Govt bond vs corporate bond: Which is a better bet currently? Avnish Jain of Canara Robeco AMC answers

With the Indian bond market expected to remain rangebound in the near term amid expectations of a prolonged rate cut pause by the Reserve Bank of India, Avnish Jain, Head Fixed Income, Canara Robeco Asset Management Company, explained why investors should consider corporate bonds over government papers. Edited excerpts:

While rate easing has again commenced in the US, with the US Federal Reserve cutting rates by 25bps, in India, the situation is different. The RBI Monetary Policy Committee (RBI MPC) has already delivered a 100bps rate in CY2025. In the past two policy meetings, the RBI MPC has maintained the status quo on the policy rate whilst keeping the stance at neutral. The Governor opined that, as per RBI’s expectations, the CPI inflation is likely to rise to 4.9% in 1QFY2027 and the quantum of rate cuts already delivered is likely sufficient to support economic activity. Against a backdrop of a longish pause in the rate cycle, investors may choose to invest in short to medium-duration funds, having higher exposure to corporate papers based on their investment objective and risk appetite.

Indian bond yields in the current fiscal have mainly been driven by local factors like inflation trajectory, fiscal policy, and RBI MPC policy decisions. Geopolitical risks in India work through higher oil and other commodity prices. Oil prices have not reacted much to the continued risks in the Middle East as OPEC+ countries have been slowly increasing oil production.

US tariffs are likely to impact growth, but the recent rationalisation and reduction in GST rates may offset some of the impact. The government further indicated that it is likely to stick to the fiscal deficit target of 4.4% (of GDP) despite a likely fall in GST revenues. Yields have generally risen in the past few months due to a change in RBI policy. The market is expected to remain range-bound in the near term.

Local factors are likely responsible for the rise in yields in the US and Japan. While the US FED has cut rates, concerns of a high debt/GDP ratio and an elevated government deficit have kept yields higher. In Japan, the Bank of Japan has been raising rates since 2024, which may have contributed to the rise in yields.

Indian rate markets depend predominantly on local factors like inflation-growth outlook, government deficits and monetary policy actions, on the future direction of bond yields. Global bond market movements may impact local market sentiment on a short-term basis.

Expectations of further rate cuts are low as the RBI MPC has shifted its stance to neutral on the expectation of higher inflation in FY2027. In this scenario, bond markets may move sideways. Corporate bonds and other spread assets like state government securities (which trade at a spread over similar maturity government securities) may perform relatively better than government bonds.

With the RBI MPC shifting stance to neutral, the bar for further rate cut remains high. RBI MPC is likely to remain in a long pause and may take action depending on evolving growth–inflation dynamics. In this scenario, strategy is likely to run low to moderate duration in combination with tactical trading based on short-term interest rate/spread rate movements.

Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.

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