India’s bond market faces its sternest test since the early pandemic days. Yields on government securities have spiked. Foreign investors dumped 160 billion rupees worth in March and April alone. Crude oil prices jumped 50% since late February, fanning inflation fears across Mumbai’s trading floors. Yet Invesco, the $2.1 trillion asset manager, sees a fat pitch. Its Asia Pacific fixed income chief calls rate-hike bets overdone.
Norbert Ling laid it out bluntly in a Friday interview. Markets overestimate the Reserve Bank of India’s hawkish turn. Inflation pass-through from pricier fuel remains unclear. Fiscal buffers could blunt the blow. “The belly will be more rate sensitive,” Ling said, zeroing in on the three- to seven-year slice of the yield curve. There, 3-year bonds fetch 6.28%, 5-years 6.69%, 7-years 6.93%—all up 36 to 41 basis points since the U.S.-Israeli war with Iran erupted on February 28. And that’s where Invesco hunts value, betting on a selloff fade.
It’s a contrarian stance. Traders fret over India’s oil import dependence—over 85% of needs met abroad. Brent crude’s rally to near $120 a barrel earlier this year hammered the rupee past 94 to the dollar. Bond yields followed, with the 10-year benchmark hitting 6.9365% recently and hovering in a 6.85%-7.02% range. RBI’s recent forex curbs, capping onshore wagers, only stoked rate-risk worries, pushing 10-year yields to 7.04% in early April, per Bloomberg.
Fund Managers Trim Hedges, Spot Opportunity in the Chaos
But Ling isn’t alone. Peers echo the calm. Some Indian debt funds slashed interest-rate hedges last week, arguing oil-driven hike bets already bloated borrowing costs. Bandhan AMC and ICICI Prudential unwound overnight indexed swap positions—derivatives that pay off on rate rises. Sundaram Asset Management ditched hedges in illiquid corporate bonds too, as reported by Bloomberg. Markets price too many hikes, they say.
Manish Banthia, a top local bond manager, piled on earlier this month. His firm views inflation risk from the Iran conflict as overpriced. “The RBI does not need to hike interest rates and which is why when the market is pricing in so many rate hikes, I have to be bullish,” Banthia told Financial Post. After two years light on duration, he’s adding it now. Yields at multi-year peaks create entry points.
RBI held its repo rate steady at 5.25% this month, its second pause in a row. Governor Sanjay Malhotra flagged West Asia risks to growth, trade, and prices but kept a neutral stance. CPI inflation for fiscal 2027? Pegged at 4.6%, with GDP at 6.9%. Core pressures stay tame, even as Brent lingers around $103. No rush to tighten, officials signal. Ling credits RBI’s rupee defenses—curbs on speculation rebuilt faith. “India has managed its inflation very well,” he notes. Outflows? Mere tactical shifts. Pre-war, foreigners loaded up.
Numbers back the appeal. Onshore fixed income yields ~7%, paired with steady growth. Investment-grade haven for globals scouting EM credit. Mutual funds dumped sovereigns at record pace in March amid the oil shock—shifting to short corporate paper where spreads widened, per Reuters. Basant Bafna at Mirae Asset called corporates’ risk-reward superior then. Spreads since eased a touch, but the pivot highlights value rotation.
And the rupee? Strained, yes. But RBI’s vigilance—record interventions earlier—caps downside. Forex reserves top $700 billion. Fiscal deficit shrinks toward 4.5% of GDP. Nominal growth outpaces policy rates. Set up for bonds to grind higher if oil eases or ceasefires hold.
Skeptics point to volatility. 10-year yields touched 6.93% in late March on raw material costs and policy bets, Indian Express noted. Rupee at 94.1775 dollars. CD ratios climb—private banks over 92%—pushing deposit rates up in quiet tightening. Yet Ling dismisses structural flight. “The outflow is more of a tactical rotation and not structural pullback,” he insists. Before war drums, inflows ruled.
Broader context bolsters bulls. India’s debt-to-GDP manageable, borrowing mostly domestic. EM index weights dipped—room for catch-up flows. Earnings cycles turn. If hikes stay off—policy hinges on oil trajectory and fiscal tweaks—medium-term bonds shine brightest. Rate-sensitive belly amplifies any dovish pivot.
So Invesco buys the dip. Others follow. Panic sells yields. Value beckons pros. India’s fixed income, battle-tested, draws discerning capital even now.
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