Indian government bond yields posted their first decline in the last four financial years as the central bank held rates, the demand-supply dynamics turned favourable and foreign inflows boosted sentiment.
The benchmark 10-year bond yield ended at 7.0556%, following its previous close of 7.0927%.
The yield fell 26 basis points (bps) this fiscal, after rising an aggregate of 118 bps over the last three years.
The benchmark bond yield posted its fifth consecutive monthly fall and is down by 30 bps for the November-March period. The yield declined 12 bps for the second straight quarter.
“Markets strong ability to tackle large supply this year, smaller than expected bond borrowing program for FY25, pick up in foreign demand after bond index inclusion announcement and broadly favorable global backdrop have together spurred rally in bonds, said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership. The Reserve Bank of India maintained the repo rate for six straight meetings after raising it by 250 basis points the previous year. Traders are expecting the policy rate to ease in the next financial year.
The market anticipates the Federal Reserve to start cutting rates in 2024, even though expectations on the quantum have been toned down after recent commentary from U.S. central bank officials.
Domestic bonds also got a push as the decade-long wait for the inclusion of securities in global bond indices finally ended, with JP Morgan announcing that it would include some notes in its emerging market debt index from June 2024.
This was followed by Bloomberg Index Services adding notes in its Emerging Market Local Currency Index from January 2025 and investors expect passive inflows upwards of an aggregate of $25 billion over the next 12-18 months.
Foreign investment in local bonds jumped as some investors indulged in front-running in the second half of the financial year.
These investors bought nearly a record 980 billion rupees ($11.75 billion) on a net basis in the current financial year.
The weighted average maturity of outstanding bonds rose, while cost of borrowing has been lower than historical average.
FY25 OUTLOOK
An improving outlook for demand-supply dynamics, with supply for the next financial year sharply lower than expectations, and constantly rising demand from long-term investors will continue to aid yields, with expectations of curve steepening, said treasury officials.
India aims to borrow 7.50 trillion rupees in the next six months, nearly 53% of the annual target of 14.13 trillion rupees. ($1 = 83.3775 Indian rupees)