Budget 2023: Government bond yield set to trend towards 7%, say experts

The yield on the benchmark government bond is likely to ease in the coming months with uncertainty over domestic conditions lifting and lower-than-expected borrowing numbers announced in the Union Budget, experts said.

The yield on the 7.26 percent 2032 paper may range from 7.10 percent to 7.30 percent in the months ahead, they said.

“I expect the 10-year benchmark yield range to drift lower to 7.10-7.20 percent. The yield will slowly trend towards 7 percent in the coming two-three months,” said Sandeep Bagla, chief executive officer of Trust Mutual Fund.

“Budget is behind us, giving us clarity on the borrowing. Headline inflation is declining and the rate hike cycle has come to an end. Hence, we feel that over a period of six months to one year, yields will decline,” said Marzban Irani, chief investment officer – of debt, LIC Mutual Fund.

Bagla said demand from insurance companies, banks, foreign institutional investors, and the Employees’ Provident Fund Organisation will be fairly strong at the longer end of the bond curve. Further, expectations that most central banks, including the Reserve Bank of India, will ease rate increases will keep bond yields benign.

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“The steepness at the short term (bond yield) will continue, but I see it cooling off now,” Bagla said.

The yield on the 10-year government bonds has eased more than 10 basis points to 7.28 percent since the budget on February 1. This can be attributed to lower-than-expected borrowing numbers through bonds announced by the government for the next financial year.

“To finance the fiscal deficit in 2023-24, the net market borrowings from dated securities are estimated at Rs 11.8 lakh crore,” finance minister Nirmala Sitharaman said in her budget speech. “The balance financing is expected to come from small savings and other sources. The gross market borrowings are estimated at Rs 15.4 lakh crore.”

The fiscal deficit for FY24 is estimated at 5.9 percent of the gross domestic product. The Centre gross borrowings for FY24 are about 3.2 percent higher than the budget estimate for FY23.

The increase in gross borrowings was partly necessitated because the Centre has bonds worth Rs 4.4 lakh crore maturing in FY24, according to RBI data as of January 30. This is 41 percent higher than the redemptions in FY23.

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“Market was prepared for Rs 12 lakh crore borrowing. With Rs 11.8 lakh crore net numbers, the market has indicated its acceptance with yields declining from 7.40 percent to 7.30 percent,” Irani said.

He expects about 60 percent of the borrowings to be announced in the first half of the FY24 starting on April 1. This amounts to Rs 30,000-35,000 crore weekly, which is more or less similar to last year’s figures.

According to the Economic Survey for FY23, the monthly average yield on the 10-year government bond stood at 7.3 percent in December 2022, after having peaked at 7.5 percent in June 2022.

Yields moderated in November and December following smaller rate hikes by major central banks and declining inflation. With the softening of yields, volatility also eased in the second half of 2022.

Yields rose in 2022 due to higher borrowing figures announced by the government in the previous budget and aggressive rate hikes by central banks across the globe, including the RBI.

The RBI has increased the repo rate by 225 bps since May 2022 to 6.25 percent to curb inflation.