On Wednesday, the Reserve Bank of India (RBI) said the Centre would borrow ₹7.5 lakh crore through bonds in the first six months of FY25. Bond sales in April-September represent 53% of the government’s gross borrowing target of ₹14.13 lakh crore for the next fiscal, much lower than 63% last year.
The Centre, which typically tends to front-load its borrowing, had conducted 60-64% of total yearly bond sales in the first six months of the financial year for the last three years.
Bonds maturing in three-to-five years may see a steep decline in their yields as the quantum of borrowing that the Centre has announced through securities in that maturity bracket is sharply lower than last year. A large portion of corporate borrowing is conducted in bonds maturing in three-to-five years. Bond prices and yields move inversely.
“The short end will be helped largely because of restoration of liquidity along with the fact that the Treasury-bill borrowing has been lower than the expectations,” said Shailendra Jhingan, MD, ICICI Securities Primary Dealership. “Given that the government’s cash balance is in a large surplus, I guess they have not borrowed incrementally through T-bills which is a big positive for the short end of the curve.”
The indicative market borrowing calendar released by the RBI shows that in the three-to-five-year maturity bracket, the Centre will sell bonds worth 1.02 lakh crore in April-September, much lower than 1.80 lakh crore a year ago. An easing of banks’ cash shortfall also warrants a decline in yields on shorter tenure government bonds, which are extremely sensitive to liquidity conditions.Price action in bonds on Thursday, the last trading day in FY24, reflects the optimism on short-term securities, with yields on three-year and five-year bonds registering a larger decline than that on the 10-year bond.Yield on the three-year government bond declined 3 basis points on Thursday, while that on the five-year bond fell four basis points. Meanwhile, the 10-year bond yield eased one basis point to 7.06%.
Bond traders said that if the Reserve Bank of India were to signal easier monetary policy in coming months, the decline in short-term bond yields could outpace that in their long-term counterparts.
Overall, with foreign flows seen strong due to inclusion of Indian debt in international indices, bond yields of varying maturities are seen declining in coming months. “The last time such low concentration in H1 was in FY19, when 50% of full year supply was issued. The change in issuance pattern is positive, given India’s inclusion into the JP Morgan EM bond index,” said Gaura Sengupta, economist, IDFC First Bank, predicting a decline in the 10-year bond yield to 6.8% in FY25.
HDFC Bank’s treasury research team sees yield on the 10-year bond at 6.70-7.00% by July, implying room for a fall in the yield by as much as 36 basis points from current levels.