Global Pulse: The global economy is walking a tightrope in early 2025. In the U.S., the first quarter surprised markets with a mild GDP contraction of 0.3%—a rare dip driven not by weak demand, but by a surge in imports ahead of new trade tariffs. 

Businesses stocked up before costs rose, inadvertently inflating the trade deficit and dragging growth into the red. Still, inflation offered some relief, with April CPI easing to 2.3%—a sign that the Fed’s tightrope act may be paying off, albeit slowly.

Across the Atlantic, the UK defied gloom with a strong 0.7% GDP growth in Q1, powered by a sharp rebound in business investment—the fastest in two years. Europe also surprised on the upside, with the Eurozone expanding 0.4% for the quarter, doubling its previous pace. Together, these data points paint a picture of a world not out of the woods yet but learning to adapt in real time. 

India: A Pocket of Stability Amid Global Churns

India continues to shine as an outlier. April CPI eased to a six-month low of 3.16%, offering comfort to the Reserve Bank of India (RBI), which recently shifted to a neutral policy stance. This allows the central bank to remain flexible while maintaining a watchful eye on evolving risks.

The economy remains robust, with GDP expected to grow at 6.8% in FY25, supported by resilient consumption, strong service exports, and improved investment momentum. This combination of moderating inflation and steady growth creates a rare, attractive backdrop for fixed income investors. 

Caution Without Alarm

While macroeconomic fundamentals are encouraging, the local geopolitical environment warrants cautious monitoring. Recent flare-ups along the India-Pakistan border have raised concerns about potential disruptions, especially in the run-up to state elections.

Historically, short-term escalations have had alimited and temporary impact on Indian bond markets, particularly if they do not materially affect oil prices or trade. However, should tensions escalate significantly, risk sentiment and foreign fund flows could see brief volatility.

At present, the situation remains contained, and the bond market has shown resilience. Still, investors should factor in geopolitical optionality by maintaining some liquidity and staying diversified across durations and credit buckets. 

Fixed Income Strategy

The evolving backdrop supports a tactical yet confident fixed income approach:

1. Extend Duration, Gradually

The RBI’s neutral stance and declining inflation create room for yields to drift lower, especially at the medium to longer end of the curve. G-Secs in the 5–10 year space looks compelling both from a carry and roll-down perspective.

2. Credit Opportunities: Enhance Yield Prudently

This is a favourable environment forcredit spreads—but only with due diligence.

Attractive segments include:

• Top-rated NBFCs and HFCs with solid balance sheets and granular loan books.
• Mid-tier issuers offering enhanced yield through properly structured NCDs with asset backing or cash flow escrows.
• Credit-enhanced structures such as guarantee-backed or cash flow-ringfenced bonds are gaining investor confidence.

However, this is not the market to chase yield blindly. Avoid over-leveraged names or those with opaque promoter histories.

3. Preserve Liquidity and Stay Nimble

With elections, monsoon progress, and potential geopolitical noise ahead, holding 10–15% liquidity within portfolios is prudent. This provides the flexibility to capitalise on dislocations or policy surprises.

What to Consider Buying?

• G-Secs (5–10 years): Attractive yields with low credit risk.
• State Development Loans (SDLs): Higher spread over G-Secs with minimal downgrade risk.
• AAA Corporate Bonds: Consistent performers for capital preservation.
• Select High-Quality NCDS: Best accessed through managed platforms and professional Wealth managers for diversification and oversight. 

Outlook Ahead

The domestic backdrop remains constructive, with steady growth, inflation softening, and the RBI creating space for flexible policy. However, global uncertainty and local geopolitical developments could trigger short-term volatility.

At this juncture, investors should stay high on quality, maintain some cash, and let duration work in their favour over the next few months. Fixed income portfolios built now—carefully and consciously—are likely to be well-rewarded in the quarters ahead.

The author, Chirag Doshi, is the CIO at LGT Wealth India.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making investment decisions.