Citi India sees bond yields declining to 6.5% if RBI signals rate cuts

Indian bonds have already rallied 5% this year, with inclusion in not just the JPM Index, but also in the Bloomberg index.

The prospect of index inclusions is expected to attract substantial passive and active flows, with an estimated influx of $25 to $35 billion into the Indian bond market.

The corporate bond spreads have remained tight post-COVID. This influx is likely to benefit corporate bonds as well.

Bagree said, “Corporate bonds are also going to benefit, there will be a crowding in of investment in corporate bonds, because a lot of the supply will be taken over by foreign investors. And so from a local investor perspective, they will be able to deploy that in corporate bonds. So I do expect corporate bond yields to also come down, maybe not as much as the government of India bonds but definitely yes.”

Surendra Goyal, Head of Equities Research at Citi India, expressed optimism regarding the capital expenditure (capex) sector, emphasising the gradual but steady recovery post-COVID.

He noted that while the recovery has been slow, all the necessary preconditions for capex have been met, signaling a favorable environment for investment in this sector.

In terms of the rupee's outlook, Bagree remained optimistic but cautioned against expecting significant appreciation. He anticipated a surplus of $45 to $50 billion in India's balance of payments next year, potentially prompting the RBI to bolster its reserves rather than allowing for substantial rupee appreciation.