Topic 2: DEBT: KEEPING COOL

In September 2025, the Indian debt market displayed cautious resilience and relative stability, with investors navigating a complex landscape of domestic monetary policy signals, global uncertainties, and shifting capital flows. Government bond yields declined marginally during the month, supported by improved demand for safer assets amidst volatility in equity markets and concerns over the depreciating rupee. The 10-year benchmark government bond yield fluctuated within a tight band of 6.50% to 6.53%, ending slightly lower than the previous months. This minor drop reflected market expectations of potential monetary easing by the Reserve Bank of India (RBI) and a general preference for stability in fixed-income instruments during a time of heightened global uncertainty. Auctions for state development loans (SDLs) and government securities (G-Secs) saw robust demand, signalling growing investor interest in low-risk assets, especially as equity market performance remained volatile. Corporate bond markets also maintained healthy activity, driven by a continuation of record-high issuances in FY25 and FY26. Earlier interest rate cuts, combined with improved credit profiles of many corporates, fuelled investor confidence and facilitated funding through debt instruments. The steady performance in this segment was further supported by the RBI’s decision to maintain the repo rate at 5.50% in its September policy meeting. While the central bank refrained from altering rates, it indicated that inflation was largely under control and that there was scope to adopt a more pro-growth stance if required. This dovish tone buoyed expectations of a potential rate cut in December, keeping fixed-income sentiment positive and bond yields relatively subdued. Global economic conditions also played a significant role in shaping the mood of the Indian debt market. Mixed signals from the US economy, including persistent inflation concerns, a cautious approach by the US Federal Reserve regarding rate cuts, and lingering geopolitical tensions, kept global bond yields under upward pressure. Nevertheless, signs of easing trade tensions and softening economic data in major economies created room for positive sentiment to return to emerging markets like India. On the fiscal front, domestic developments had a mixed but manageable impact on bond markets. The Indian government’s announcement of GST rate cuts in September was a significant step toward boosting consumption and simplifying tax compliance. While such measures could be seen as a potential drag on near-term fiscal revenues, the overall market reaction remained calm. Investors viewed the reform positively from a long-term economic growth perspective. Moreover, strong GST collections for the month, totalling a record ₹1.89 lakh crore, alleviated concerns about fiscal slippage, supporting continued demand for government securities. Foreign Portfolio Investors (FPIs) played a nuanced role in the debt market during the month. While they remained aggressive net sellers in Indian equities—pulling out over $2 billion—they showed moderate interest in Indian debt instruments. Inflows from FPIs totalled approximately ₹900 crore under the general investment limit and another ₹1,100 crore via the voluntary retention route (VRR). These selective investments in government securities and high-quality corporate bonds reflected a cautious but positive outlook toward Indian fixed-income assets. However, the pace of inflows was slower than in previous months, largely due to the significant depreciation of the Indian rupee, which raised concerns over currency-adjusted returns. The rupee hit an all-time low near ₹88.80 per US dollar in late September, driven by a combination of factors including equity outflows, rising import demand, and geopolitical pressures. Several broader macroeconomic and global developments influenced capital flows and exchange rates during the month. The rupee’s depreciation was among the most significant financial stories of September 2025. Its fall to nearly ₹88.80 per USD reflected both external and internal pressures. Key among these were portfolio outflows from equities, the escalation of US-India trade tensions, a widening trade deficit, and a rise in gold imports ahead of the festive season. The US's decision to double tariffs on Indian exports and raise H-1B visa fees created additional headwinds for the IT and manufacturing sectors, further undermining investor sentiment and accelerating capital flight. In parallel, global financial market volatility, rising oil prices (Brent crude nearing $70 per barrel), and geopolitical tensions—especially surrounding the Russia-Ukraine conflict and Iran—drove increased demand for the US dollar, putting pressure on emerging market currencies like the rupee. Despite this, the RBI chose not to intervene aggressively in the forex market, allowing for a controlled depreciation while maintaining liquidity support in the domestic system. Its intervention strategy aimed to avoid disorderly currency movements without burning through foreign exchange reserves. While the weakening rupee did raise concerns among FPIs, India’s macroeconomic fundamentals—strong tax revenues, manageable inflation, and a stable interest rate environment—kept investor faith intact in the debt market, even as global uncertainty prompted a “wait and watch” approach. In conclusion, the Indian debt market in September 2025 remained a zone of cautious optimism. It was underpinned by a supportive monetary policy, stable demand for long- and short-duration instruments, selective FPI inflows, and robust domestic liquidity. Looking ahead, investor focus will remain on RBI's December policy decision, the trajectory of inflation, and developments in global trade and geopolitical risk—all of which will influence the direction of yields, capital flows, and the overall momentum of the debt market in the final quarter of the year.