Indian bonds show neutral to marginally attractive valuation compared to equity amid rate-cut cycle: SBI Mutual Fund

Indian bonds currently appear neutral to slightly attractive compared to the equity market, as well as their own historical performance during previous rate-cutting cycles, highlighted a report by SBI Mutual Fund.

The report noted that with markets anticipating a softening of interest rates, bond yields are reflecting the possibility of future cuts. This shift in monetary policy has created a favourable environment for Indian bonds, particularly government bonds.

"From a valuation standpoint, Indian bonds appear neutral to marginally attractive compared to the equity market and their own historical performance during the rate-cutting cycle" said the report.

It further added, "Our view is that Indian bonds, particularly government bonds, are well-positioned at this juncture, which represents a convergence of structural bullish factors for India and a potential global peak in policy rates".

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It also added that a notable rally in bond yields was observed following India's inclusion in the FTSE Emerging Markets Global Bond Index, along with a change in policy stance. Bond yields rose by 5 basis points after this announcement, signaling positive market sentiment.

In addition, crude oil prices have moderated to around $77 per barrel, easing some inflationary pressures and further supporting bond markets. The report stated that the demand-supply dynamics for government bonds are also favourable, making them well-positioned for future growth.

According to the report, the corporate bond market is facing a different scenario, with the yield curve showing inversion due to pressures from the credit-deposit ratio.

This inversion provides attractive returns in the short-term corporate bond segment, while investors are increasingly focusing on building longer-term positions in government bonds to benefit from the ongoing rate-cutting cycle.

"The corporate bond curve is inverted given pressures from credit - deposit ratio at the front end. This yields a good carry in the short-term segment while focusing on building duration via government bonds" the report added.

Overall, structural factors in the report point to a bullish outlook for Indian bonds as global policy rates approach their peak, making government bonds a favourable option for investors looking for stable returns.

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