Indian investors are strategically favoring long-term bonds in anticipation of a conservative budget, aligning their positions with expectations for fiscal prudence in the upcoming federal government’s interim budget announcement, scheduled for February 1, 2024.
The budget for the fiscal year 2024/25 is anticipated to prioritize fiscal responsibility, avoiding pre-election spending surprises. Market participants, including funds, insurers, and banks, are bolstering their exposure to longer-duration bonds, foreseeing potential reductions in the government’s fiscal deficit by at least 50 basis points (bps). The expected range for gross market borrowings is Rs 15-15.5 lakh crore ($186.47 billion).
Recent bond auctions have surpassed expectations, reflecting market optimism about a budget that favors long-term bonds. Alok Singh, the group treasury head at CSB Bank, highlights the possibility of demand for government securities outstripping supply in the upcoming fiscal year.
Foreign investors are also demonstrating interest, with purchases of Rs 44,600 crore of government bonds in the last three months. This trend is expected to continue ahead of the inclusion of such bonds in JPMorgan’s global bond index in June.
Vikas Goel, managing director at primary dealer PNB Gilts, cautions that any gross borrowing figure exceeding Rs 15.50 lakh crore could temporarily elevate yields. Despite this, the benchmark 7.18% 2033 bond yield was last recorded at 7.15%, down 3 bps in January, despite a gain of over 20 bps in the 10-year US counterpart.
Foreign banks have demonstrated a positive outlook, net buying bonds worth Rs 75,900 crore since October, while private banks have purchased Rs 19,300 crore of notes from the secondary market. Longer-term investors, including insurance companies, have shown keen interest, with net purchases of Rs 44,400 crore of bonds.
However, state-run banks have net sold bonds worth Rs 30,800 crore, even as they remained aggressive bidders in recent primary auctions, particularly for 10-year and 14-year papers.
Conversely, the market remains cautious about shorter-duration securities due to uncertainty surrounding the timing of rate cuts from the Reserve Bank of India. Despite the central bank’s cash infusions via repos, tight liquidity conditions have hindered significant declines in yields for such debt instruments.
