India bonds flat before debt supply, FY25 budget remains key

Government bond yields ended barely changed after a lacklustre session on Thursday, with market participants eyeing fresh debt supply on Friday, even as the budget announcement due next week remained in focus.

The benchmark 10-year yield ended at 6.9674 per cent after closing at 6.9632 per cent in the previous session.

New Delhi aims to raise Rs 31,000 crore ($3.71 billion) through a sale of bonds, which includes Rs 20,000 crore of the benchmark note, which would be the last auction before the budget announcement on Tuesday.

For the fixed income market, the key data points would be the fiscal deficit target as well as the gross borrowing figure.

A Reuters poll found the government remained committed to upholding pre-election targets, with median forecasts for the fiscal deficit target at 5.1 per cent of gross domestic product and the gross borrowing at Rs 14,13,000 crore the same as February's interim budget.

Neeraj Gambhir, head of treasury at Axis Bank, said there was room to cut the gross borrowing by Rs 50,000 crore to 7,50,00 crore.

Even if the deficit stays identical to the interim budget, the borrowing is expected to reduce by Rs 50,000 crore – either through dated securities or treasury bills, because of the extra cash balances inherited from the previous year, JPMorgan Chase Bank said in a note.

Meanwhile, the 10-year US yield stayed below 4.20 per cent after top Federal Reserve officials said inflation was easing closer to their 2 per cent target.

The market is now certain that the Fed will start its rate easing cycle in September and has factored in 64 basis points of cuts in 2024, according to the CME FedWatch Tool.

However, the fall in bond yields remained capped amid rising bets of Donald Trump winning the U.S. presidential race, which could lead to higher growth as well as elevated inflation.