Budget offers lower borrowing plan, 10-year bonds suffer 8-month steepest fall of 8bps

Railway stocks fell, possibly on account of concerns over the implementation and impact of announced projects.

India's 10-year bond yield fell 8 basis points, making its steepest fall in the last eight months, after the government surprised with a lower-than-expected borrowing programme in its Union Budget for FY25.

The 10-year bond yield ended at 7.07 percent, down 8 basis points, its maximum fall since May 3, 2023, from its previous close of 7.14 percent.

The government announced Rs 14.13 trillion in the fiscal year starting April 1. A Moneycontrol poll estimated around Rs 15-16 lakh crore for the fiscal year 2024-25, with net borrowing estimated at Rs 11.50-11.75 lakh crore. The net borrowings, adjusted for maturities, are planned at Rs 11.75 trillion for the next fiscal year, according to Finance Minster Nirmala Sitharaman.

Analysts said the borrowing programme is lower than expected as India prepares for big foreign inflows on global index inclusions. In FY24, the Centre declared the gross market borrowing at Rs 15.43 lakh crore, marking an 8.6 percent increase from the borrowing in 2022-23.

"While the net borrowings for FY25 are in line with our expectations, lower-than-expected gross borrowings possibly could be attributed to the government utilising its surplus from the GST compensation fund (a public fund) to pay off their debt for FY25 to RBI or market participants, leading to a difference of Rs 1.24 trillion between actual total redemption and the (lower) market loan redemption taken in the budget.

The FY25BE net market borrowing will be 69.7 percent of total fiscal funding as against 68 percent in FY24RE," said Madhvi Arora, lead economist with Emaky Global.

Bonds also got a boost from the government's announcement to cut the fiscal deficit target. The government reduced the fiscal deficit target at 5.1 percent of GDP for FY25. It revised down the fiscal deficit target for FY24 to 5.8 percent from 5.9 percent of the GDP.

"The higher-than-expected capex and lower-than-projected fiscal deficit suggest that the quality of expenditure is going to be healthier than what we had pencilled in both in FY2024 and FY2025. Faster fiscal consolidation and a dip in borrowings will help to cool yields further over the coming year, if the estimates for revenue and capital receipts appear credible as the year progresses," said Aditi Nayar, chief economist and head of research and outreach at ICRA.

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