The bond market cheered Finance Minister Nirmala Sitharaman’s Interim Budget announcement to lower the fiscal deficit, implying lower gross borrowing in the next fiscal, with Government Security (G-Sec/GS) yields thawing substantially.

The yield of the 10-year benchmark paper (7.18 per cent GS 2033) softened by about 9 basis points (bps), with its price rallying by about 60 paise.

The aforementioned paper, which is the most traded among all G-Secs, closed at a yield of 7.0583 per cent (previous close: 7.1442 per cent). Its closing price was ₹100.83 (₹100.24). Bond yields and prices are inversely related and move in opposite directions.

Lower gross borrowing, coupled with the inclusion of G-Secs in key global bond indices in FY25, would mean that the government may be able to borrow funds cheaper from the market.

This, in turn, could have a salubrious impact on India Inc’s cost of funds. In the short term, bank treasuries may make gains in the fourth quarter due to the decline in G-Sec yields.

The Budget Estimate (BE) for the fiscal deficit in FY25 is 5.1 per cent of GDP. The fiscal deficit for FY24 has been revised lower to 5.8 per cent from the BE of 5.9 per cent.

The gross and net market borrowings through dated securities during FY25 are estimated at ₹14.13-lakh crore (about ₹1.30-lakh crore lower vis-à-vis FY24) and  ₹11.75-lakh crore (about ₹5,275 crore lower), respectively.

“A lower fiscal deficit percentage implies that the government is borrowing less relative to its GDP. This can positively impact investor confidence, as it signals responsible fiscal management.

“Reduced borrowing requirements mean less pressure on the financial markets. When the government borrows less, it decreases the overall demand for funds in the market, potentially leading to lower interest rates,” said Venkatakrishnan Srinivasan, Founder and Managing Partner, Rockfort Fincap LLP.

Also, when investor demand exceeds government bond supply, the yields tend to cool down, he added.

Sitharaman, in her interim budget speech, emphasised that now that private investments are happening at scale, the lower borrowings by the Central Government will facilitate a larger availability of credit for the private sector.

Ajay Manglunia, MD and Head, Investment Grade Group, JM Financial, observed that lower government borrowing implies a lesser supply of G-Secs, which will ease the pressure on yields. Further, expected demand from foreign investors due to the inclusion of G-Secs in JP Morgan’s Government Bond Index-Emerging Markets (GBI-EM) will fuel a rally in G-Secs.

Manglunia estimated that the government’s cost of borrowing could be 30-50 basis points lower in FY25 compared to FY24. If G-Sec yields thaw, corporate bond yields too will come down proportionately, helping India Inc. raise funds at a lower cost.

2024: Good year for bonds

Sandeep Yadav, Head, Fixed Income, DSP Mutual Fund, opined that an increasing demand and a decreasing supply make 2024 a good year for bonds.

“We expect the RBI to sell bonds to buffer the sharp fall in yields. However, even then, the yield fall should be significant,” he said.

V Rama Chandra Reddy, Head-Treasury, Karur Vysya Bank, underscored that the interim Budget is prudent in setting the fiscal deficit at 5.1 per cent, which is a big positive for the bond market.

“The outcome is non-inflationary, which supports early easing by the RBI. The Budget has provided a positive outlook and a kicker for the bond market.

“Going ahead, accelerated FPI inflows and spending by the Government will ease the domestic liquidity conditions... As a precursor to rate cuts, the RBI is expected to push the stance to neutral,” he said.

Reddy observed that it’s a goldilocks for the bond market and time to play with duration, with the 10-year yield likely to dip to 6.80 per cent levels in the first half of this calendar year.

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