The bond market expressed enthusiasm for the Interim Budget for 2024-25, as the government presented a borrowing program smaller than the market’s most optimistic estimates. The fiscal moderation of the Budget and the prospect 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 Budget day the best day for government bonds since May when yields fell. 8 percent.
The reduction in the gross borrowing target was seen as a move that could make next fiscal year’s borrowing program more manageable. The positive sentiment was boosted by the government’s record-high gross bonds in the current fiscal year, which ended smoothly.
Additionally, the prospect 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 target to reduce the fiscal deficit to 5.1% of GDP in 2024-25, resonated well with bond traders. The government’s decision to refrain from populist measures ahead of the next General Elections was seen as a positive signal for foreign investors.
Analysts also noted the disinflationary implications of the fiscal tightening, prompting speculation about possible 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 burst this year may provide the Monetary Policy Committee 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 sustained momentum and possible stance changes in future monetary policy reviews.