The benchmark 10-year government bond yields surged after the 2024 Lok Sabha election results indicated that the Bharatiya Janata Party (BJP) will be able to form the government with support of its National Democratic Alliance (NDA) alliance partners.
Though the debt markets have recovered from a 9 basis points (bps) yield surge on 10-year government bonds to settle at 7.01 per cent yield on June 7, 2024, several events, such as the upcoming budget session and JP Morgan Bond Index Fund inclusion can impact yields.
Venkatakrishnan Srinivasan, founder of Rockfort Fincap LLP, says: “A decisive mandate in Lok Sabha election results might have lowered yields due to expectations of policy continuity and economic reforms. Conversely, a fragmented mandate could introduce uncertainty, potentially increasing yields The Budget Session will provide clarity on fiscal policies and government borrowing, and influence market sentiment. The US Federal Reserve meeting and anticipated inflows from JP Morgan Bond Index inclusion, alongside the movement in US Treasury yields, will have significant implications for capital flows and yield dynamics.”
So, here are four key events that retail investors should follow, and understand their potential impacts to better navigate the upcoming period by adjusting investment strategies accordingly.
Full-Fledged Budget Session
A full-fledged Budget is expected to be unveiled in July 2024 after the newly elected government comes to power. The budget will outline fiscal policies, spending priorities, and borrowing plans of the newly formed government.
Says Srinivasan: “The focus areas for stakeholders in debt market include fiscal deficit targets and economic reforms. A fiscally prudent budget could support lower bond yields. A budget with high fiscal deficits might increase yields due to concerns about government borrowing and inflation.”
US Federal Reserve Meeting
The next US Federal Reserve meeting is scheduled for June 12, 2024. The Fed’s decisions on interest rates and their economic outlook will influence global liquidity and investor risk appetite.
According to Srinivasan, a dovish US Fed stance signalling rate cuts or maintaining current rates could lead to capital inflows into Indian markets, potentially lowering yields. A hawkish stance might result in outflows, increasing yields.
JP Morgan Bond Index Fund Inflows
The inclusion of Indian government bonds in JP Morgan Government Bond Index – Emerging Markets (GBI-EM) is set to start from June 24, 2024.
The increased global visibility is expected to attract around $25 billion worth passive inflow into Indian debt market. Increased foreign inflows can lead to a reduction in bond yields due to higher demand for Indian debt securities, according to Srinivasan.
Other Factors
On May 29, 2024, S&P Global Ratings revised its outlook on India to positive from stable. S&P’s upgrade of India’s outlook to positive from stable (BBB-/A-3) after 14 years indicates improved economic prospects and fiscal management, which is a positive factor for the bond market, says Srinivasan. This factor will support lower yields, however, a spike in US Treasury yields could counteract this, pushing Indian bond yields higher.
“The appetite for bonds, especially if they are structured with lower denominations, can influence yields,” says Srinivasan.
Incidentally, increased retail participation can drive demand and potentially reduce yields. A decrease in government T-Bill borrowing and record dividend paid by RBI to Government of India will likely keep the yields stable in the long run.
