| Company | Value | Change | %Change |
|---|
Retail participation has been growing as well, with the reduction of the face value of bonds to only ₹10,000 now and the introduction of other regulatory measures coupled with the emergence of several Online Bond Platform Providers (OBPPs) democratising access to bonds. This warrants a deeper understanding of key growth triggers, looming challenges and investment strategies that could unlock greater value for Indian retail investors looking to diversify into fixed-income instruments.
Tracking key demand drivers that boosted the Indian bond market in 2024
With both pension funds and insurance companies showing increasing interest for government securities, state development loans (SDLs) and corporate bonds, domestic demand in the Indian bond market has been on the rise throughout 2024. Moreover, with Indian Government Bonds (IGBs) being included in the JPMorgan-Emerging Market (EM) Bond Index in June 2024, foreign fund inflows amounting to $15 billion have found their way into the Indian bond market since then.
As the inclusion process will continue till March 31,2025, by which time India’s weightage on the index will rise to 10%, this steady inflow of foreign capital is likely to continue well into the new year. As the tapering GDP growth curve fuels expectations of RBI rate cuts in the near future, bond prices are likely to trend higher in 2025 as well, notwithstanding external risks posed by an appreciating US Dollar and rising US Treasury yields.
Examining key challenges and opportunities that lie ahead
While the RBI has kept key interest rates unchanged in its Monetary Policy Committee (MPC) meeting that concluded on December 6, there is a broad-based consensus that the banking regulator will begin cutting interest rates in 2025 as inflation pressures cool and GDP growth slows down.
This fall in interest rates should reduce yields on older bonds, boost bond prices and fuel the current bond market rally even further. However, policy shifts in major economies like the United States could lead to uncertainties that could trigger a temporary selloff by foreign investors as was evident in late November 2024 when yields on IGBs briefly spiked to 6.87%.
Moreover, with the US Dollar regaining strength and yields on US Treasuries rising due to expectations of tighter monetary policy, Emerging Markets (EM) assets like Indian bonds could lose their sheen temporarily. That said, the Indian bond market has displayed remarkable resilience in the recent past, largely due to the stable macroeconomic environment and steady demand from institutional investors that continues to act as a stabilising force in the face of external challenges.
What’s more, global investment giant FTSE Russell and Bloomberg’s Global Aggregate Bond Index are mulling over the inclusion of IGBs in their respective indices, opening doors to significantly higher inflows as global funds tracking these indices readjust their portfolio allocation.
How retail investors can ride the wave of opportunity in 2025
For retail investors looking to diversify their portfolios, the Indian bond market offers a variety of investment options that could generate higher returns than traditional fixed-income instruments like fixed deposits and savings accounts.
To make the most of it, it’s important to understand the bond dynamics well, assign assets as per their long-term and short-term goals, diversify the portfolio by investing in a mix of government bonds and corporate bonds. Retail investors could consider bond laddering; an investment strategy involving investing in bonds with staggered maturities to maintain regular cash flows and minimize reinvestment risks.
With most factors alluding to an extended bond market rally in 2025, the timing may just be right for retail investors looking to participate in India’s economic growth story by investing in the domestic bond market.
However, considering the associated interest rate, inflation, credit and market risks involved, investing through SEBI-registered online fixed-income investment platforms that is led by an experienced leadership team is recommended to take informed decisions and to enjoy a seamless experience. These platforms not only provide detailed analytics and credit ratings to help investors in making informed decisions but also boost investor confidence and take the stress out of bond investing.
—The author, Saurav Ghosh, is Cofounder, Jiraaf, a SEBI regulated bond platform. The views are personal.
