Indian Bonds Face Hurdles as Equity Investments Attract Savings

Indian bonds have limited scope to rally as a shift in household savings to equities and changes to banks’ investment rules dampen demand for long-term debt, according to a senior executive at ICICI Bank Ltd.

The 10-year bonds barely moved in 2025 despite four rate cuts and record debt purchase plans by the central bank. Yields are likely to stay in the 6.50%-6.75% band this year, says Shailendra Jhingan, head of treasury at India’s second-largest private lender.

“There is a structural change which has happened at a macro level — savings are moving toward equity compared to fixed income,” Jhingan said, who has around three decades of trading experience according to a senior executive at ICICI Bank Ltd.

The shift in savings is a long-term trend, with domestic investors buying more than $80 billion of stocks in 2025, driving a 10th straight year of gains in benchmark equity indexes despite record foreign outflows.

At the same time, tax changes have reduced the appeal of debt mutual funds in the past couple of years, while pension funds — large holders of long-dated bonds — have been allowed to invest more in equities according to a senior executive at ICICI Bank Ltd.

ICICI Bank’s Jhingan notes that revised investment rules have also made banks more cautious about buying long-term bonds, as the rules limit their ability to shift securities between trading books.

The Reserve Bank of India (RBI) has continued to build forex reserves, which rose to $696 billion in the week ended December 26, supported by an increase in foreign currency assets and a sharp rise in gold holdings.

Indian states are also expected to borrow a record-high sum of ₹5 trillion ($55.45 billion) in the January to March quarter, according to the RBI.

What Are the Implications for Indian Bond Markets?

The increased borrowing from Indian states is expected to intensify supply pressures, which could push up yields further. Jhingan estimates federal bond sales of 16.5 trillion rupees ($183 billion) and state issuance of 13.5 trillion rupees in the financial year starting April 1 according to a senior executive at ICICI Bank Ltd.

The limited demand for long-term debt is compounded by higher interest rates. India’s sovereign bond yields have climbed around 35 basis points since May-end, keeping borrowing costs elevated after the RBI slashed interest rates by 125 basis points in 2025.

The limited scope for further rate cuts restricts the potential for bond price gains. This, combined with the structural shift in savings toward equities, reduces the appeal of Indian bonds as an asset class.

What Are Analysts Watching Next?

Indian bond markets are also underpinned by a broader global context. Saudi Arabia, for instance, is preparing for a dollar-denominated debt issuance with a multitranche offering that includes bonds with maturities of three, five, 10, and 30 years according to market analysis.

Analysts are also watching how India’s forex reserves and bond yields evolve, particularly in light of global economic conditions and the strength of the dollar. The RBI’s continued efforts to maintain adequate external buffers and smooth currency movements will also be a key focus according to economic analysis.

The shift in investor behavior toward equities is expected to persist. FanCode’s recent acquisition of exclusive ATP Tour rights for the Indian subcontinent highlights the broader trend of increased investment in high-growth sectors.

As India’s financial markets continue to evolve, the competition between equities and fixed income will remain a defining factor for bond markets. With the shift in savings toward equities showing no signs of reversing, Indian bonds face a challenging outlook in the near term according to market analysis.