India's Short-Term Bonds Soar: Investors Flock to Lucrative Carry Trades

• Bond carry trades, profiting from low funding costs and high bond yields, are gaining popularity in India.
• Investors can earn ~1 percentage point by borrowing overnight and buying five-year notes, highest in over two years.
• RBI's gradual inflation outlook and low policy rate (5.25%) suggest stable interest rates, fueling the strategy.
• International banks are increasing positions, with experts like Vikas Jain predicting a "carry trade year."
• While profitable, risks include rising short-term yields, inflation spikes, and rupee volatility.

Why It Matters: India's short-term bonds are booming due to profitable carry trades, driven by stable rates and liquidity.