Global volatility, rising US yields, stronger dollar to impact Indian markets. Vikas Garg of Invesco Mutual Fund explains how.

Indian and global markets have experienced significant volatility in recent months, driven by external factors like rising US yields, foreign capital outflows, and a stronger dollar. Domestically, concerns over slowing GDP growth, high inflation, and the fiscal burden of increasing welfare politics have also contributed to the uncertainty.

In an exclusive conversation with Business Today, Vikas Garg, Head of Fixed Income at Invesco Mutual Fund, shares his perspective on the outlook for the Indian fixed income market amidst global volatility, the impact of rising US yields and a stronger dollar on India’s bond, welfare politics, and key trends shaping 2025. With global uncertainties and US policy changes affecting emerging markets, Garg provides insights into how India’s fixed income sector could navigate the coming year.

Q. What is your outlook for the Indian fixed income market amidst the current global volatility?

The year 2025 brings an element of global volatility as US President Trump implements his policies, some of which may have the potential to shorten the US rate cut cycle, raise volatility in global financial markets, and increase currency pressure for emerging market (EM) countries.

Amidst this global volatility, the Indian fixed income market is expected to remain largely insulated due to strong fundamental factors, similar to the divergence exhibited in 2024. Fiscal demand-supply dynamics will remain favorable as the government is expected to continue with fiscal consolidation, and demand remains healthy from both domestic and foreign investors. Slowing growth and moderating inflation dynamics could create room for the MPC to deliver its first rate cut in February 2025, though we expect a shallow rate cut cycle of 50-75 basis points.

Amidst tight banking liquidity, the RBI has initiated various measures to provide relief. Overall, the risk-reward remains favorable, especially in long-tenor G-Secs and short-tenor corporate bonds. The risk to our view may emanate more from the global front if US policies create elevated volatility in the currency market, which could force central banks to turn hawkish to protect their currencies.

Q. What are the key trends you see shaping the Indian economy and markets in 2025?

Global volatility to remain high as US policies unfold
Domestic fixed income market to stay resilient and favorable on the back of strong fundamental factors
External factors to remain healthy but INR may become more volatile as RBI reduces its intervention
FY2026 inflation is expected to moderate further to 4.2%-4.4% from ~4.7%-4.8% in FY25, driven by moderating food inflation and benign base effect
Domestic rate cut cycle is expected to start from Feb 2025 with cumulative 50-75 bps rate cut in this cycle
Fiscal demand-supply dynamics to stay favorable for yet another year & remain the most comforting factor

Q. What is your view on welfare politics and how do you think it impacts the fiscal health of the country?

The central government has established its credibility by focussing on capex-related reforms while keeping a tight leash on revenue expenditure with controlled and directed subsidies. While many states have adopted welfare politics for political gains, we expect the central government to maintain its fiscal prudence and find a fine balance between capex and populist measures.

Q. What is the impact of rising US yields and a stronger dollar on India’s bond inclusion story?

The benefits of India’s bond inclusion will remain intact even with volatile US yields and a strengthening dollar. While the flows to emerging market-dedicated debt funds will depend on global yields and currency movements, India will still maintain its relative attractiveness over its peers due to a stable political landscape, healthy growth, a manageable current account deficit, robust FX reserves, a relatively stable currency, and very low foreign investor holdings in domestic G-Secs. Even if investors were to maintain a neutral weight on sovereign bonds, it could result in a healthy inflow of $8-10 billion in CY25, driven by inclusion in three major global emerging market debt indices: JP Morgan, Bloomberg, and FTSE Russell.