New Delhi
Investors are increasingly turning to India’s short-term government bonds as expectations grow that interest rates will remain low for some time. The strategy, known as a bond carry trade, allows investors to borrow at low overnight rates and invest in higher-yielding bonds to earn steady returns.
Market participants say the trade has become more attractive after the Reserve Bank of India signaled a slow and gradual rise in inflation toward its four per cent target. With price pressures contained, investors believe policy rates are unlikely to rise sharply in the near future.
Currently, investors can earn close to one percentage point by borrowing overnight and investing in five-year government securities, the widest margin seen in more than two years. International banks with bond trading desks in India have increased their exposure, according to people familiar with the trades.
Analysts say the focus has shifted from chasing capital gains to earning stable income. Demand has risen sharply for bonds with maturities of three to five years, helping short-term debt outperform longer-dated securities.
This trend has widened the yield gap between three-year and ten-year bonds, as long-term yields moved higher due to weaker demand while short-term yields stayed steady. Surplus liquidity in the banking system has also kept funding costs low, further supporting the strategy. However, experts caution that carry trades carry risks. A sudden rise in inflation, higher short-term yields, or renewed volatility in the rupee could reduce returns or cause losses.
Despite these concerns, market participants expect carry trades in short-term Indian bonds to remain popular into 2026, supported by rates and central bank stance policy.
