Budget 2024: Bond Market Focus Fixated on Government’s Fiscal Discipline Commitment, Borrowing Plan

The Union Budget 2024, which is an interim budget, is expected to focus on government’s commitment to fiscal consolidation. Finance Minister Nirmala Sitharaman is anticipated to announce a fiscal deficit target of 5.9% in FY24. The bond market traders are closely watching the government’s fiscal deficit target and market borrowing plans in the Union Budget. The trajectory of Indian government bond yields will also be impacted by the Budget targets and the upcoming US Federal Reserve policy meeting.

Anurag Mittal, Head of Fixed Income at UTI AMC, stated that the government’s commitment to fiscal consolidation and its target of achieving a 4.5% fiscal deficit by FY26 will be a focal point for fixed income investors. The bond market will be keenly observing the continuation of capex expenditure, as the government has focused on raising capex spending.

Additionally, credible revenue and expenditure assumptions, along with market borrowing, will also be in focus. Currently, Indian government bond yields are flat, with the benchmark 10-year yield trading around 7.1757%. However, market analysts believe that a fiscal deficit between 5.3-5.5% with a net market borrowing of ₹11.5-11.8 lakh crore could be positively received by the bond market.

Economists expect the government to meet its gross borrowing target of ₹15.4 lakh crore and net borrowing target of ₹11.8 lakh crore in FY24. For FY25, net market borrowing of the Centre is estimated to be around ₹11.7 lakh crore, resulting in a gross borrowing of approximately ₹15.3 lakh crore. The inclusion of Indian bonds in the JP Morgan Global Bonds Index from June 2024 onwards is also expected to bring additional inflows of ₹1.7-2.6 lakh crore till March 2025. This strategic reduction in market borrowing by the government, coupled with escalating demand from long-term investors like pension and insurance companies, has created a favorable demand-supply equilibrium for government bonds.

The anticipated inclusion of India in global bond indices is likely to further boost the demand for Government Securities (GSec) and potentially lower bond yields while increasing bond prices. The government’s borrowing plan and fiscal consolidation commitment are crucial for the bond market, and market participants will closely analyze the Union Budget 2024 for directional cues.