Govt bond yields dip to 6-month low
Fiscal deficit target lower than expected; room for RBI to cut rates
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 ~14.13 trillion, against the current financial year’s gross borrowing estimate of ~15.43 trillion. The net borrowing for the next financial year, starting April 1, is pegged at ~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.
“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.
“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 noninflationary, 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 ~2.29 trillion on Wednesday.
Banks likely to see trading gains in Q4
Commercial banks are likely to post heavy trading profits in the Januarymarch period after a lacklustre third quarter, as government bond yields fell in response to a lower than expected fiscal deficit target for FY25 announced in the interim Budget, translating into lower market borrowing.
“The fall in bond yields will lead to some treasury gains in the fourth quarter. However, in order for it to have a significant impact, the move should be followed by a rate cut,” said an analyst who did not wish to be named.
The yield on the benchmark 10-year government bond declined by 12 basis points (bps) this year, from 7.174 per cent in December 2023 to 7.058 per cent on February 1, 2024. The benchmark yield fell up to 7.04 per cent during the day.
“The government’s borrowing plan for FY25 has decreased to ~14.1 trillion, as compared to ~15.1 trillion in FY24. This reduction is expected to enable banks to lend more next year due to improvement in overall liquidity,” said Sunny Agrawal, head of fundamental equity research, SBI Securities Ltd.
“Furthermore, it will lead to an increase in the value of government bonds, which would result in extra profits for state-owned banks. As the PSU (public sector undertaking) banks already have a position in the bond, it will incur MTM (mark to market) gain on the investment book,” Agrawal said.
MARKET PARTICIPANTS SAID THAT BENCHMARK YIELD MAY STAY BETWEEN 7% AND 7.08 % AHEAD
OF THE MONETARY POLICY COMMITTEE OUTCOME SCHEDULED ON FEB 8