Rate cuts, index inclusion likely to help bond prices rally in FY25

A combination of factors — index inclusion, rate cuts and fiscal prudence — could boost the bond market in financial year 2024-25 (FY25), market participants said.

In addition, the Reserve Bank of India’s (RBI’s) continued efforts to maintain orderly liquidity conditions in the banking system would give a further fillip to the bond market.

In September 2023, JPMorgan announced the inclusion of India's bonds into the JPMorgan Government Bond Index-Emerging Markets (GBI-EM).

Subsequently, on March 5, 2024, Bloomberg Index Services revealed that Indian government bonds would be added to its Emerging Market Local Currency Government Index from January 31, 2025.

One of the eagerly-awaited events for the financial year is the prospect of rate cuts by the Indian central bank. The market is anticipating at least two rate cuts by the RBI’s Monetary Policy Committee (MPC) over the year. RBI kept the policy repo rate unchanged at 6.5 per cent in FY24.

“The year is seen as positive because we expect at least two cuts if not more. And with liquidity, at least let's say at the minimum it will have the repo rate. If FPI and associated flows continue, I do see the 10-year (benchmark government bond yield) coming down to 6.75 per cent by the end of FY25. On a conservative note, I'm saying 6.75 per cent (yield on the benchmark 10-year government bond),” said Vikas Goel, managing director (MD) and chief executive officer (CEO), PNB Gilts.

Market participants foresee significant inflows, potentially surpassing $40 billion from the announcement date of JP Morgan to the end of the scale-in period, averaging around $2 billion per month.

As the Bloomberg index is relatively smaller, it is expected to channel inflows of $2-3 billion into India. And, approximately $30 billion of the inflows are anticipated through the JPMorgan index.

“Based on the calendar that we got, I think markets have reacted positively. Hopefully, next financial year should look reasonably good with the FPI flows coming in. I don't know how soon we will see a 6.9 per cent (yield on the benchmark 10-year government bond), but I think maybe the upside remains capped now,” said the treasury at a private bank.

A lower-than-expected fiscal deficit target for the financial year 2024-25 set during the interim Budget pleasantly surprised the bond market. The government has set the fiscal deficit target at 5.1 per cent of GDP. This is notably lower than the market's anticipated range of 5.3-5.4 per cent. The government has committed to narrow it to 4.5 per cent of GDP by 2025-26.

Followed by the lower borrowing, the calendar for the initial half of the financial year gave another cheer to the bond market.

The central government plans to borrow 53.07 per cent of its full-year borrowing target of Rs 14.13 trillion for FY25, which was lower than market expectation. The market was expecting around 58 per cent of the total borrowing in the initial half.

“H1 of FY25’s gross g-sec borrowing was lower than expected at Rs 7.5 trillion, which is 53 per cent of the full-year borrowing. The change in issuance pattern is positive, given India’s inclusion in the JP Morgan EM bond index,” IDFC First Bank said in a note. 

During FY24, domestic markets witnessed foreign inflows of Rs 3.23 trillion, a notable turnaround from the Rs 45,365-crore outflows seen in FY23. Of the total inflows, foreign investors injected Rs 1.2 trillion into the debt segment. It marked the highest influx since the financial year 2014-2015, according to data on the National Securities Depository Limited.

A combination of factors — index inclusion, rate cuts and fiscal prudence — could boost the bond market in financial year 2024-25 (FY25), market participants said.

In addition, the Reserve Bank of India’s (RBI’s) continued efforts to maintain orderly liquidity conditions in the banking system would give a further fillip to the bond market.

In September 2023, JPMorgan announced the inclusion of India's bonds into the JPMorgan Government Bond Index-Emerging Markets (GBI-EM).

Subsequently, on March 5, 2024, Bloomberg Index Services revealed that Indian government bonds would be added to its Emerging Market Local Currency Government Index from January 31, 2025.

One of the eagerly-awaited events for the financial year is the prospect of rate cuts by the Indian central bank. The market is anticipating at least two rate cuts by the RBI’s Monetary Policy Committee (MPC) over the year. RBI kept the policy repo rate unchanged at 6.5 per cent in FY24.

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“The year is seen as positive because we expect at least two cuts if not more. And with liquidity, at least let's say at the minimum it will have the repo rate. If FPI and associated flows continue, I do see the 10-year (benchmark government bond yield) coming down to 6.75 per cent by the end of FY25. On a conservative note, I'm saying 6.75 per cent (yield on the benchmark 10-year government bond),” said Vikas Goel, managing director (MD) and chief executive officer (CEO), PNB Gilts.

Market participants foresee significant inflows, potentially surpassing $40 billion from the announcement date of JP Morgan to the end of the scale-in period, averaging around $2 billion per month.

As the Bloomberg index is relatively smaller, it is expected to channel inflows of $2-3 billion into India. And, approximately $30 billion of the inflows are anticipated through the JPMorgan index.

“Based on the calendar that we got, I think markets have reacted positively. Hopefully, next financial year should look reasonably good with the FPI flows coming in. I don't know how soon we will see a 6.9 per cent (yield on the benchmark 10-year government bond), but I think maybe the upside remains capped now,” said the treasury at a private bank.

A lower-than-expected fiscal deficit target for the financial year 2024-25 set during the interim Budget pleasantly surprised the bond market. The government has set the fiscal deficit target at 5.1 per cent of GDP. This is notably lower than the market's anticipated range of 5.3-5.4 per cent. The government has committed to narrow it to 4.5 per cent of GDP by 2025-26.

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Followed by the lower borrowing, the calendar for the initial half of the financial year gave another cheer to the bond market.

The central government plans to borrow 53.07 per cent of its full-year borrowing target of Rs 14.13 trillion for FY25, which was lower than market expectation. The market was expecting around 58 per cent of the total borrowing in the initial half.

“H1 of FY25’s gross g-sec borrowing was lower than expected at Rs 7.5 trillion, which is 53 per cent of the full-year borrowing. The change in issuance pattern is positive, given India’s inclusion in the JP Morgan EM bond index,” IDFC First Bank said in a note. 

During FY24, domestic markets witnessed foreign inflows of Rs 3.23 trillion, a notable turnaround from the Rs 45,365-crore outflows seen in FY23. Of the total inflows, foreign investors injected Rs 1.2 trillion into the debt segment. It marked the highest influx since the financial year 2014-2015, according to data on the National Securities Depository Limited.

Huge Appetite
 

Market participants foresee significant inflows, potentially surpassing $40 billion
 

Lower borrowing for the initial half of the financial year cheered the bond market
 

The government plans to borrow 53.07% of its full-year borrowing target of Rs 14.13 trillion for FY25, lower than the market expectations
 

The benchmark government bond yield fell by 26 basis points over the year due to a surge in early-stage capital inflows within the debt segment
 

Market participants said that domestic conditions have largely remained favourable for the bond market since the onset of FY24