Govt Bond Yields Fall As Centre Borrows Less Than Expected; Know Bond Market Outlook

Indian government bond yields ended the week and also the financial year on a lower note as government borrowing plans for the first half of FY25 were much lower than estimated. The Reserve Bank of India (RBI) announced on March 27, 2024, that the Centre would borrow Rs 7.5 lakh crore through bonds in the first six months of FY25, much lower than previous estimates, which improved investor sentiments. The benchmark 10-year bond yield, IN071833G=CC, closed at 7.05%, lower than the previous week's close of 7.09 per cent. The yield dipped 26 basis points (bps) this fiscal year after it rose 118 bps over the past three years.

Continuing its downward dip, the benchmark bond yield posted its fifth consecutive monthly fall, dropping by 30 bps in the November-March period. Meanwhile, 17 state governments collectively announced auctions of securities worth Rs 16,100 crore via the Core Banking Solution (E-Kuber) system on April 2, 2024. Also, the Centre will borrow 3.21 trillion rupees via the sale of Treasury bills in April-June, which is also below market expectations, Reuters reported.

Treasury And Bond Yields

The indicative yield for T-bills stands at 7.01 per cent, 7.14 per cent, and 7.07 per cent for three-month, six-month, and 364-day durations, respectively. In the 1-2 year tenure, the 6.90% OIL MKTG COS GOI SB 2026 show a yield of 7.4 per cent.

Moving on to longer tenures, the 7.37% GS 2028 (4-5 year tenure) and the 7.18% GS 2033 (9-10 year range) both show yields of 7.04 per cent. Further State-owned Indian Renewable Energy Development Agency Ltd (IREDA) has approved a borrowing proposal of Rs 24,200 crore for the fiscal year 2024-25. The borrowing includes fundraising through bonds, perpetual debt instruments (PDI), term loans, commercial papers, and external commercial borrowings (ECB), a regulatory filing said.

Bond Market Outlook

Foreign Portfolio Investors (FPIs) have taken a u-turn in capital flow this fiscal year by injecting Rs 1.2 lakh crore into the debt market, following a withdrawal of Rs 8,938 crore in FY23. in the previous fiscal. This is due to attractive yields on Indian sovereign debt relative to US treasury bonds, coupled with India's favourable macroeconomic indicators. Further, the upcoming inclusion of Indian bonds in JP Morgan's index is also a major factor.

 Nitin Raheja, Executive Director, Julius Baer India, said that the expected global tapering in policy rates should further enhance this appeal of Indian bond yields to investors. The impending inclusion of Indian government bonds in JP Morgan's index is expected to attract USD 20 to 40 billion in the next 2 years attract substantial foreign investment, potentially strengthen the rupee and thereby bolster the economy, experts say.

Suyash Choudhary, Head – Fixed Income, Bandhan AMC said, "The demand versus supply environment seems very favourable for government bonds, against a backdrop of a solid local macro-economic setting and a (hoped for) imminent turn in the global rate cycle. We reiterate that the number one risk fixed income investors face currently is reinvestment risk: the risk that maturing investments over the next few years may have to be reinvested at substantially lower yields."

The upcoming RBI monetary policy next week will provide further cues to the market.