Yield on the 10-year benchmark government bond fell as much as 10 basis points from the previous close to a low of 7.04%, its lowest intraday level since June 19, 2023, Bloomberg data showed. The bond closed at a 7.06% yield. Bond prices and yields move inversely. Government bond yields are the benchmarks for pricing corporate debt.
On Thursday, while presenting the interim Budget for FY25, Finance Minister Nirmala Sitharaman announced gross market borrowing of Rs 14.13 lakh crore, lower than market expectations of around Rs 15.3 lakh crore. The Centre pegged the fiscal deficit target for the next fiscal year at a lower-than-expected 5.1% of GDP, sharply down from 5.8% this year.
“This immediately led to a rally of 7-10 bps in long-end G-Secs. Further, during this calendar year we expect FPIs to invest US$30-35 billion in G-secs on account of India’s inclusion in global bond indices, thus reducing the overall cost of government borrowing,” said Kaku Nakhate, India Country Executive, Bank of America.
While the lower-than-expected fiscal deficit projection contributed to the declining borrowing numbers, the gross borrowing estimate for next year was much lower than it would have been had the government not utilised funds in the goods and services tax (GST) compensation fund.
“The Centre has reduced the redemption by Rs 1.24 lakh crore by using revenue from the GST cess account. In FY25 there are no GST loan-related bonds maturing – however the Centre has used Rs 1.24 lakh crore to reduce its overall G-sec redemptions,” said Gaura Sengupta, economist, IDFC First Bank.During the pandemic, the Centre had provided loans to states to make up for a shortfall in GST compensation cess collections. The Centre had raised the funds for the loans through the issuance of special bonds. The proceeds from the cess account were used for repayment of the portion of those bonds maturing in FY24, Sengupta said.“Repayment in RE (Revised Estimate) 2023-24 and BE (Budget Estimate) 2024-25 is net of recovery of Rs 78,104 crore and Rs 1,23,604 crore, respectively from GST Compensation Fund,” the Budget documents read.
Gross market borrowing in the current fiscal year is projected at Rs 15.43 lakh crore and net borrowing at Rs 11.80 lakh crore. Net borrowing for the next year is projected at Rs 11.75 lakh crore.
“Obviously it is leading to a rally. The curve is flattening because long-term g-sec supply is coming down,” said Shailendra Jhingan, MD, CEO of ICICI Securities Primary Dealership.
“If the RBI shifts to a neutral stance at its policy, the 10-year bond yield could fall to 6.80-6.90%; otherwise, I think 7% is the floor,” he said.
With the government bringing down its gross bond supply, demand for sovereign debt is seen receiving more of a boost in FY25 amid inflows from foreign funds due to the inclusion of Indian debt in a JP Morgan index.
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