ETMarkets Smart Talk | 2-year bonds attractive, long end risky: Apoorva Javadekar’s fixed-income playbook

With India’s 10-year bond yield hovering around the 7% mark, the fixed-income market is entering a more complicated phase. Global bond sell-offs, elevated US yields, oil prices and shifting expectations around RBI policy are creating a divergence across the yield curve.

While the recent rise in yields may make short-tenor bonds more attractive, the long end remains vulnerable to global rate pressures and domestic fiscal risks. Apoorva Javadekar, Chief Economist at Shriram Group, believes the 2-year segment offers a relatively attractive entry point, while investors should remain cautious on long-duration bonds.

In this episode of ETMarkets Smart Talk, Javadekar explains why markets may be pricing in too much RBI tightening, what could drive Indian bond yields from here, and how investors should navigate government securities, corporate bonds and duration risk in the current environment. Edited Excerpts –


Q) With the US Fed back in a rate-hiking cycle and the Indian 10-year yield around 7%, how should investors rethink the fixed-income opportunity in India right now?

A) Indian bond yields are more exposed to global financial conditions and Us Fed rate hikes, especially with the gradual opening of India’s capital account and the inclusion of Indian bonds in global bond indices.

10-Year Indian yields surged by 20 bps to touch 7.05% on a global bond sell-off over the past two weeks, despite an unprecedented liquidity surplus in the Indian system, illustrating the point.

US and Indian 10-Year yields are at an 88% correlation on a 30-day rolling basis, much higher than the 60% average in the pre-index-inclusion period.

To an extent, as the US and global bond sell-off continues, the Indian bond markets, especially at the long end, will be vulnerable.

Rate Hikes Largely Priced: That said, the FOMC’s decision and expected rate path align with market expectations. We view future rate hikes as largely priced into US 2Y bond yields, limiting the scope for a further significant sell-off.

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Q) For an investor entering the bond market today, does a 7%+ yield on government securities offer an attractive entry point, or is there a risk of yields moving even higher? The RBI has already delivered significant rate cuts, while inflation is moving higher. Do you think the easy part of the Indian bond rally is behind us, or can bond yields still move lower from here?

A) The 2-year offers an attractive entry point as our baseline is that the RBI will not tighten policy as priced or expected by the market.

However, we view the long end as risky, given vulnerabilities in the global bond markets and a potentially worsening domestic fiscal situation due to elevated fertilizer and fuel subsidies.

2Y View: Indian 2Y bonds are pricing in more than a rate hike for the upcoming October MPC meeting, and roughly 3 rate hikes by December.

We view this as excessive tightening priced in 2Y bonds and do not think that the RBI will deliver an aggressive rate hike.

Inflation is benign, and growth is slowing: Our reading of the recent inflation print of 4.82% for August is more benign than the market; only 5% of ex-food products are experiencing a meaningful acceleration in August, compared to 6%-7% in the previous 3 months, suggesting that inflation is not broadening beyond food and fuel to a material extent.

At the same time, growth momentum is slowing materially in July and August, with deceleration in industrial production growth, PMI and other sentiment indices, and GST collections.

With CAPEX supporting growth in Q1-FY27, the Indian economy is more vulnerable to rising cost of capital at this particular juncture.

Hence, we think that the RBI may not materially tighten the policy in the coming months, making 2Y or other short tenor bonds a good entry point with attractive yields, a significant chance of capital gains if the yields on 2Y soften after the October meeting, and at the same time limiting the duration risk even in the adverse scenario in which the RBI signals a long rate hike cycle.

Long-End is exposed: However, we are bearish and cautious on 10Y and long-tenor bonds, which will be more vulnerable to a global bond sell-off and to a potentially deteriorating fiscal balance for the government due to losses on fuel excise duties and elevated fertilizer subsidies.

Further, the RBI”s potential OMO sells can trigger another round of long-end sell-off in India.

Q) For Indian bond investors, what is the bigger risk today: rising inflation, higher US yields, or a weaker rupee?

A) Clearly, higher US yields at the long end of the curve and elevated oil prices. Historically, the Indian debt market experienced capital outflows during the Fed rate-hike cycle; for example, in Q3 and Q4 2022, Indian debt lost around $580 million in capital flows when the Fed raised rates by 125 bps.

Index inclusion of India’s bonds led to $5-6 billion in debt inflows at the end of 2024 and the start of 2025, despite lower Indian yields relative to the US.

However, with the inclusion effect largely played out, debt flows are vulnerable to compressed yield spreads in India relative to the US, which are at 196 bps for 2Y and 207 bps for 10Y and around 1.2σ units below their 5-year average.

Read more: ETMarkets Smart Talk | Higher US rates could accelerate capital flight from EMs, but India remains better insulated: Rajesh Palviya

Q) For retail investors looking to invest in Indian bonds today, how should they choose between government securities, high-quality corporate bonds, target-maturity funds and short-duration funds in this environment?

A) We prefer short-duration over long-duration, as explained above. Corporate bonds offer a 20-50 bps spread within the AAA/AA categories, well below the historical average. The compression in AAA spreads is prompting a rotation into AA corporate bonds.

Lower-rated bond premiums of around 200 bps sit below historical averages. However, strong earnings growth limits broad downgrade risk and offers duration investors an opportunity to earn 100-200 bps above the GSec.

Having said that, some oil-exposed sectoral bonds might suffer from a credit rating migration risk,

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times.)