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Indian Benchmark Bond Yields: A Close Watch on Budget and US Fed for Future Direction



Indian government bond yields began the week on a relatively flat note as investors awaited crucial events for directional cues. The market is on hold for the upcoming U.S. Federal Reserve policy decision, which is expected to affect global bond markets, including India. In addition, the domestic budget announcement is closely watched for any fiscal measures that could impact local bond markets. The benchmark 10-year yield in India concluded at 7.1735% on Monday, marginally softer compared to its previous close at 7.1760%. These events underscore the dynamic nature of bond markets and highlight the need for investors to remain vigilant and informed.

Expectations are mounting as India’s finance minister prepares to announce the budget for the upcoming financial year this Thursday. According to insider sources, the government may aim to keep its gross market borrowing for 2024/25 in the vicinity of the current fiscal year’s level, with a target borrowing range of 15 trillion to 15.50 trillion rupees ($180.5 billion), compared to the planned 15.43 trillion rupees for this year. Furthermore, a Reuters poll anticipates a decline in the fiscal deficit, as a percentage of GDP, to 5.30% in 2024/25, down from 5.90% in the current fiscal year. The same poll also projects gross borrowing of 15.60 trillion rupees. These potential fiscal measures are keenly observed by market participants, who are adjusting their strategies accordingly.

On the other hand, industry experts are presenting slightly different projections. Pankaj Pathak, a fixed income fund manager at Quantum AMC, believes the government’s borrowings for the next fiscal year may indeed be lower than this fiscal. Pathak states, “We expect a gross market borrowing of around 14.8 trillion rupees and net market borrowing of around 11.2 trillion in FY25.” This prediction, while diverging from the government’s anticipated target, sheds light on the potential variability in the fiscal landscape. Such differing viewpoints reiterate the importance of active monitoring and skilful navigation in the bond markets.

Expanding on Pathak’s projections, he anticipates the government will persist with the fiscal consolidation plan, aiming to trim down the fiscal deficit to approximately 4.5% of GDP by FY26. For the upcoming FY25, the fiscal deficit target could potentially be around 5.3% of GDP.

However, the general market mood continues to be restrained due to elevated U.S. yields, with the 10-year yield lingering near 4.15%. Market sentiment is largely on hold as investors await the outcome of the U.S. Federal Reserve’s meeting slated for Jan. 30-31. The recent spate of robust economic data has resulted in a decrease in speculations regarding the timing and speed of rate reductions in 2024, thereby elevating the importance of the Fed’s upcoming meeting.

The market appears to be factoring in lower odds for a rate action in the near term. According to the CME’s FedWatch Tool, the probability of a rate hike in March stands at approximately 48%, experiencing a significant dip from 87% in the previous month. This shift in odds implies a decreased expectation for aggressive monetary tightening, hence setting an intriguing stage for the upcoming Fed meeting’s outcome.

Simultaneously, oil markets are displaying a surge amid mounting geopolitical tensions. The benchmark Brent crude contract is edging towards the $85 per barrel mark, signaling an escalation in oil prices. The ongoing volatility in the Middle East has been a key driver for this upward movement, adding yet another layer of complexity to the global economic climate.