Bond Yields Seen Stuck in 6.6-6.9% Band, Curbing Trade Scope

Indian government bond yields are expected to remain confined to a 6.6-6.9% range in the near term, according to a research note from Motilal Oswal Private Wealth. This limited band is seen restricting trading opportunities for investors.

The assessment follows the Reserve Bank of India's (RBI) latest Monetary Policy Committee decision to hold the benchmark repo rate at 5.25% with a neutral stance. The central bank also raised its GDP growth forecast for FY27 to 6.7% while trimming its CPI inflation projection by 10 basis points to 5.0%.

Ashish Shanker, Managing Director and CEO at Motilal Oswal Private Wealth, noted that the softer inflation outlook supports a pause through CY2026, though global risks leave room for a 25 basis point hike in early CY2027. The 10-year G-Sec yield has eased to approximately 6.75-6.80%, near levels seen before the US-Iran conflict.

Global monetary policy divergence, including potential rate increases by the US Federal Reserve and tightening by the Bank of Japan, continues to keep policymakers alert to currency depreciation and capital outflows.

The report recommends accrual-oriented strategies across the credit spectrum and income-generating assets like InvITs as the core fixed-income allocation. This is supplemented by liquid alternatives such as Hybrid SIFs, Arbitrage Funds, and Conservative Equity Savings Funds. Accrual exposure should form 55-60% of fixed-income allocations, directed toward performing credit, private credit strategies, high-yield non-convertible debentures, and infrastructure investment trusts.

On equities, the report maintains a neutral view on the broader asset class with an overweight stance on mid and small caps, citing resilient domestic demand and earnings visibility. Around 78% of MSCI India revenues originate domestically, insulating the market from global tech-driven volatility.

For precious metals, the report maintains a neutral allocation with a preference for gold over silver. Gold gained 0.9% in July to close at USD 4,042 per ounce and rose to around USD 4,400 in early August, supported by 289 tonnes of net central bank purchases in Q2 and safe-haven demand amid geopolitical tensions.