ICICI Bank's Prasanna predicts 6.75% drop in 10-year bond yield

Budget 2024: ICICI Bank's head of treasury, B Prasanna, predicts that the benchmark bond yield could plummet to 6.75 per cent or even lower by the latter half of 2024. 

This projection stems from a favourable shift in demand-supply dynamics, catalysed by the unexpected reduction in the government's borrowing target for 2024-25.

The government's announcement of a lower fiscal deficit target and reduced gross borrowing aims to reach 5.1 per cent of GDP and borrow Rs 14.13 lakh crore, respectively, in the upcoming financial year. This move, contrary to economists' expectations, has driven optimism in the market.

Prasanna stresses that the government's commitment to fiscal consolidation, coupled with the anticipation of liquidity easing in the domestic banking system and potential rate cuts by the Federal Reserve and the Reserve Bank of India (RBI), are contributing factors to the anticipated drop in bond yields.

The inclusion of sovereign debt in global bond indices starting June adds another dimension to the fiscal landscape, potentially attracting notable inflows. Prasanna estimates around $20 billion in inflows, which could cover nearly one-sixth of the net borrowing.

The combination of reduced government borrowing, improved fiscal discipline, global bond index inclusion, and anticipated liquidity adjustments may lead to a substantial decline in benchmark bond yields, with Prasanna projecting a target of 6.75 per cent or lower by the latter part of 2024.

(With Reuters Inputs)