields may slow discretionary flows, but index-linked investments are sticky, predictable, and long-term in nature. Even if global risk appetite fluctuates, India’s strategic weight in these benchmarks ensures demand for high-quality Indian debt.

Q) Should investors lock into long-duration bonds now, or stay short given global uncertainty?
A) The dilemma is real, but India’s setup is quite attractive right now. With inflation contained and the RBI already cutting rates, locking into duration selectively makes sense.

Recommended approach:
• Core: Allocate to 3–7 year maturity bonds for stable carry.
• Tactical: Use opportunities to add 7–10 year exposure on market sell-offs.
• Hedge: Keep a short- to medium duration for agility and reinvestment flexibility.

In short, don’t go “all-in” on either extreme. Balance income generation with the ability to capitalize on volatility.

Q) How should investors balance between sovereign bonds, corporate bonds, and private credit AIFs?
A) This is where portfolio design becomes critical:
• Sovereign & AAA PSU Bonds: These remain your core foundation—liquid, low risk, and essential for stability.
• High-grade corporates (2–7 years): Offer yield enhancement without compromising quality. PSUs remain our top preferences.
• Private credit/ AIFs: They provide higher returns but come with illiquidity and governance risks. SEBI’s latest reforms improve transparency, but manager selection is everything. We recommend limiting allocations to 10–12% of portfolios for investors with higher risk appetite.

In essence, aim for a tiered structure—stability from sovereigns, yield pickup from corporates, and opportunistic alpha from high-yielding credits.

Q) Are inflation risks behind us, or could tariffs and supply shocks cause a resurgence in volatility?
A) India’s current inflation trajectory is favourable, with July CPI at 1.6%, giving the RBI plenty of room to prioritise growth. But declaring victory would be premature.

Risks to watch:
• Food inflation due to erratic monsoons or supply disruptions.
• Tariff-led cost pressures if global trade tensions persist.
• Commodity price spikes, especially crude oil, which could quickly alter bond market sentiment.
Our view: The medium-term disinflation story remains intact, but investors should prepare for two-way volatility. Use yield spikes to add quality exposure, not to exit prematurely.

Final Takeaways
“India’s fixed-income market is at a rare sweet spot—benign inflation, supportive policy, robust domestic flows, and structural foreign demand through index inclusion.

For investors, the opportunity is to balance carry, quality, and tactical flexibility—build a solid core, selectively add duration, and keep cash ready for volatility. In fixed income, patience and positioning will define performance over the next 12 months.”

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)