Indian Bonds Poised to Rally Further on Borrowing Cut Bets

The Indian bond market is set to rally further as investors bet on a reduction in the government's net borrowing program for the next fiscal year. The government announced a lower-than-expected borrowing program for the fiscal year starting April 1, 2025, which is likely to create a favorable supply-demand dynamic for Indian government bonds. This reduction in net borrowings will lead to a decrease in the supply of new government bonds in the market, coupled with steady demand from institutional investors, pension funds, and insurance companies.

The decrease in supply, coupled with steady demand, will create a favorable supply-demand dynamic for Indian government bonds, leading to an increase in bond prices and a decrease in yields. This is evident from the rally in Indian bonds, with the benchmark 10-year yield falling by the most in nine months following the government's announcement. The lower fiscal deficit and reduced borrowings are likely to provide comfort to the Reserve Bank of India (RBI), potentially supporting the bond market rally.

The Indian bond market is expected to perform well in the coming year due to several favorable factors. The government's commitment to fiscal discipline, as indicated by the lower borrowing program, is likely to boost investor confidence and attract foreign inflows. This, in turn, will lead to a more stable and resilient bond market. Additionally, the robust domestic demand for government securities, state development loans (SDLs), and corporate bonds is expected to continue, providing a stable foundation for the bond market.

Moreover, the inclusion of Indian Government Bonds (IGBs) in the JPMorgan-Emerging Market (EM) Bond Index has attracted significant foreign inflows, amounting to $15 billion since June 2024. As the inclusion process continues until March 31, 2025, more foreign capital is expected to flow into the Indian bond market, further boosting its performance. The anticipated interest rate cuts by the RBI, fueled by expectations of a tapering GDP growth curve, are also likely to drive bond prices higher and support the bond market rally.

However, there are some external risks that could influence the Indian bond market's performance. An appreciating US Dollar and rising US Treasury yields could lead to uncertainties and trigger temporary selloffs by foreign investors, as seen in late November 2024 when yields on IGBs briefly spiked to 6.87%. Additionally, policy shifts in major economies like the United States could lead to uncertainties and impact the performance of the Indian bond market.

In conclusion, the Indian bond market is likely to rally further on borrowing cut bets, driven by a lower fiscal deficit, reduced borrowings, robust domestic demand, foreign inflows, and anticipated interest rate cuts. However, external risks such as an appreciating US Dollar, rising US Treasury yields, and policy shifts in major economies could influence its performance. Investors should stay informed about these factors and make informed decisions based on the latest developments in the Indian bond market.