Debt Monthly View for April 2025

Two key developments significantly influenced the debt market in April 2025: The RBI's policy pivot and a dramatic pause in U.S. tariff action.

In April 2025, the Reserve Bank of India (RBI) adopted an ‘accommodative’ stance, indicating that interest rates are expected to stay steady or move lower fostering a supportive environment for India’s economic growth. Governor Sanjay Malhotra reinforced the central bank’s clear focus on supporting the economy. All members unanimously voted for a 25-bps rate cut and a shift in policy stance.
The policy minutes showed strong agreement among Monetary Policy Committee (MPC) members to prioritize growth, supported by increasing confidence that inflation will stay close to the 4% target. The RBI also lowered its FY26 GDP (Gross Domestic Product) growth forecast by 20 basis points to 6.5%, factoring in risks from global tariffs.

Following the Pahalgam attack, rising geopolitical tensions between India and Pakistan drove bond yields higher towards the end of the month of April 2025. However, the RBI announced an Open Market Operation (OMO) purchase to inject liquidity, reaffirming its pro-growth stance, helping stabilize the bond yields.

Chart I: Indian Government bond yield curve has steepened; shorter end reacts to liquidity boost and rate cut hopes

Source: Bloomberg. Data for the month ended March and April 2025.

On the global front, trade tensions continue to exert pressure on market dynamics. Global trade tensions are weighing on markets, hurting business sentiment, manufacturing, and GDP, though U.S. consumer spending and jobs remain strong. Signs of a possible U.S. slowdown have raised expectations that the US Federal Reserve (FED) may start cutting rates around July 2025, especially if the labor market weakens or tariffs remain high.

Chart II: FED monetary policy due in May 2025; US Inflation eased for the second consecutive month

Source: Bloomberg. Data up to the month ended April 2025.

While the broader market expectations were for two rate cuts this year by the US, economists now expect the Fed to hold steady unless conditions worsen. Fed officials too signal a cautious approach, with rate cuts likely to be gradual unless economic risks escalate.

We expect The Fed to hold rates steady on May 7, 2025 policy meeting, which is in line with the broader market expectations. However, markets will closely watch Chair Powell’s guidance for clues on future policy direction amid growing uncertainty.

Indian bond yields have steadily declined over the past several months, while U.S. yields have been more volatile and remained elevated. This divergence, especially pronounced from December 2024 onward, reflects differing monetary policy paths—RBI turning accommodative, while the Fed remained cautious. This sets a positive backdrop for Indian bond markets, with softening yields and potential foreign investor interest.

Chart III: Indian Bond Yields Decline on Accommodative RBI Policy, OMO operations, While U.S. Yields Remain Elevated Amid Fed Policy Uncertainty and Tariff negotiations

Source: Bloomberg. Data up to the month ended April 2025.

U.S. 10-year Treasury yields edged down from 4.20% to 4.16% in April 2025. Meanwhile, Indian 10-year government bond yields declined by around 23 basis points, ending the month at 6.36%, after trading between 6.32% and 6.50%—a drop from the 6.58%–6.75% range seen in March 2025.

The recent drop in bond yields is largely driven by the RBI’s April policy, which signaled a more accommodative approach by revising inflation and growth forecasts downward. A softer-than-expected inflation reading for March 2025 further supported the case for lower yields.

Despite ongoing geopolitical tensions with a neighboring country, Indian bond yields have continued to decline—reflecting easing inflation, the RBI’s pro-growth stance, and reduced fiscal concerns.

Money market yields in India too softened on the back of liquidity support by the RBI.  T-bill rates for the 3-month segment plunged post easing in liquidity conditions. Meanwhile, the 3-month AAA PSU CP/CD rates too moved in tandem to the 6.5%- 6.7% range against the 7.2% - 7.3% band on closing basis.

Chart IV: Money Market Rates eased on the back of liquidity flux; Corporate bond yields too softened across the curve

Source: Bloomberg. Data is for the months ending March and April 2025. Data on corporate bond yields is for AAA PSU corporate bonds.

The corporate bond yield curve has also steepened, with the spread between 10-year corporate bonds and 10-year G-Secs narrowing to around 63 basis points by the end of April 2025. Despite this, demand for corporate bonds remains robust, matched by steady supply. Corporate bond issuances for FY2025 have reached Rs 8.8 trillion, slightly up from Rs 8.6 trillion in FY2024.

Liquidity management has been focused on enhancing transmission of the rate cuts with RBI infusing substantial durable liquidity since December 2024. Infusion has been made via Cash Reserve Ratio (CRR) cut, OMO purchase and USD INR buy-sell swaps.

Banking system liquidity eased in April 2025 despite seasonal pressures from advance tax, GST, excise collections, and currency demand. The RBI offset these challenges with significant OMO purchases, pushing core liquidity into surplus. The average daily liquidity stood at Rs 1.3 trillion in surplus for the month of April 2025 (~ 0.8% of Net Demand and Time Liabilities - NDTL) against a deficit of Rs 1.23 trillion on an average for the month of March 2025.

Chart V: Banking system liquidity in surplus; Core liquidity too in a surplus ~ 1.4% of NDTL

Source: Bloomberg. RBI. Data up to the week ended April 25, 2025.

To facilitate smooth transmission of rate cuts, the RBI actively managed liquidity through a Rs 1 trillion OMO purchase program for April 2025.  Since January 2025, total OMO purchases have reached Rs 3.83 trillion. As a result, core liquidity surged into a surplus of ~ Rs 2.4 trillion in April 2025 against Rs 1.1 trillion by March 21, 2025.

Chart VI: RBI’s Active Liquidity Management: OMO Purchases Touch Rs 3.8 trillion in CY2025

Source: RBI and Bloomberg. Data up to the period ended April 30, 2025.

Liquidity conditions are likely to improve in the coming months, as we expect the RBI to remain proactive in managing liquidity. Early May 2025 is likely to see strong spending, following past trends, and will be further supported by a large RBI dividend of Rs 2.5-3 trillion expected in May 2025. This should ensure ample liquidity in the first half of the year. However, currency demand and seasonal changes in government balances could lead to tighter conditions in the second half.

India’s retail inflation - Consumer Price Index (CPI) eased to 3.34% year-on-year in March 2025 from 3.6% in February 2025. On a month-on-month basis, CPI declined by 0.3%, led by a 0.9% drop in food prices—mainly due to lower vegetable and pulse prices. Wholesale inflation (WPI) also softened, falling to 2.1% in March 2025.

Although both Skymet and IMD (India Meteorological Department) forecast a normal monsoon, potential volatility in summer vegetable prices remains a risk.

Chart VII: RBI’s Growth-Friendly Stance Gets Backing from Softer Inflation

Source: RBI, MOSPI. Data for Inflation is for the month ended March 2025. Data on Repo Rate is for the month ended April 2025.

With continued moderation in commodity prices, we expect headline WPI to average in the 1.6–1.8% range in FY26, while CPI is likely to remain in the 3.5–3.8% range.

Broader markets now expect a 25 bps repo rate cut each in June and August 2025, with a rising probability of a deeper easing cycle.  We believe food inflation is likely to ease, supported by a good rabi crop, normal monsoon expectations, and soft global food prices. A high base and lower crude oil prices should also help keep overall inflation in check.

We expect the terminal rate to be 5.5% thus making room for two more rate cuts by the RBI of 25 basis points each. However, if inflation were to be softer than anticipated, or if growth tends to weaken rapidly under pressure from global growth, there appears a realistic chance for the repo rate cutting cycle to be deeper.

The Indian Rupee (INR) appreciated by 1.15% against the U.S. Dollar (USD) on a month-on-month basis, strengthening from Rs 85.47/USD in March 2025 to Rs 84.49/USD in April 2025. This appreciation was driven by a combination of factors, including a rise in foreign investments, a weaker U.S. dollar amid escalating trade tensions, effective liquidity management by the RBI, and the rupee’s resilience in a volatile global market.

Chart VIII: Rupee Strengthens Amid Trade Tensions and RBI Support

Source: Bloomberg. Data up to the month ended April 2025.

Brent crude fell below $59/barrel—its lowest since February 2021. Prices for crude are now down by 20.8% in CY 2025 so far, with April 2025 alone seeing a steep 15.6% decline (the worst monthly fall since November 2021).

This drop is largely driven by rising global supply—especially OPEC+ increasing output—amid fears of weak demand due to global recession risks fueled by Trump’s tariffs. With supply outpacing demand, oil prices continue to trend lower.

Chart IX: Brent Crude Hits 3-Year Low Amid Supply Surge, Demand Fear

Source: Bloomberg. Data up to May 01, 2025.

Foreign investments in Indian Government Bonds (IGBs) saw notable growth in March 2025 alone, with the Fully Accessible Route (FAR) segment receiving an influx of Rs 227 billion during the month alone. However, Foreign investors sold and exited Indian bond markets in April 2025 largely due to a combination of global and domestic factors that raised caution.

Geopolitical tensions, particularly between India and Pakistan, escalated after the Pahalgam attack. This increased risk perception among foreign investors. U.S. trade tensions and tariffs under President Trump created volatility in global markets, prompting a flight to safety (e.g., U.S. Treasuries). Though the Indian rupee appreciated during April 2025, the potential for reversal due to geopolitical risk and oil price volatility made currency risk a concern.

Chart X: Global Jitters & Geopolitical Tensions Trigger Foreign Exit from Indian Bonds

Source: CCIL. Data up to the month ended April 2025.

In the medium term, global financial markets are expected to experience reduced volatility. The USD is likely to stabilize within its current range, potentially leading to a reversal of the safe-haven trade, which may result in increased capital flows into Emerging Markets (EMs) like India.

Outlook

In its April 2025 meeting, the RBI’s cut the repo rate by 25 bps to 6%, in line with expectations, and shifted the policy stance to "Accommodative" to support economic growth.
India’s GDP grew 6.2% YoY in Q3 FY25, driven by strong government spending, private consumption, and exports.

While global growth concerns and weak U.S. data add uncertainty, softer crude prices and supportive domestic policies – RBI’s pro-growth stance, provide stability. We project 6.2% growth for FY26, though rising U.S. tariffs and slower global demand present risks.

The US tariff war has heightened downside risks to growth, prompting the RBI to ease its monetary stance. With inflation expected to be lower than last fiscal, the central bank has room to cut rates further. Shifting to an 'accommodative' stance signals more easing ahead — we anticipate two more rate cuts this fiscal, 25 bps each. The RBI is also likely to stay proactive in managing liquidity to ensure effective transmission of these cuts across the economy.

Nonetheless, US-imposed tariffs, the possibility of reciprocal actions by India, and subdued global growth remain key risks. Given these developments and ongoing uncertainties, we anticipate some near-term market volatility. However, we maintain our medium-term positive outlook (refer Why India is the Market to Watch) on medium to long-term bonds considering:

• Declining net supply of government bonds

• Continued strong demand from insurances companies, pension and provident funds

• India’s inclusion in the global bond indices to continue to add to the demand

• Potential rate cuts and Open Market Operations (OMO) purchases by the RBI

What can investors do?

Given the above factors, we expect the bond yields to go down (prices to go up). In this declining interest rate environment, investors with medium to long investment horizon, can consider dynamic bond funds. These funds can allocate to long-duration bonds while keeping flexibility to adjust portfolio position if market conditions change. This adaptability allows investors to remain invested for a longer period.

For investors with shorter investment horizons and a low risk tolerance, liquid funds remain the more suitable option.

Source: Reserve Bank of India (RBI), Ministry of Statistics & Program Implementation (MOSPI), Bloomberg

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Above article is authored by Quantum.

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