The budget announcement to lower the planned gross market borrowing by Rs 12,000 crore failed to cheer the bond market as traders were expecting higher reductions. The government has lowered its planned gross market borrowing to Rs 14.01 trillion for the current financial year, from Rs 14.13 trillion estimated in the Interim Budget.
The yield on the benchmark
The 10-year bond ended the day flat at 6.969%, after hitting an intraday low of 6.926% and the high of 6.989%.
“The yields touched 6.92% after the finance minister announced fiscal deficit for the current fiscal at 4.9%, but when the bond market realised that the most of the reduction is in treasury bills and not in dated-securities, yields retracted to 6.97%. Reduction of borrowing by Rs 12,000 is insignificant,” Vikas Goel, managing director and CEO at PNB Gilts, told FE. “The yields will come down more in the front end because the supply of treasury bills will be less while the supply of dated securities will not change,” he added.
The fiscal deficit for the current financial year is set at 4.9%, an improvement from the 5.1% target announced in the Interim Budget. In the previous financial year, the government borrowed Rs 15.43 trillion. “The gross and net market borrowings through dated securities during 2024-25 are estimated at Rs 14.01 trillion and Rs 11.63 trillion, respectively…” Sitharaman said.
“The bond markets, going into the Union Budget, were optimistic about the fiscal deficit coming in below 5.10%, the target given in the Interim Budget,” said Puneet Pal, head — fixed income, PGIM India Mutual Fund. “The fiscal deficit did come in lower at 4.94%, but the borrowings through dated securities (G-sec) were down only by Rs 12,000 crore, which, in a way, disappointed the bond market as traders were expecting a reduction of Rs 40,000-60,000 crore given the reduction in the fiscal deficit to 4.90%,” he added.
He expects the benchmark 10- year bond yield to continue to trade in a range of 6.90% to 7.05% over the course of the next couple of months. The benchmark yield is likely to trend lower gradually towards 6.50% over the next one year, he added.
Government borrowings are one of the key drivers for bond yields, which have fallen since the start of this financial year. “Though the market borrowing has reduced marginally, there is a likely chance of trimming the borrowing at a later date in the second half,” said V Ramachandra Reddy, head of treasury, Karur Vysya Bank. “The fiscal consolidation has provided a case for the RBI to ease the monetary conditions, beginning with changing the stance in the next policy and followed by a rate cut in October,” he added.
Meanwhile, the rupee weakened 3 paise against the dollar to close at a record low of 83.693. The currency touched 83.7175 during intraday trade, inching past the previous lifetime low of 83.6775, and compared with 83.6275 before the Budget announcement. The rupee had opened higher earlier against a weak tone in the dollar and weakness in crude oil prices, said Anuj Choudhary, research analyst at Sharekhan by BNP Paribas. The dollar index was trading higher by 0.03% at 104.34.