Topic 2: DEBT MARKETS: BRIEF SIGH

In February 2025, the Indian debt market remained stable amid key developments influencing its performance. The 10-year benchmark G-Sec yield held steady at 6.71% on February 27, supported by expectations of fiscal consolidation and potential interest rate cuts. Corporate bond yields for AAA and AA-rated securities showed minimal fluctuations, reflecting a stable market environment, though stress in the microfinance sector and increased risk weights on NBFC loans posed potential risks to borrowing costs and liquidity. The Reserve Bank of India (RBI) played a crucial role in maintaining stability through Open Market Operations (OMOs) to inject liquidity, while fully subscribed Treasury Bill auctions indicated strong demand. The Union Budget 2025-26 set a fiscal deficit target of 4.4%, with a slightly lower government borrowing plan than the previous year, further aiding market stability. Investment trends pointed toward corporate bond funds and dynamic bond funds as attractive options, given their potential for higher returns in a falling interest rate scenario. Overall, February 2025 saw a balanced debt market, characterized by steady G-Sec yields, cautious corporate bond conditions, and effective liquidity management by the RBI. There are several key factors which drove increased interest in fixed-income investments in February 2025. Higher yields compared to historical averages made bonds attractive to investors seeking stable returns amid market volatility. Anticipation of interest rate cuts by central banks, including the U.S. Federal Reserve, further supported fixed-income investments, as lower borrowing costs were expected to enhance bond returns. Global economic uncertainties, including trade tensions and policy shifts under the Trump administration, also pushed investors toward safer assets like bonds. In the high-yield sector, improved credit metrics and shorter durations made these bonds appealing to those seeking higher returns with manageable risk. Additionally, bonds played a crucial role in portfolio diversification strategies, particularly during periods of market stress, with the "Fed put" concept providing an implicit backstop for fixed-income markets. The Indian fixed-income market also benefited from strong domestic fundamentals, including a stable political environment, controlled inflation, and favourable demand-supply dynamics for government securities. The Indian debt market faced several challenges in February 2025, impacting liquidity, investor participation, and foreign inflows. Low liquidity in secondary markets remained a concern, as institutional investors preferred private placements over public issuances, limiting broader market participation. Public issuance accounted for only 2% of total corporate bond issuances in FY2024, highlighting barriers to expanding the market. Additionally, the India-U.S. bond yield spread narrowed to a two-decade low of 227 basis points, making Indian debt less attractive to foreign portfolio investors (FPIs). Rising global borrowing costs, driven by tightening monetary policies in developed economies, further discouraged foreign inflows. Sectoral stress also posed challenges, particularly in the microfinance sector and non-banking financial companies (NBFCs), where higher risk weights increased borrowing costs and tightened liquidity. These factors collectively contributed to a cautious outlook for the Indian debt market.