Bonds in India Rally as Modi Surprises With Lower Borrowings

(Bloomberg) --

Indian bonds rallied, with the benchmark 10-year yield falling by the most in nine months, after the government announced a lower-than-expected borrowing program.

Prime Minister Narendra Modi’s administration plans to sell bonds worth 14.13 trillion rupees ($170 billion) in the fiscal year starting April 1, Finance Minister Nirmala Sitharaman said in her budget speech on Thursday. That’s lower than the 15.2 trillion rupees estimated in a Bloomberg survey. 

Bonds also got a boost from a fiscally prudent budget, with borrowings being reduced for the first year in three. The rally extends the best January gain in five years for Indian sovereign bonds that was fueled by foreign inflows ahead of the global index inclusion from June. 

“The lower fiscal deficit is certainly good news for the bond market with the cherry on top being gross borrowing way lower than the current year, paving the way for further lower drift in yields,” said Naveen Singh, head of trading at ICICI Securities Primary Dealership. “This fiscal consolidation would provide enough comfort to RBI to change their stance.”

The net borrowings, adjusted for maturities, are planned at 11.75 trillion rupees for the next fiscal year, Sitharaman said in her last budget speech before elections. 

The yield on the benchmark 10-year bond fell by nine basis points, the most since May 2023, to close at 7.06%, while that on the 14-year notes fell by 11 basis points.  

Corporate bonds also rallied, with the average yield on top-rated three-year corporate bonds falling by 10-12 basis points, according to traders. 

READ: Modi Shuns Populist Budget as Focus Stays on Infrastructure 

Foreigners have plowed more than 500 billion rupees 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.   

“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 bond may drift down to 6.90%-6.95% by June, he said. 

(Updates with 10-year yields in the sixth paragraph)

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