Finance Minister Nirmala Sitharaman surprised the market during the interim Budget, announcing a fiscal deficit target of 5.1% for FY25, which was below consensus estimates. Further, the announcement that the government would limit gross and net borrowing, while continuing its push on public capex, came as a shot in the arm to the fixed income market.
Consequently, bond yields fell 8 bps from 7.14% to 7.06%, the lowest since June 20, 2023. This is expected to benefit the debt mutual fund industry, which has been struggling since almost a year following the removal of the indexation benefit from the longer duration debt funds.
“Fixed income investments appear promising due to factors like lower fiscal deficit, expected FII inflows after India’s inclusion in global bond indices, peaking of monetary tightening by global central banks (including RBI), low core inflation, and increased demand from long-term buyers like insurance companies and pension funds,” said Navneet Munot, MD & CEO – HDFC Asset Management.
The 10-year benchmark paper (7.18% GS 2033) was quoting a high of Rs 100.98 and a low of Rs 100.30. The last traded price was Rs 100.83, implying a yield of 7.06%. The previous closing price was Rs 100.24, according to CCIL data. In the last three months, medium-to-long duration funds have seen net flows of Rs (-12 crore), while long duration funds have seen net flows of over Rs 530 crore. Now, fixed income managers are upbeat on incremental flows.
“The move is directionally positive. Core inflation has moderated and with contained government borrowing, G-Sec yields will be softening. The Fed has also stated that its tightening cycle is over. While there is a debate on the magnitude of rate Fed cuts, what is clear is that global rates will head south,” said Ashish Gupta, CIO of Axis Mutual Fund.
He said this bodes well for medium-to-long term debt MFs. Given the current YTM of 7.5-7.75%, investors stand the chance to see capital appreciation as well. India’s inclusion in global bond indices is expected to fetch $23 billion in flows, while some foreign brokerages peg the amount closer to $30 billion.
Vikas Garg, Head of Fixed Income at Invesco Mutual Fund, says, “This reinforces our high conviction on benign G-Sec demand supply dynamics to act as a trigger for a market rally. Fiscal prudence and the moderating domestic inflation may prompt the RBI to ease system liquidity as well.
Reduced G-Sec supply, coupled with healthy demand from domestic investors and FPIs through inclusion in the JP Morgan global debt indices can lead to structural compression on term spread, making a compelling case for long duration funds.