Indonesia bonds to extend edge over India on rate-cut bets

Investors are favoring Indonesian sovereign debt over Indian bonds in the contest between Asia’s two traditional high-yield markets. Analysts say the trend has room to run.

The yield gap between Indonesia’s 10-year bonds and India is currently about 10 basis points. Economists surveyed by Bloomberg expect it to double by the third quarter of 2026, underscoring expectations of sustained outperformance by the Southeast Asian nation’s debt.

Investors are tilting toward Indonesia despite bouts of political unrest. They’re betting on stronger rate-cut prospects, better fiscal discipline, and fewer trade risks than in India, where growth faces headwinds from US President Donald Trump’s punishing 50% tariffs — the harshest in Asia.


“Indonesia bonds could continue to outperform for the rest of the year given BI is open to further rate cuts, while the RBI is more reluctant with a view that inflation could spike in the latter half of the year,” said Murray Collis, head of Asia fixed income at Manulife Investment Management. He was referring to Bank Indonesia and the Reserve Bank of India.

Indonesia’s 10-year yield is forecast to fall to 5.98% by the third quarter of 2026, according to an average of economists surveyed by Bloomberg. For India, it is projected to fall to 6.16%. This would leave a gap of 18 basis points in Indonesia’s favor.

Capital flows reflect the divergence. Since April, global funds have poured $3.3 billion into Indonesian bonds, while Indian debt has suffered about $800 million in outflows following Washington’s tariff announcement on April 2.

The two countries’ debt has long been viewed as traditional rivals, offering relatively high yields by Asian standards — making them natural points of comparison for investors seeking returns in the region.

Indonesia saw the worst civil unrest in years late last month after the government’s plans to increase lawmakers’ allowances triggered a wave of popular indignation. The country’s financial markets have stabilized since then, partly helped by Finance Minister Sri Mulyani Indrawati’s pledge to improve the government’s policies. Stock investors also look set to brush aside the social unrest, with analysts betting on growth fundamentals to lift corporate earnings.

Policy Divergence

Bank Indonesia surprised markets with a rate cut last month and signaled more easing ahead, while the Reserve Bank of India held steady in August, and indicated a higher bar for future cuts.

Economists expect Indonesia to lower rates by about 50 basis points by end-2026, compared with just 25 basis points from the RBI, according to a Bloomberg survey.

“My preference is for Indonesia government bonds” due to the clear easing cycle and manageable pace of fiscal deficit reduction, said Wee Khoon Chong, a strategist at BNY. In contrast, RBI’s policy outlook has turned neutral, while the economy faces a wider fiscal deficit profile and downside risks from US tariffs, he added.

India’s 10-year bond yields surged 19 basis points in August, the steepest monthly jump in nearly three years, while the rupee’s recent slide to record lows has further dented sentiment.

The biggest risks for Indian bonds are rupee depreciation and potentially increased supply ahead, BNY’s Wee Khoon said.