Government's Borrowing Plan Likely To Support Easing Bond Yields
The benchmark 10-year G-sec yield is expected to reduce to 6.8% in FY25, says Gaura Sengupta, economist at IDFC First Bank.
Lower planned borrowings by the Union government in the first half of the next financial year threw up a positive surprise and is expected to help support a lower bond yield curve in the near term.
The G-sec borrowing calendar for the first half of the next fiscal threw mild surprises, with a lower proportion of total FY25 gross issuances compared to past years and the lowest since FY19.
The H1FY25 gross borrowing at Rs 7.50 lakh crore stands at 53.1% of Rs 14.13 lakh crore estimated for FY25 and 15.5% less than in the same period in FY24.
The benchmark 10-year G-sec yield is expected to reduce to 6.8% in FY25, according to Gaura Sengupta, economist at IDFC First Bank.
The move is likely to be aided by a confluence of factors. The demand-supply dynamic in FY25 is likely to be favourable for G-secs, with demand supported by India's inclusion into JP Morgan EM bond index and strong investor demand, Sengupta explained.
Lower-than-expected gross borrowings should support bonds across the curve in the near term, followed by lower inflation prints in H1FY25, according to Madhavi Arora, lead economist at Emkay Global.
However, much lower share of three-year and overall sub-seven-year tenor in H1 borrowing, reversion of system liquidity to positive in H1, and continued active/passive FPI inflows should augur well for the shorter end of the curve than the longer end, implying bull steepening in coming months, Arora explained.
Index inclusion is expected to bring FPI inflows of $30 billion from June-end onwards till April–May 2025, Sengupta said.
On the supply front, net G-sec issuance in FY25 is lower at Rs 10.5 lakh crore versus Rs 11 lakh crore in FY24. Indeed, it's likely that demand for G-sec will exceed supply, Sengupta said.
Some part of this demand will shift into the state development loans, whose supply is expected to remain elevated in FY25. State budgets imply net SDL supply of Rs 7.9 lakh crore in FY25 vs Rs 7.2 lakh crore in FY24.
Global Cues: Rate-Cut Cycle
"We are watching the evolution of the rate-cutting cycle globally and back home, as we restate that RBI will not precede the Fed in rate cuts," Arora said. The base argument of rising possibility of no-cut by Fed in 2024, if proved correct, could spill over into the RBI's reaction function and will be cyclically noisy for bonds and FX, she explained.
The RBI may still have to manage the problem of plenty, especially in H1FY25 with regards to finding a balance between FX and fixed income amid flows and healthy liquidity, thus ensuring that financial conditions don't turn too easy, Arora said.