India’s gilt funds are seeing renewed investor interest, thanks to recent signals from the Reserve Bank of India that more rate cuts could be on the way. The policy outlook has turned more dovish following a 50 basis-point repo rate cut in June 2025, bringing the rate down to 5.50%, and a simultaneous cut in the cash reserve ratio (CRR) by 100 bps.
Government bond yields have eased: the 10-year G-Sec yield recently dropped to about 6.48%, reflecting easing inflation and improving liquidity conditions. This has helped gilt funds post stronger returns, especially for those with longer durations.
For example, the SBI Magnum Gilt Fund-Growth plan has a fund size of over ₹11,300 crore, with trailing returns of 4.99% (1-year), 7.51% (3-year) and 6.14% (5-year). Among other top performing gilt funds, ICICI Prudential Gilt, Baroda BNP Paribas Gilt, and PGIM India Gilt Fund have delivered 3-year returns in the range of ~8% and 1-year returns between 5-7%, making them attractive in current bond market conditions.
Analysts say that gilt funds benefit in a falling interest rate environment, because bond prices rise when yields fall, giving mark-to-market gains in addition to the regular interest accruals. With inflation under control – headline inflation having eased in recent months – the expectation is that the RBI may continue to ease rates.
However, some risks remain. In times when yields rise unexpectedly or if rate cuts are delayed, gilt funds can show volatility. Also, long-duration gilt funds may experience stress if inflation spikes or global bond markets move unfavorably.
Still, with repo rate now at 5.50%, CRR trimmed, inflation moving downwards, and gilt yields softening, many investors are viewing gilt funds as a favorable choice among debt instruments for medium- to long-term horizons.
