By Subhadip Sircar and Malavika Kaur Makol
Indian bond traders overlooked the modest increase in debt supply announced in Saturday’s budget, as hopes for an interest-rate cut this week help the nation’s debt extend gains.
Yields on the 10-year bond fell two basis points to 6.68 per cent on Monday after the government projected a higher-than-expected 14.82 trillion rupees ($171 billion) of debt sales.
The Reserve Bank of India is expected to start cutting interest rates in its Feb 7 policy meeting after keeping borrowing costs unchanged for about two years, according to analysts. That along with hopes that the RBI will continue to buy bonds has supported fixed-income notes.
“On the margin, with fiscal discipline, the rate cut view for this Friday may have been strengthened,” said Suyash Choudhary, head of fixed income at Bandhan AMC Ltd.
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Indian bonds have gained in recent days, driven by the central bank liquidity measures aimed at easing a financial system cash deficit that had climbed to its highest level in more than a decade. Last week, the benchmark 10-year yield fell to its lowest in almost three years after the Reserve Bank of India announced steps to inject about $18 billion into the banking system, including bond purchases.
Borrowings are set to rise as the government expects lower collections from small savers, according to Tata Asset. Net borrowings, adjusted for repayments, are estimated at 11.54 trillion rupees for the year starting April 1, Finance Minister Nirmala Sitharaman announced on Saturday.
“Given the fact that the RBI may continue to buy bonds, from a demand perspective the supply numbers may be easily digested,” said Sakshi Gupta, principal economist at HDFC Bank Ltd. Yields may continue to inch lower, helped by the fact that there may be rate cuts, she added.
Despite the doubling in the government’s debt sales since the pandemic, robust demand from long-term investors, like pension funds and insurance companies, has helped absorb supply.
Foreign interest has also played a role in supporting bonds in the current financial year, following JPMorgan Chase & Co.’s decision to include India in its emerging market debt index. Global funds poured $14.4 billion into index-eligible bonds in 2024.
Still, some foreign demand may slow this year as the impact of President Donald Trump’s trade war on the global economy is complicating the outlook for emerging markets.
For now, “we expect positive momentum to continue, with long-term yields declining further,” said Pankaj Pathak, fixed income fund manager at Quantum Asset. “Bonds are being supported by expectations of a rate cut on Friday.”
