The Indian fixed income market has delivered modest positive returns in 2025, driven by low inflation and robust growth. The Reserve Bank of India’s (RBI) accommodative policy has supported the market, with the central bank pausing its repo rate at 5.50% in October 2025. This pause is seen as a signal for potential easing ahead, as the RBI awaits clarity on global trade headwinds.
Government bond yields have been volatile, initially declining sharply to 6.24% following the RBI’s aggressive easing cycle, but subsequently climbing back to 6.58% by end-September due to elevated government borrowing pressures and supply concerns. The RBI’s front-loaded rate cuts were intended to reduce borrowing costs amid easing inflation, but the bond market’s response was complicated by heavy government borrowing schedules.
Despite the market turbulence, foreign portfolio investors (FPIs) remained net buyers of Indian debt, with cumulative inflows exceeding ₹50,000 crore through September 2025. The consistent FPI appetite for Indian debt helped provide some stability to the market, even as domestic factors created upward pressure on yields.
The key drivers of performance in the Indian fixed income market include monetary easing, low inflation, robust growth outlook, and index inclusions. The RBI cut the policy repo rate from 6.50% in January to 5.50% by August, implementing a cumulative 100 basis points reduction. Headline CPI inflation eased to 2.07% in August, near the lower tolerance band, driven by favourable food and fuel prices.
The macroeconomic backdrop of India exhibits strength, with strong domestic demand, investment activity, and government spending sustaining above-trend GDP expansion. Inflation is stable around 2% despite base effects and supply shocks, granting the RBI policy flexibility. The current account deficit is manageable, supported by moderate oil prices and FPI debt inflows.
However, there are risk factors in the fixed income market, including supply-demand dynamics, global policy uncertainty, and inflation spikes. To navigate these risks, investors can consider dynamic bond funds, duration funds, and corporate bond funds. These funds can tactically adjust portfolio maturity exposure to capitalize on shifting supply-demand conditions driven by government borrowing schedules and index inclusions.
The RBI’s October 1, 2025, policy decision to keep the repo rate unchanged at 5.50% with a neutral stance marks the second consecutive pause after three cuts totalling 100 basis points earlier this year. The governor cited the need to assess the impact of previous policy actions and await greater clarity on trade-related uncertainties before charting the next course. Despite the pause, market expectations suggest the RBI may resume rate cuts in December if downside growth risks materialize and trade uncertainties subside.