Indian bond yields may soften post marginal cut in gross govt borrowing, fiscal deficit

Bonds

Yield on the Indian bonds is expected to soften in the coming months after the marginal reduction in the government market borrowing and lower fiscal deficit numbers, experts said.

Currently, yield on the 10-year benchmark bond 7.10 percent 2024, is trading at 6.9666 percent, which was almost flat as compared to open at 6.9662 percent today, and 6.9663 percent at close on the previous trading session.

“With borrowing program lowered marginally and walking the fiscal consolidation glide path is encouraging from debt markets standpoint as it raises the prospects of softer bond yields,” said Achala Jethmalani, Economist at RBL Bank.

Anurag Mittal, Head of Fixed Income of UTI AMC, expects 10-year Government bond benchmark to trade in a range of 6.90-7.05 percent in the near term.

Finance Minister Nirmala Sitharaman in a speech presenting the full Budget for 2024-25, said the Centre marginally cut the gross borrowing target from the markets in 2024-25 to Rs 14.01 lakh crore to finance its fiscal deficit of 4.9 percent of the GDP.

This is Rs 1.4 lakh-crore lower compared to the estimate of Rs 15.43 lakh crore for FY24.

In percentage terms, the Centre's gross borrowing is 8.4 percent lower than the FY24 figure, while for net borrowing the reduction is a much lower 0.4 percent compared to the previous fiscal's figure.

The sharply lower gross borrowing figure for FY25 is a result of the central government's focus on aggressive consolidation as it looks to meet a sharply lower fiscal deficit target.

The borrowing number is key since the central government finances its fiscal deficit mainly through issuing dated securities.

On the other, the government also reduced the fiscal deficit target to 4.9 percent of the GDP for 2024-25, from the target of 5.1 percent pegged in the interim Budget.

It was already a huge 70 basis points (Bps) less than the previous fiscal’s revised estimate of 5.8 percent. One basis point is a hundredth of a percentage point.

Further, the Finance Minister set the fiscal deficit target even lower at 4.5 percent for the next financial year 2025-26.

Zarin Daruwala, CEO, India and South Asia, Standard Chartered Bank, said lower fiscal deficit will result in lower Government borrowing, and coupled with index inclusion flows, will reduce interest rates across the economy.