The Indian rupee appreciated, while government bond yields collapsed after Finance Minister Nirmala Sitharaman set lower-than-expected fiscal deficit and gross borrowing targets for the next financial year in the Interim Budget 2024.
The rupee appreciated 14 paise to 82.82 against the US dollar in early trade on Friday supported by gains in its Asian peers and positive domestic equities, as the interim budget focused on higher capex and faster fiscal consolidation.
Meanwhile, the Indian government bond yields extended their decline, tracking moves in US Treasury yields, a day after the interim budget triggered aggressive debt purchases on the back of lower borrowing and deficit targets.
India’s benchmark 10-year yield was around 7.0265% as against its previous close at 7.0583%, which was the lowest since July 18. The yield logged its biggest single-session fall on Thursday since May 3.
As per the Budget announcements, the government aims to reduce its fiscal deficit to 5.1% of gross domestic product (GDP) in FY25, from a downwardly revised 5.8% for this financial year.
The government aims gross borrowing of ₹14.13 lakh, against expectations of ₹15.60 lakh crore.
Analysts believe rupee to appreciate further and bond yields to extend decline on increased expectations of a credit rating upgrade as fiscal consolidation and lower borrowing costs suggest an improvement in the fiscal profile.
“The bond market should find significant comfort in the FY 2025 fiscal deficit number of 5.1%, which is lower than market expectations of 5.3-5.4%. Additionally, Indian bonds may attract around ₹2 trillion alone from passive FPI inflows due to their inclusion in global bond indices,” said Jitendra Gohil, Chief Investment Strategist, Kotak Alternate Asset Managers Limited.
Rupee extended gains on Friday after it appreciated to its highest level in two weeks on February 1 amid decline in the dollar.
Ajay Kedia, Director of Kedia Advisory expects the rupee to strengthen going forward amid a drop in US treasury yields and positive sentiment after the presentation of the interim budget.
“The local unit is likely to hold its gains amid weakness in the dollar and decline in US treasury yields. USDINR may get support at 82.60, while resistance is placed at 83.24,” Kedia said.
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Investors will now keep a keen eye on the US non-farm payrolls data, due later on Friday.
“Forecast of increase in unemployment rate and moderation in the US job creation would hurt the dollar. Additionally, strong flow of funds to the domestic bond market and softer oil prices would also support the rupee to trade higher. USDINR Feb is likely to dip further towards 82.80, as long as it trades under 83.15,” ICICI Direct said.
Murthy Nagarajan, Head-Fixed Income, Tata Asset Management believes this is an anti-inflationary budget in an election year as the fiscal deficit target is reduced from 5.8% to 5.1%. He is of the view that the finance ministry is clearly aiming for rating upgrade with aggressive fiscal deficit reduction target as we are at investment grade rating.
“The ten-year bond yields have come down to around 7.05 to 7.08 levels from 7.15 levels. Further drop in yields is expected due to flows from foreign institutional investors and expectation of India’s rating upgrade,” said Nagarajan.
Also Read: Budget 2024: Govt's lower fiscal deficit target a boost to investor confidence, say experts
Amit Goel, Co-Founder and Chief Global Strategist at Pace 360 said that the budget was a complete game-changer for the long-term Indian bond market.
“With India's fiscal deficit set to go down to 4.5% of GDP by 2026, India will be one of the most sustainable fiscal stories among EMs. Even the US has a fiscal deficit of more than 6% and is on a completely unsustainable path. This along with India’s inclusion in global bond indices is a complete game changer for long maturity Indian government bonds,” said Goel.
He expects Indian 10-year yields to come down to 6.5% by year-end, which according to him will be a big positive for PSU Banks and the Indian corporate sector.
B. Prasanna, the head of treasury for ICICI Bank also expects the benchmark yield to hit 6.75% in the next few months, as the unexpected cut in borrowing has turned demand-supply dynamics favourable.
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