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 favorable 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".

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 USD 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 favorable, 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 favorable option for investors looking for stable returns.