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Government bond yields slumped to a six-month low on the back of a lower than expected fiscal deficit target set by Finance Minister Nirmala Sitharaman for 2024-25 during her interim Budget speech on Thursday. The government has pegged the fiscal deficit target at 5.1 per cent of the gross domestic product, against market expectations of 5.3-5.4 per cent.
The fiscal deficit target for FY25 translated into lower gross market borrowing. The government aims to borrow Rs 14.13 trillion, against the current financial year’s gross borrowing estimate of Rs 15.43 trillion. The net borrowing for the next financial year, starting April 1, is pegged at Rs 11.75 trillion. “Both will be less than that in 2023-24,” Sitharaman said.
The yield on the benchmark 10-year government bond settled 8 basis points lower at 7.06 per cent, against 7.14 per cent on Wednesday. The benchmark yield fell up to 7.04 per cent during the day. Prior to Thursday, the yield was last recorded at 7.06 per cent on July 18, 2023.
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“For meeting the investment needs our government will prepare the financial sector in terms of size, capacity, skills and regulatory framework,” Sitharaman added.
Market participants said that the lower borrowing for the financial year will give room to the Reserve Bank of India (RBI) to ease the monetary policy.
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“If fiscal conservatism is shown, there is room for easing monetary policy,” said Vikas Goel, managing director and chief executive officer at PNB Gilts. “The yields are headed lower. If it falls below the 7.05 per cent yield level (benchmark bond), the next resistance will be around 7 per cent. In the near term, the yield might fall to 6.94 per cent, from where it may bounce back,” he added.
Market participants said that the benchmark yield might trade between 7 per cent and 7.08 per cent ahead of the Monetary Policy Committee outcome scheduled on February 8.
“The Budget is prudent in setting a fiscal deficit of 5.1 per cent, which is a big positive for the bond market, and the outcome is non-inflationary, supporting the early easing by RBI,” said V R C Reddy, head of treasury at Karur Vysya Bank.
“Going ahead, accelerated FPI (foreign portfolio investment) inflows and spending by the government will ease the domestic liquidity conditions. RBI is likely to change the stance to neutral in April, which will be a precursor to rate cuts. It’s Goldilocks for the bond market and a time to play with duration. We may see the yields falling to 6.80 per cent levels in the first half of this calendar year,” Reddy said.
The banking system liquidity has remained in deficit mode for the past four months. Consequently, the gains on the shorter tenure bonds were limited as compared to longer tenure bonds. The liquidity deficit widened to Rs 2.29 trillion on Wednesday.
