The Indian government bond yields remained largely unchanged during the week. Investors are eagerly anticipating more cues from the upcoming Union budget next week, during which the focus will primarily be on the fiscal deficit and market borrowing figures.
The benchmark 10-year yield ended at 6.96 per cent, down 2 basis points from its previous close. The benchmark 10-year yield was at 6.97 per cent last weekend. In Union Budget 2024-25, Reuters forecasts predict a fiscal deficit target of 5.1 per cent of GDP and gross borrowing at 14.13 trillion rupees.
Economic Times cited some market experts who think that the government could reduce borrowing by about 500 billion rupees due to strong revenue and a record surplus transfer from the central bank. Also, The 10-year U.S. bond yield was about 4.20 per cent at the weekend as weaker economic data increased expectations that the Federal Reserve will begin lowering interest rates in September.
Meanwhile Centre sold Rs 200 billion worth of the benchmark bond on Friday, which was bought near prevailing rates. Also total FPI investment in Indian bonds since JP Morgan index inclusion crossed USD 1 billion mark and stood at USD 1.12 billion (Rs 9,364 crore) as of July 16.
Treasury And Bond Yields
The indicative yield for T-bills currently stands at 6.73 per cent, 6.84 per cent, and 6.87 per cent for three-month, six-month, and 364-day durations, respectively. In the 1-2 year tenure, 8.33% GOVT.STOCK 2026 indicates a yield of 6.89 per cent.
Moving on to longer tenures, 7.37% GS 2028 (4-5 year tenure) and the 7.10% GS 2034 (9-10 year range) show indicative yields of 6.90 and 6.96 per cent respectively.
Bond Market Outlook
The debt market will focus on the Fiscal Deficit target for FY25 and its trajectory for FY26 in the upcoming budget. In India, food prices, especially vegetable prices, led to a four-month high of 5.08 per cent in headline retail inflation in June, dampening the prospects of an interest rate cut in the upcoming RBI MPC meeting, as the central bank targets around 4 per cent.
Foreign portfolio investors (FPIs) have invested over USD 1.05 billion in index-eligible Indian bonds since June 28, and experts anticipate increased inflows in the coming months due to the softening bias in bond yields. As of July 16, overseas investors held a total of Rs 1.94 trillion worth of bonds via fully accessible route (FAR), with the total FPI investment in Indian bonds since June 28 standing at USD 1.12 billion.
If Indian government bonds get included in the Bloomberg Barclays EM index and FTSE Russell index, it could lead to increased inflows into the Indian bond market and potentially lower government and even corporate bond yields. Also, market expectations indicate a 75 per cent chance of a 25-basis point interest rate cut in the US by September, according to the CME FedWatch Tool.
