The bond market has expressed enthusiasm over the Interim Budget for 2024-25, as the government unveiled a borrowing program smaller than the market’s most optimistic estimates. The Budget’s fiscal restraint and the anticipation of demand for bonds exceeding supply next year, driven by India’s inclusion in global bond indices, contributed to positive sentiments in the bond market.
The Centre’s gross borrowing target for dated securities in 2024-25 is Rs 14.13 lakh crore, a reduction from the current fiscal year’s Rs 15.43 lakh crore Bond traders celebrated the news, making the Budget day the best day for government bonds since May as yields dropped 8 percent.
The reduction in the gross borrowing target was seen as a move that could make the upcoming fiscal year’s borrowing program more manageable. The positive sentiment was reinforced by the government’s record-high gross bond issuances in the current fiscal year, which were completed smoothly.
Additionally, the anticipation of India’s inclusion in JP Morgan’s Emerging Markets Index, with potential inflows of up to $30 billion during 2024-25, further eased concerns in the bond market. Foreign portfolio investors bought Indian gilts worth 189 billion rupees in January alone, marking a record.
Traders gung-ho
The Budget’s fiscal discipline, particularly its aim to shrink the fiscal deficit to 5.1% of GDP in 2024-25, resonated well with bond traders. The government’s decision to hold back from populist measures ahead of the upcoming General Elections was viewed as a positive signal for foreign investors.
Analysts also noted the disinflationary implications of the fiscal tightening, prompting speculation about potential rate cuts by the Reserve Bank of India (RBI) in the first half of the calendar year. While the RBI has maintained a hawkish tone, the absence of a fiscal blowout this year may provide the Monetary Policy Committee with room to loosen policy later in the year, according to experts.
Bond traders are closely watching the RBI’s upcoming monetary policy review, with expectations that the tone of the outcome will influence market movements. The reduction in the gross borrowing target was particularly well-received, as it sets a positive tone for government bond auctions. However, some caution remains as the net borrowing figure and GST compensation details caused confusion in the market, with analysts highlighting the need for continued momentum and potential stance changes in future monetary policy reviews.
