The Reserve Bank of India’s (RBI) June monetary policy delivered a well-telegraphed rate cut, but surprised markets with its size and liquidity stance. The Monetary Policy Committee (MPC) reduced the policy repo rate by 50 basis points to 5.50%, taking the total rate reduction in 2025 to 100 bps. Accompanying the cut was a significant 100 bps reduction in the Cash Reserve Ratio (CRR), set to be implemented in phases by November 2025, which is expected to inject ₹ 2.5 lakh crore in durable liquidity into the banking system.
The combination of a larger-than-expected rate cut, a liquidity infusion, and a shift in policy stance from “accommodative” to “neutral” marks a recalibrated but supportive policy backdrop. The RBI has now clearly signalled that further action will be data-driven and contingent on inflation and growth outcomes.
Macro Landscape: Comfort on Inflation, Growth Steady
India’s retail inflation continues to trend lower. The latest CPI inflation print for May 2025 stood at 3.1% year-on-year, slightly below April’s 3.2%. This marks the seventh consecutive month of moderation, led by soft food prices, a stable core, and easing global commodity costs. With a normal monsoon forecast and ample foodgrain supply, inflation risks appear contained in the near term.
Growth has held firm, with Q4 FY25 GDP coming in at 7.4%, driven by strength in private consumption, public capex and a resilient services sector. FY25 real GDP growth was recorded at 6.5%, and the RBI projects a similar trajectory for FY26. While external risks persist, domestic macro fundamentals remain stable.
Bond Market View: Bullish Short End, Broadening Opportunities
The rate and liquidity measures have set a constructive tone for the bond market. The short-medium end of the curve (up to 5 years) has rallied strongly post-policy, with demand for high-grade instruments increasing. The CRR cut adds further momentum, as it enhances system liquidity, supporting spreads and keeping money market rates anchored.
The short-medium end now offers the most compelling risk-reward. With repo at 5.50% and systemic liquidity set to improve, short-medium duration bonds, CPs, and CDs offer attractive carry with limited duration risk. Investors may benefit from roll-down strategies and high accruals in the 2–5 year bucket.
On the longer end, there is room for yields to drift lower, although gains may be more gradual. The RBI’s shift to a ‘neutral’ stance implies it may pause the macroeconomic landscape before initiating further easing. Hence, while long-duration bonds remain investable, returns are likely to be steady.
Credit Segment: High-Yield Picks Up Steam
In a benign interest rate environment and flush liquidity conditions, investor appetite is expected to extend down the credit curve. Select high-yield corporate bonds in the AA– to A– segment now look attractive, especially with spreads still offering meaningful pick-up over AAA peers. With RBI easing and liquidity rising, investors are likely to begin chasing yields in quality high-yield names with sound business models and visible cash flows.
Simultaneously, AAA-rated infrastructure investment trusts (InvITs) and other high-grade structured credits offer an opportunity to lock in yields at elevated levels. These assets, typically with stable cash flows and underlying operational assets, provide a balance of safety and return, particularly relevant for investors seeking steady income in a softening rate environment.
Strategy Ahead
Investors should consider increasing exposure to:
• Short-medium duration, high-quality debt instruments.
• High-yield credits in the AA– to A– range, after adequate credit due diligence.
• AAA-rated InvITs for attractive yield-locking with stable risk profiles.
While the broader bias for yields is downward, the RBI has moved into a more data-dependent mode. The probability of further rate cuts will hinge on sustained disinflation, global risk moderation, and domestic demand trends.
Conclusion
The June policy has set the stage for a supportive fixed-income environment, especially at the short to medium end. The rate cut, liquidity infusion via CRR, and easing inflation create room for bond yields to soften further, though the RBI’s ‘neutral’ stance advises caution. With opportunities widening across credit categories, a diversified fixed income strategy — balancing quality, tenor, and selective credit — is well placed to deliver risk-adjusted returns.
(Chirag Doshi is CIO, Fixed Income at LGT Wealth India)
Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
