With India’s risk profile improving and yields remaining attractive compared to global peers, Shroff believes the upgrade will not only make Indian bonds more acceptable to global investors but also broaden their inclusion in leading international bond indices.
This shift, he says, could result in narrowing yield differentials with US Treasuries and increased demand for longer-duration sovereign bonds, marking a significant opportunity for fixed income investors. Edited Excerpts –
Overseas investors significantly increased their purchases of Indian bonds for the second straight month in August, driven by attractive yields. Net inflows into the fully accessible route for government securities soared to ₹10,471 crore, fueled by a widening yield gap between Indian and US treasury bonds.
Q) Could this rating upgrade lead to a re-rating of Indian corporate bonds, and if so, which segments or sectors are likely to benefit the most?
A) India’s rating upgrade was long overdue given the strong growth and fiscal prudence over the years compared to peers. With a sovereign upgrade the risk premium tends to reduce across the curve. The biggest beneficiaries are the highest rated corporate bonds, especially the AAA to AA category.
Higher sovereign credibility generally translates to better borrowing conditions for high quality corporations. Country re-rating is generally followed with Corporates Re-rating as well, especially in the sectors with strong balance sheets.Higher sovereign credibility generally translates to better borrowing conditions for high quality corporates.With more allocations to sovereign bonds, the spillover effect tends to result in narrowing spreads for high quality corporate bond spreads as more money chases quality assets.
Indian corporates can also borrow in the overseas bond market at much competitive rates providing an alternative to INR borrowing.
Q) What changes can fixed income investors expect in foreign capital flows into India’s debt market after this upgrade?
A) The upgrade improves the overall risk profile of India, thus making its debt more acceptable globally. Given the higher yields in India compared to peers, Indian debt becomes relatively more attractive and higher debt inflows can also act as a cushion to depreciating currency.
Indian sovereign debt prior to the upgrade had already been included in some of the leading bond indices. Post the upgrade one can expect inclusions in other broad-based indices. Improved credit worthiness typically broadens the base of global investors.
All this can ultimately lead to higher allocations to Indian debt by global players thus leading to narrower yield differentials compared to US treasuries and a stronger demand for higher duration sovereign bonds.
For global investors seeking higher carry Indian bonds become a much better proposition on a risk adjusted matrix.
Q) After the status quo policy from the RBI do you see further rate cuts in the rest of FY26 and why?
A) The Monetary Policy Committee maintained the repo rate unchanged at 5.5% and maintained the neutral stance on expected lines. The inflation projections for FY26 were lowered to 3.1% from 3.7% earlier, whereas the Q1FY27 inflation was projected at 4.9%.
The growth forecast for FY26 was kept unchanged at 6.5%. The decision was primary on account of already front loading the rate cuts, RBI would like to monitor the transmission and given the current geopolitical situation and outlook on currency RBI adopted a more cautious approach thus raising the bar for future cuts.
Interestingly the bond markets are currently not pricing in any cuts given the recent sell off, however the OIS market continue to pencil future cuts.
The recent July CPI print came at 1.55%, the lowest in eight years whereas Core inflation ex gold and silver has also moderated to 3.1%. The inflation is likely to undershoot RBIs projections by 30-40 bps in FY26.
A new data series is expected to be introduced for FY27 which may have a much lower allocation to the food basket around 35% from the current 43%. The global growth trajectory looks weaker given the geopolitical situation.
Domestically with the tariff pressures and subdued urban demand The MPC has room for an additional 25 – 50 bps purely based on inflation trajectory. The recent announcement of reduction in GST rates may provide some cushion to growth and as a result the timing of rate cut becomes a little uncertain.
With the FED expected to cut rates in the next quarter, this can provide additional cushion to currency which has been a cause of concern given the recent sell off in INR post tariff announcements.
Q) How should investors position themselves in the fixed income portfolio amid rate cut and geopolitical concerns?
A) The recent sell off post the august policy and with the market expected to remain in passive mode given the current geopolitical setup investors can increase their allocations to high quality 2–5-year corporate bonds and 7-10 year sovereign assets as they tend to benefit the most in a rate cut as the curve steepens.
With a spread of 100-150 bps over repo rate short term corporate bonds shall continue to remain in demand.
Some portion should be allocated to money market funds for stability, lower volatility and flexibility amid the geopolitical risks. The current carry for money market funds continues to be attractive in the 6.30-6.40 range providing enough cushion over short term FD rates.
The longer end of the sovereign curve yielding 7.40% on an annualized basis looks attractive, however this can be a double-edged sword, highly volatile and needs patience to earn rewards.
The 30-40 year sovereign yields were close to 7.00% in March and post 100 bps cut and infusion of liquidity via OMOs the yields on this segment have risen nearly 30 bps.
We expect some borrowing cuts in this part of the curve in H2FY26 and robust demand from long only investors as absolute yields continue to remain attractive. Investors should clearly assess their risk appetite before making any investment or consult an advisor.
Q) How can investors determine the right balance between bonds, equities, and hybrid instruments in their portfolios amid changing market dynamics?
A) The right balance between equities, debt and other financial assets is mainly guided by investors risk appetite, age and long-term financial goals.
Each asset class typically moves in cycles with equities outperforming during the high growth phase, Bonds may mitigate the downside risk and gold may act as a hedge to inflation risks or uncertain times. A prudent long-term strategy rather than chasing asset classes can weather different phases of the cycle.
The right allocation is never static though and investors are advised to periodically review the portfolio at least on an annual basis to adjust for changing market dynamics and personal goals. A disciplined asset allocation approach is what ultimately leads to wealth creation.
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