Budget 2024: Bonds rally, yields drop after FM Sitharaman announces lower than expected govt borrowings, fiscal deficit

Indian government bonds rallied on Thursday, with the benchmark 10-year yield falling by the most in more than a year, after the Finance Minister announced a lower-than-expected fiscal deficit target and borrowing program in the Interim Budget 2024.

The yield on the benchmark 10-year bond fell as much as 9 basis points to 7.05%, while that on 14-year notes fell by 12 basis points. 

The government plans to sell bonds worth ₹14.13 lakh crore in the FY25 as compared with ₹15.43 lakh crore for the current fiscal, FM Sitharaman announced in her budget speech. This amount is lower than the ₹15.2 lakh crore estimated in a Bloomberg survey. 

Read Budget 2024 Key Highlights here

Net borrowings are pegged at ₹11.75 lakh crore for the next financial year, largely unchanged as compared to the current financial year.

Bonds prices also were boosted from a lower government’s fiscal deficit target at 5.1% of gross domestic product (GDP) in FY25 as against an estimate of 5.3% in the survey. 

Analysts believe FY25 market borrowing looks manageable on the back of reduced gross borrowing numbers and added comfort from potential foreign flows with inclusion in the JP Morgan Emerging Market Bond Index.

“This is a judicious interim budget. The degree of fiscal consolidation with a target of 5.1% in FY25 is more than anticipated and is positive for softening of bond yields. Further the reiteration of the fiscal target for FY26 gives the bond market medium term visibility. The consolidation impacts expenditure including capex by the government,” said Vetri Subramanian, Chief Investment Officer, UTI AMC.

Read here: Budget 2024: Government sets FY25 fiscal deficit target at 5.1% of GDP

The government also plans to conduct switch auctions worth ₹1 lakh crore during the year to swap bonds expiring in the near term with longer-tenor securities, according to budget documents.

“The union budget has further boosted Indian debt market outlook given the impending global bond index inclusion. Lower than anticipated fiscal deficit and gross borrowing puts debt market in sweet spot besides making the proposition attractive for banks specially PSUs,” said Pankaj Pandey, Head of Retail Research, ICICI Direct.

Foreign investors have plowed more than ₹50,000 crore into index-eligible debt since JPMorgan Chase & Co’s inclusion announcement in September. Still, foreigners own just 2% of India’s sovereign debt market, leaving ample scope for new buyers, Bloomberg reported.

“We are in a better position to see a whole year of benign yields scenario irrespective of how the global bonds are behaving,” said Abhisek Bahinipati, fixed-income trading head at Mirae Asset Capital Markets India. The yields on 10-year bonds may drift down to 6.90%-6.95% by June, he said.

Read Budget 2024 LIVE Updates here

(With inputs from Bloomberg)

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