Despite India’s robust economic growth exceeding 8% year-over-year for the past three fiscal years and a substantial government fiscal deficit at 9% of GDP, bond yields remain surprisingly low. A recent Goldman Sachs said that changes in household savings behavior are a significant factor in maintaining these low yields.
The report said that the yield curve is currently the flattest it has been in the last decade. This unusual situation arises even as the Indian government continues substantial borrowing. “The primary driver behind the compression of term premiums is a marked shift in household savings towards long-duration products like retirement and insurance plans,” the report states.
According to Goldman Sachs, this shift has led to increased demand for Indian Government Bonds (IGBs), particularly those with longer tenors. “Insurance companies, for instance, have raised their investments in bonds with maturities over 20 years from 23% pre-pandemic to 37% now,” it said.
This increased demand from long-term investors has resulted in the lowest 10s30s slope in the past ten years. The report highlighted that “the sensitivity of the 10s30s slope to IGB ownership by long-term investors has significantly increased post-pandemic.” This regulatory-driven demand is exerting downward pressure on long-term yields, a trend expected to continue.
Despite this, the 2s10s slope remains at multi-year lows but is projected to increase as the Reserve Bank of India (RBI) embarks on an anticipated shallow easing cycle before year-end. “We expect the 2s10s slope to rise as the RBI begins to ease rates,” Goldman Sachs predicts.
Fiscal consolidation
Looking forward, the central government’s commitment to fiscal consolidation, targeting a fiscal deficit of less than 4.5% of GDP by FY26, is expected to further influence the yield landscape. “The decline in the pace of IGB issuance over the next two years should continue to put downward pressure on yields,” the report asserts.
However, regulatory requirements will likely ensure that compressed spreads do not deter investments in long-duration bonds. “We may even see a negative 10s30s slope,” the report anticipates.
Goldman Sachs also pointed to India’s infrastructure needs as a potential future driver of bond demand. “As the government consolidates its fiscal position, long-duration savings can be redirected towards infrastructure assets,” the report suggests. Incentives could encourage the quasi-government and corporate bond markets to issue more long-dated bonds.
With macro-economic stability and strategic fiscal policies, this trend is expected to persist, aligning with India’s broader economic growth goals.
