Budget 2024: Aggressive Fiscal Deficit Target With Bond Index Inclusion To Ease Yields

With the government's aggressive fiscal deficit target in the upcoming budget along with higher foreign inflows, bond market participants foresee yields in government securities tapering off.

Economists have pegged the fiscal deficit target for FY25 at 5.3%, and expect it not to be a challenge to achieve its current target of 5.9%.

The market borrowings for the current fiscal could be slightly lower than that current borrowing of Rs 15.4 trillion, Kaushik Das, managing director and chief economist-India and South Asia, Deutsche Bank AG told NDTV Profit in an interview. "Even after factoring in the redemptions, net market borrowings could be lower than Rs 15.4 million market borrowing we saw last year."

It is expected that the government will continue to focus on fiscal deficit consolidation despite the Lok Sabha election pressure, said Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP. "This could lead to expectations of decreased government borrowing, potentially impacting interest rates and market dynamics."

Reduced government market borrowing tends to create a positive impact on bonds in the medium term, Srinivasan said. With lower supply combined with additional sources of demand from the inclusion of India’s government bonds in the JPMorgan Bond Index, bond prices may rise leading to potential yield compression, Srinivasan said.

As of Jan. 25, the yield for the 10-year G-Sec was at 7.18%. The Finance Minister Nirmala Sitharaman will present the interim budget on Feb. 1.

Foreign investors have been increasingly gaining a portion of the government securities. In the last two months of 2023, FIIs have invested Rs 33,162 crore in government securities. So far in January, FIIs have mopped up debt securities worth Rs 17,120 crore.

The uptick is mainly fuelled by the government bond's inclusion in the JPMorgan Index that is to begin from this June. Earlier this month, Bloomberg Index Services also proposed to include Indian bonds in its emerging market local currency indices starting in September 2024.

However, market reactions can be influenced by various factors, including economic conditions, inflation, crude oil prices, rupee volatility, RBI MPC policy, and higher supply of state government loans, Srinivasan said.

The demand side of those bonds will improve because the offshore communities will be buying these bonds because of this inclusion, Das said.

In the upcoming fiscal, the government will target an aggressive deficit tightening of 5.2-5.3%, according to Abhay Garg, vice president, PNB Gilts. "This should be in line with their medium-term target of meeting 4.5% by FY26."

"Government borrowing will be similar to that of the last few years and with fiscal consolidation, we might not see any upward movement in gross borrowing," Garg said.

With huge FII inflows and demand from long-term domestic investors, the bond market could stand to benefit. "Given the solid macro stability, I think there will be a good case for the yield to move lower," he said.