Indian bonds poised to rally further on account of borrowing cut bets

By Subhadip Sircar and Tomoko Sato 

India’s net market borrowings will likely decline for a second straight year, possibly extending a rally in the nation’s bonds, as the government is expected to stick to its fiscal consolidation path.  

Prime Minister Narendra Modi’s administration will borrow Rs 11.4 trillion ($132 billion) for the fiscal year that begins April 1, lower than the Rs 11.6 trillion for the current year, according to the median estimate of 20 economists polled by Bloomberg. Gross borrowings may rise slightly to Rs 14.7 trillion due to higher maturities lined up.

 

The announcement will be made during the Feb. 1 federal budget, with the financial system facing a cash squeeze and foreign investors selling out of India’s markets. Finance Minister Nirmala Sitharaman is tasked with reviving growth, maintaining fiscal discipline, and win a sovereign ratings upgrade. Most economists predict she’ll stick to the roadmap of narrowing the budget deficit to 4.5 per cent of the gross domestic product in the next fiscal year.

 

 

“The fiscal consolidation should continue to bring down the deficit to more sustainable levels and reduce the overall debt pile,” said Pankaj Pathak, fixed-income fund manager at Quantum Asset Management Co. “This is a favourable environment wherein the supply of bonds is not growing or growing at a tepid pace” while demand from long-term buyers is rising. 

While demand from insurance and pension funds will continue to support the market, the key change is a shift in incremental demand. The central bank is seen as a main buyer of sovereign debt amid waning demand from overseas funds. The secondary market purchases are aimed at easing a cash deficit, which widened to its most in a decade last week.

 

Nomura Holdings Inc. earlier estimated around Rs 2 trillion of purchases from the RBI, while Standard Chartered Plc’s forecast was for as much as Rs 1.5 trillion for the coming year. The authority has already shown its intent: the central bank on Monday said it would inject nearly $18 billion into the financial system via bond purchases, a forex swap and a repo auction. 

 

More liquidity infusion might still be needed before the fiscal year-end in March, analysts at Standard Chartered and Citigroup Inc. said after the announcement. 

 

This comes as heightened global uncertainty clouds the outlook for foreign flows into India. The country will reach its full 10 per cent weight in JPMorgan Chase & Co.’s emerging market bond index by March, likely diminishing a key source of demand. Last year, bonds eligible for index inclusion drew $14.3 billion, pushing Indian yields down 41 basis points, even as US yields surged nearly 70 basis points.

 

The 10-year yield is expected to drop to 6.50 per cent by the end of the year, as per the Bloomberg poll, suggesting over 17 basis points easing from the current levels. The yields slid to their lowest level in nearly three years on Monday following data showing RBI’s debt purchases.

 

“While gross Indian government bond issuance could increase modestly in FY26, the continued decline in net issuance is more important,” Morgan Stanley analysts including Upasana Chachra wrote in a note. “That should still allow government securities to rally over the medium term.”