Bond markets staged a smart rally on Thursday after the government said it would borrow a net Rs 11.75 trillion from the markets in the next fiscal. This is a smaller amount compared to the current year’s borrowings of Rs 11.8 trillion and the announcement surprised the market. The yield on the 10-year benchmark bond fell by as much as 8 basis points (bps) to close the session at 7.06%. While yields could fall further, some market participants expect the Reserve Bank of India (RBI) to change its stance on liquidity from “withdrawal of accommodation”. Some are betting on a rate cut later in the year.
Yields are expected to trend down further especially with foreign portfolio investors estimated to invest close to $25 billion by about June, courtesy India’s inclusion in the bond index. Ajay Manglunia, MD and head – investment grade group, JM Financial, believes the high demand may take the yield on the benchmark bond to 6.50-6.75% range in the next six months. “We see more demand and less supply in the next financial year as Indian bonds will be included in global indices,” Manglunia said.
The treasury team at HDFC Bank expects to see yields in the range of 6.7-7% by Q2 FY25. “The lower than expected borrowings for FY25 will support bond yields, paving the way for a move below 7%, on a sustained basis, over the coming months,” they said.
The top team at Axis Mutual Fund observed the lower gross market borrowings are a big positive. “These coupled with the expected inflows in JP Morgan Indices Index beginning June 2024 will help bring down yields further lower. We expect the RBI to complement the Budget with changed stance on liquidity and lower interest rates in the second half of the year,” they said. They further observed that they expect the 10-year bond yields to touch 6.75% by June – September 2024.
Falling yields on gilts are also good news for corporates as it reduces their borrowing costs and encourages them to tap bond market to meet their funding requirements.
Naveen Singh, head of trading at ICICI Securities Primary Dealership believes the fiscal consolidation would provide enough comfort to the RBI to change its stance. Finance minister Nirmala Sitharaman has set a target for the fiscal deficit of 5.1% in FY25 while revising the current year’s deficit to 5.8% of GDP.
The finance minister said in her interim Budget speech the Centre will borrow a gross `14.13 trillion from the markets in FY25, a smaller sum than the `15.43 trillion budgeted for the current fiscal. The smaller borrowings have been helped by the use of the GST cess funds for lowering repayments. The finance minister emphasised the government wants to reduce market borrowing so as to not crowd out private investors.
The fall in the benchmark yield also led to a 13 bps drop in the yield on the 14-year notes. The rally extends the best January gain in five years for Indian sovereign bonds that was fuelled by foreign inflows ahead of the global index inclusion from June. Corporate bonds also rallied, with the average yield on top-rated three-year corporate bonds falling by 10-12 bps.
“We are in a better position to see a whole year of benign yields scenario irrespective of how the global bonds are behaving,” said Abhisek Bahinipati, fixed-income trading head at Mirae Asset Capital Markets India. The yields on 10-year bond may drift down to 6.90%-6.95% by June, he said.