India’s 10-year bond yields have fallen to a 40-month low of 6.37 per cent amid falling interest rates. With the RBI’s accommodative stance signalling a room for further cuts in the repo rate, analysts point to a favourable environment for investors exploring fixed income options.
Since January 2025, 10-year bond yields have seen a decline of 40 basis points following a series of liquidity injecting actions from the RBI such as OMO (open market operation) purchases, US dollar-rupee swap, long term VRR (voluntary retention route), along with two 25 basis points cuts in the repo rate.
There is an inverse relation between bond prices and interest rates. When interest rate falls, new bonds are issued at lower yields compared with existing bonds that offer higher yields. As a result, the demand for the existing bonds rises leading to a rise in their prices.
From a debt mutual fund investor’s perspective, when interest rate falls, the bonds held by debt funds, especially those with high coupon rates, become more valuable. That’s because they continue to offer higher interest rates than newly issued bonds. This in turn pushes bond prices upwards, boosting NAV (Net Asset Value) of the debt fund.
“For investors, this is a favourable environment. Short-duration and ultra-short-term funds remain well-positioned in the 3–6 month horizon, as we expect 1-year yields to fall more than longer-term yields, making them particularly attractive for funds with investments in the 6 months to 18 months bucket. Long-term investors should actively consider duration strategies like gilt funds, dynamic bond funds, and income funds,” said Avnish Jain, head, fixed income, Canara Robeco Mutual Fund.
“With the possibility of 75–100 bps of cumulative rate cuts this year, the case for fixed income has strengthened considerably,” Jain said.
“For investors, adding more fixed income to their portfolio remains a sensible move for portfolio diversification as any future direction of interest rates may still be downwards. Given the uncertainty in the timing of the next rate cut, moving to short end corporate bonds and the mid segment of tenor 5-8 years could benefit the most rather than the long-end,” said Vishal Goenka, co-founder of IndiaBonds.com
“Investors are getting a very conducive environment for fixed income. They should focus on mitigating reinvestment risks via adequate duration selection. In making these selections they should be mindful of their appetite for near term volatility, even as the prospects of such volatility shouldn’t translate into inaction that amplifies future re-investment risks,” Suyash Choudhary, head of fixed income, Bandhan AMC, said.
He further said that on a global stage, there is a significant amount of uncertainty and in such circumstances local policy predictability can offer a relief to investors. “The RBI monetary policy decision and articulation served an important function in this direction,” Choudhary said.
Global investors
Global investors also seem to have picked up on the cues. Data from NSDL shows foreign portfolio investments have seen strong inflows of around ₹51,730 crore in the first three months (January-March) of 2025 through the “Fully Accessible Route” — a mechanism introduced by the RBI to allow non-residents to invest in specified government securities without any investment limits.
The US 10-year bond yield, meanwhile, has increased from 3.65 per cent as of September 8, 2024 to 4.33 per cent as of April 17, 2025.
Market analysts said that even as the US yields have remained on an upward trajectory, bond yields in the Asian markets, particularly China and India, have moved downward with a disinflation trend seen in the region. With prospects of the exports from the Asian countries to the US falling amid tariff uncertainties, those goods could find a home in Asia, further driving down the prices, thus making foreign investors more bullish on these markets.
