What impact do a stronger dollar and a weaker rupee have on Indian bonds? Suresh Darak of Bondbazaar explains

The Indian bond market is expanding rapidly, driven by regulatory support and rising investor interest. However, factors like interest rate movements, rupee depreciation, and global liquidity trends influence bond yields and returns. In an interaction with Business Today, Suresh Darak, founder of Bondbazaar, shared his views on key trends, risks, and opportunities shaping bond investments in India. Edited excerpts.

How has the Indian bond market evolved over the past few years, and what factors have contributed to its growth?

India’s bond market has witnessed tremendous growth, surpassing Rs 200 lakh crore in outstanding bonds — about two-thirds of India’s GDP. Growing at a 20% CAGR, it may soon exceed the size of the equity market. This growth has been driven by regulatory support and increasing supply and demand from issuers and investors.

For instance, SEBI has reduced the face value of bonds to Rs 1,000 for debt IPOs, making them more accessible. Issuers are increasingly using IPOs as an effective fundraising tool, while investors are exploring them for higher returns. In 2024, debt IPOs nearly doubled to Rs 20,000 crore, and this figure is expected to double again this year. The entire ecosystem — regulators, issuers, intermediaries, and investors — is working together to expand the bond market.

When should investors consider adding bonds to their portfolio?

For retail investors, there is no “good” or “bad” time to invest in fixed-income products because they provide stable returns, regardless of market conditions. Investors should always allocate a portion of their portfolio to fixed-income assets, with the exact proportion depending on age and risk appetite.

Bonds are ideal fixed-income products as they offer fixed interest payments and return the principal to maturity. They are fully regulated by SEBI and provide a wide range of returns (7-14%) with liquidity options.

How should retail investors approach bond investments?

As with any investment product, investors need to find the right combination of returns and risk that works for him/her. There are a wide range of options and investors can earn fixed returns of 7-14% in investment grade bonds. Between 7-9% returns, the risk is negligible since these bonds are AAA rated by SEBI-accredited rating agencies, implying highest safety. The bonds between 10-15% are investment grade, but relatively higher risk. Bond funds are an alternative where the fund manager creates a portfolio of bonds on behalf of the investors. However, these funds do not give fixed returns, and they vary from time to time because the fund manager is actively buying and selling bonds. Also, the returns from bond funds can be muted since they must invest a large proportion of their portfolio in AAA or sovereign bonds.

How will interest rate trends impact the Indian bond market over the next 12 months?

India is currently facing a liquidity crunch, prompting RBI to take multiple measures, including repo rate reductions, open market operations, and variable repo rate auctions, injecting over Rs 40 lakh crore in recent months.

However, this liquidity injection has not fully translated into lower interest rates at the institutional or retail level. 10-year government bond yields remain stable at 6.8-6.9%, despite various economic changes. If RBI implements further rate cuts, yields may decline, making this a good time for investors to lock in fixed-income investments before rates shift.

How will RBI’s monetary policy influence bond yields and market liquidity?

RBI’s liquidity injections typically soften bond yields, but they must also manage inflation and currency stability. Increased rupee supply can:

• Raise inflation (higher money supply).
• Depreciate the rupee (weaker exchange rate).

Despite rupee depreciation, RBI continues injecting liquidity, which may keep bond yields low for now.

What impact do the rising dollar and falling rupee have on Indian bonds?

The rising dollar and falling rupee create a detriment for global investors in Indian bonds since they will not see adequate returns. Moreover, existing global investors may sell their Indian bonds and exit, leading to capital outflows. This can lead to higher bond yields as the supply of bonds increases while demand decreases. Separately, rupee depreciation makes imports like oil more expensive leading to rising inflation in India. As inflation increases, RBI might raise interest rates to control inflation, potentially leading to a rise in bond yields. Falling rupee can also create a perception of weakness in the economy due to which higher yields may need to be offered to attract investors.

What are the risks and opportunities in long-duration vs. short-term bonds?

Investors in long-duration bonds face:

• Higher interest rate risk (bond prices fall if rates rise).
• Credit risk (issuer downgrades over time).

With the current flat yield curve, there is no significant advantage in choosing long-term bonds. Investors can either lock in current yields for longer periods or opt for short-term bonds and reinvest upon maturity. 

How is online investing transforming bond markets?

Online platforms like Bondbazaar are making bond investments accessible to retail investors. Historically, bond markets were limited to institutions (banks, mutual funds, and corporates). However:

• SEBI’s recent regulations have improved accessibility.
• Automation simplifies bond transactions.
• Platforms provide education and awareness.
• Dedicated relationship managers (RMs) support first-time investors.

With digital access expanding, retail interest in bonds is set to rise significantly.