Finance Minister Nirmala Sitharaman’s announcement of lower gross and net market borrowings for the financial year 2024-25 (April-March) led to a sharp correction in Indian bond yields last week. Will a lower yield trend deter bond market investors, who look for reasonably high returns at low risks, from participating? Instead, will they move into the equity markets? Experts ETMarkets spoke to think otherwise and called this a great move for the bond markets.

On February 1, Sitharaman in her last Budget of the Modi 2.0 government announced that the gross and net market borrowings through dated securities during 2024-25 are estimated at Rs 14.13 and 11.75 lakh crore, respectively, which are lower from FY 2023-24. The move is aimed at facilitating a larger availability of credit for the private sector, the FM had said.

The government said it will continue on the path of fiscal consolidation and reduce the fiscal deficit below 4.5% by 2025-26.

Bond yields plunged after the announcement of fiscal deficit and borrowing targets, both of which were lower than market estimates. The Indian 10-year benchmark bond yield dropped to 7.0511%, its lowest level since July 19, after the announcement, Reuters reported.
“Bond market investors look for returns, which are over and above the expected inflation. Absolute bond yields, even if high, would not be attractive if inflation was higher. Retail investors tend to weigh between options looking at absolute investors,” said Sandeep Bagla, chief executive officer at TRUST Mutual Fund.

Lower yields are unlikely to deter the majority of bond market investors, he clarified, adding that bond markets are dominated by large institutional investors, who look to invest in products based on real interest rates. Bagla said lower government borrowing was not the sole factor determining bond yields and other important criteria could be domestic liquidity in the banking system, the Reserve Bank of India’s (RBI’s) policy stance and overnight rates determined by the RBI from time to time.Alekh Yadav, head of investment products at Sanctum Wealth, echoed a similar view adding that lower borrowing and downward revision of fiscal deficit would act as positives for the bond market. This was reflected immediately after the Budget when the 10-year government bond yield declined.

Yadav is of the view that bond markets will appreciate lower demand leading to lesser additional supply, which could then pave the path for RBI to cut interest rates.

Let’s Do The Math

While calling the move extremely positive for the bond market, Amit Goel, co-founder and chief global strategist at Pace 360, said the current yield is a lesser component of the bonds’ returns compared to the possibility of capital gains.

“While the yields have fallen, the decks have been cleared for 10-year G-Sec to trade at 6.5% by the end of CY2024 and less than 6% before the end of CY 2025. So, the capital gains on a 10-year bond will be more than 7%,” Goel said.

He prefers an even longer duration bond than 10 years as with longer maturity, the current yield component becomes smaller. “We are buying Indian 20 and 25-year bonds also,” he added.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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