Bond yields: Bond yields likely to soften with FPI inflows, saving interest costs for government

Kolkata: Government bond yields are likely to soften further by the end of the fiscal, leading to an annualised savings of ₹1,000 crore-₹2,000 crore for the exchequer. Higher demand, especially from foreign portfolio investors, would help yields remain tamed, economists said, pointing to North Block’s second-half borrowing calendar published last week.

The Centre’s gross borrowings for the second half of the fiscal have been fixed at ₹6.61 lakh crore with the borrowing target for the entire fiscal being maintained at ₹14.01 lakh crore, the central bank said last week. About 77% of the bond issuances will be for 10 years or higher tenure.

“Given the favourable global and domestic backdrop, we expect a further downward bias in domestic yields, leading to a steepening bias in the yield curve,” Bank of Baroda economist Aditi Gupta said.

Bond yields have eased gradually in the first half of the fiscal, with the 10-year benchmark yield at more than a two-and-a-half-year low last week, tracking lower US treasury and soft oil prices.

“The 10-year government-security yield is expected to reduce towards 6.5% by March 2025, supported by favourable demand-supply dynamics and expected RBI rate cut,” an IDFC First Bank report said. Demand for g-secs is bolstered by India’s inclusion in the JP Morgan Emerging Market bond index, besides the usual demand from insurance, provident funds and pension funds.

A whopping $24 billion in overseas inflows is expected as a result of the inclusion in the JP Morgan Emerging Market index.The softening trend in yield will further be supported by RBI’s policy rate reduction towards the end of the fiscal, as anticipated by the market.DBS Bank senior economist Radhika Rao expects a dovish policy outcome from RBI’s monetary policy committee in October, while IDFC First Bank projects the rate cut cycle to begin in December, with food inflation pressures expected to ease. “By March 2025, we expect a cumulative 50 basis points rate cut,” the IDFC First Bank note said.

All these factors would keep the actual interest cost for the government lower.

“Based on movement in yields, we estimate that the savings in interest costs on an annualised basis would be between ₹1,000 crore-₹2,000 crore,” Bank of Baroda’s Gupta said.

The annualised interest cost on the second-half market borrowing would be around ₹45,000 crore if the government sticks to the borrowing programme, she added. This is based on present yields in the market.