Budget 2024: Bond market focus fixated on government’s fiscal discipline commitment, borrowing plan

The Union Budget 2024 will be an interim budget, and hence, is widely expected to lack any major policy announcements or big-bang reforms ahead of the general elections. However, the street expects Finance Minister Nirmala Sitharaman to commit to the path of fiscal consolidation.

The government is expected to achieve its fiscal deficit target of 5.9% in FY24. Amid the steady growth of the Indian economy, it is further expected to reduce the fiscal deficit target by around 50 bps for FY25, thus targeting it at the 5.4% to 5.5% range.

The bond market traders keenly watch the government’s fiscal deficit target and market borrowing plans in the Union Budget for directional cues. The trajectory of Indian government bond yields will be influenced by the Budget targets and the upcoming US Federal Reserve policy meeting.

Also Read: Budget 2024: FY25 fiscal deficit likely to be estimated at 5.5% of GDP, say economists

“Government’s commitment to fiscal consolidation will be in focus for fixed income investors. Since the government has committed to target a 4.5% fiscal deficit by FY26, the bond market will be keenly looking at consolidation from 5.9% in FY24. The continuation of capex expenditure will be keenly observed. The government has focused on raising capex spending and market participants will look at the government to continue the same,” said Anurag Mittal, Head of Fixed Income, UTI AMC.

Besides, credible revenue, expenditure assumptions and market borrowing will also be in focus.

On Monday, Indian government bond yields were flat, with the benchmark 10-year yield trading around 7.1757%, following its previous close at 7.1760%.

Indian bond yields eased marginally after benchmark bonds saw strong demand at the last auction ahead of the union budget on February 1.

Mittal believes a fiscal deficit between 5.3-5.5% with a net market borrowing of ₹11.5-11.8 lakh crore could be taken positively by the bond market.

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Economists expect the government to meet its gross borrowing target of ₹15.4 lakh crore and net borrowing target of ₹11.8 lakh crore in FY24. They expect the government’s borrowings from the bond market in FY25 to be marginally higher. 

“Despite better than expected revenue collections, the government will maintain the target, on account of higher than anticipated spending and due to a shortfall on the part of disinvestment receipts. In FY25, even as revenue collections are expected to come off a high base, net borrowing is estimated to increase only marginally to ₹12-12.5 lakh crore. Along with repayments of ₹3.7 lakh crore, this implies a gross borrowing of around ₹15.7-16.2 lakh crore,” said Sonal Badhan, Economist at Bank of Baroda.

Soumya Kanti Ghosh, Group Chief Economic Adviser at State Bank of India believes in FY25 net market borrowing of the Centre to be around ₹11.7 lakh crore and with repayments of ₹3.6 lakh crore, gross borrowing is expected at ₹15.3 lakh crore.

Also Read: Cut deficit to 5.4% in FY25: Ind body to govt

Meanwhile, next year the government will also have access to more FPI due to the inclusion of Indian bonds in the JP Morgan Global Bonds Index. From June 2024 onwards, 23 sovereign Indian bonds will be included in the index. 

“Till March 2025, this is expected to bring additional inflows to the tune of ₹1.7-2.6 lakh crore. In case inflows are towards the higher end of the bracket then overall gross and net borrowing targets may be reduced for FY25,” said Badhan.

The government's strategic reduction in market borrowing, coupled with escalating demand from long-term investors such as pension and insurance companies, has significantly tilted the demand-supply equilibrium favorably towards government bonds. Further, the anticipated inclusion of India in global bond indices is poised to further boost the demand for Government Securities (GSec). This is anticipated to bring down bond yields and propel bond prices higher.

Read Budget 2024 Expectations Live Updates here

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