Listen to this article
As India navigates the global economic order grappling with persistent geo-political and economic uncertainty, RBI’s decision to infuse liquidity may shape the Indian debt market in May 2025.
Now the key question for debt fund investors is whether this is the beginning of the rate cut cycle?
Cafemutual talked to Avnish Jain, Head - Fixed Income, Canara Robeco Mutual Fund, Dwijendra Srivastava, Chief Investment Officer- Fixed Income, Sundaram Mutual Fund and Pratik Shroff, Fund Manager, LIC Mutual Fund.
What shaped debt market in April 2025?
The shift in the policy framework of the RBI and the US tariffs are the two major events that have impacted the debt market in April.
The RBI has changed its stance to ‘accommodative’, which, according to the RBI Governor, Sanjay Malhotra, means that either rates will remain stable or go down further.
Also, the liquidity infusion by the RBI has benefited the Indian debt market.
What does May hold?
Avnish feels that the three months pause on the tariff’s implementation will give time for the economies to negotiate trade deals with the US.
Geo-political escalations will keep on playing an important role in the market movements, though the signs of any recession may nudge the Federal Reserve to go for further rate cuts, which may affect the global markets.
However, RBI’s announcement of Rs.1.25 lakh crore of liquidity infusion in May makes Indian debt market more positive compared to other markets.
Dwijendra said that the geo-political escalations along the India-Pakistan border may make the market react to the developing conditions. But it may have a short-term impact.
Pratik said that the RBI is more worried about the growth, rather than the inflation, which seems to be in control. He added that the fresh liquidity infusion and bond purchase of Rs.2.50 lakh crore by the RBI have increased the favorability of the Indian G-Secs.
Medium-term outlook
Avnish said that Indian macro-economic factors remain resilient with strong albeit moderating growth and inflation hovering around 4%. The current tension between India Pakistan may continue to create near term volatility in markets; however, yields may drift lower in coming months.
Dwijendra said that the long-term bond yield is expected to be around 6% because the bond yields are linked to long term inflation forecasts, which is at 4% right now.
He said that the strong macroeconomic indicators are making Indian debt market less volatile, which is why the government is supporting the market by infusing liquidity.
Pratik stated that despite the rise in U.S. Treasury yields, the decline in the Dollar Index indicates greater stability for the Indian rupee. This development, along with sustained corporate borrowing, could lead to government securities (G-Secs) outperforming corporate bonds over the medium to long term.
Fund Recommendations
According to Avnish, the money market funds still provide value for short term investors, as more rate cuts are expected in the next few months. And for medium to long term investment horizon, one can choose corporate bond funds, as corporate bonds can offer a better spread over G-Secs.
Dwijendra said that he is keen on mid duration strategy, as it has a good chance of making risk adjusted capital gains.
Pratik said that Indian Govennment Bonds present a strong opportunity for high-risk investors seeking potential capital appreciation. Conversely, conservative investors may prefer low-duration funds or banking and PSU funds, which offer relatively stable returns with lower volatility.
Unlock the power of smart investing—join Cafemutual Passive Conference on May 23 at Taj Santacruz and stay ahead in the passive revolution.
Register yourself now.
To know more about Cafemutual Passives Conference 2025, click here!
