Bond Market 2025: Why This Cycle Is Different

A global monetary easing cycle is now underway. The U.S. Federal Reserve has cut policy rates four times since 2024, and the Reserve Bank of India (RBI) has followed with three successive reductions this year. Historically, such synchronised rate cuts have sparked rallies in emerging-market equities. Yet this time, the story is different. While foreign investors have turned net sellers in Indian equities, they are turning net buyers in Indian debt.

Debt, Not Equity, Drawing Foreign Capital
India’s bond market is witnessing a shift long in the making. So far this calendar year, foreign portfolio investors (FPIs) have invested nearly Rs 70,000 crore (about USD 8 billion) in Indian debt—almost double last year’s pace—even as they withdrew money from equities. This reversal marks a structural transformation driven by reforms, index inclusions, and domestic participation. At the heart of this shift is India’s inclusion in major global bond benchmarks such as the JP Morgan GBI-EM Global Diversified Index, Bloomberg EM Local Currency Index, and FTSE Emerging Markets Government Bond Index. Full inclusion across these indices—spanning 2024-26—is expected to channel USD 30-40 billion of passive inflows into Indian government securities. These index-linked flows are stable, long-term, and less sentiment-driven, lending depth to India’s debt market even as equity flows remain volatile.

Domestic Participation Deepens the Market
Another differentiator in this cycle is the democratisation of bond investing. The RBI’s Retail Direct platform has opened access to government securities (G-Secs) for individuals, while fintech platforms are enabling seamless participation in both primary and secondary markets. Retail and high-net-worth investors are now able to hold sovereign bonds—assets once dominated by institutions—thereby broadening the domestic demand base. SEBI’s decision to reduce the minimum investment size for corporate bonds from Rs 1 lakh to Rs 10,000 has further improved accessibility. This move, coupled with simplified issuance norms for smaller companies, is spurring the growth of the corporate bond segment, which now accounts for over Rs 53 lakh crore (about 23 per cent of the total bond market).

Reforms, Ratings, and Resilience
Structural strength is reinforced by India’s improving sovereign credibility. In 2025, three major rating agencies—Japan’s R&I, S&P Global Ratings, and Morningstar DBRS—upgraded India’s sovereign rating to BBB or higher, citing resilient growth, fiscal consolidation, and manageable external debt. The upgrades coincide with the IMF raising India’s FY26 growth forecast to 6.6 per cent and the World Bank to 6.5 per cent, keeping India the fastest-growing large economy despite a modest rupee depreciation and global trade headwinds. This macro backdrop provides an anchor of stability that contrasts sharply with earlier easing cycles, when fiscal stress or inflation volatility kept global investors cautious.

Policy Tailwinds and NRI Participation
The RBI has also expanded the participation base by allowing Non-Resident Indians to invest in corporate debt instruments—including NCDs, bonds, and commercial papers—via rupee accounts. These changes, along with the removal of certain FPI limits in the corporate debt segment, have widened the foreign investor base. Lower yields globally are now amplifying India’s relative appeal. With benchmark 10-year G-Secs yielding around 6.5 per cent, India offers one of the most attractive real yields in the emerging-market universe, supported by cooling inflation, stable fiscal metrics, and record FX reserves above $650 billion.

The Numbers Behind the Shift
As of March 2025, the size of India’s overall bond market stood at Rs 2,26,00,000 crore (around USD 2.7 trillion). Of this, central and state government securities account for nearly 75 per cent, and corporate bonds around 25 per cent. While this remains smaller as a share of GDP than many Asian peers—India’s corporate bond market equals 18 per cent of GDP versus 80 per cent in South Korea—the trend is accelerating, supported by reforms and steady institutionalisation. The corporate earnings outlook also supports debt market strength. As GST rate cuts and higher disposable incomes spur consumption, stronger profitability will improve credit quality and expand the investible universe for bond investors.

Conclusion
For decades, India’s debt market was a quiet cousin to equities—illiquid, opaque, and institution-heavy. In 2025, that narrative is changing. A confluence of reforms, credible macro fundamentals, and structural inclusion in global benchmarks has transformed Indian fixed income from a policy-driven backwater into a mainstream, globally integrated asset class. This time, the bond market, not equities, is where the real story lies for global investors.

Disclaimer: The opinions expressed above are of the author and may not reflect the views of DSIJ.