Bond Market Recap of 2023 And Outlook Of India's Bond Yields in 2024

After a turbulent season for bonds in 2023, India's bond yields are expected to dip lower amid global changes and potential rate cuts in 2024.
Bond Market Recap of 2023
Bond Market Recap of 2023

The year 2023 has been a rollercoaster ride for the global bond market, particularly because of conflicting narratives centred around 'persistent inflation' and the upcoming 'recession. Amidst this volatility and expected rate cuts by US Feds, let’s know what lies ahead in 2024 for India's bond market?

Bond Market Recap

At the start of 2023, Indian bond yields, particularly the 10-year benchmark, were hovering around 7 to 7.44 per cent because of heightened inflation concerns and proactive rate hikes by the Reserve Bank of India (RBI).

However, in April, the RBI, responded to improved economic conditions and the trajectory for inflation, pressing a pause on rate hikes. Consequently, the 10-year benchmark yield dipped below the 7 per cent mark, marking a dip from the earlier peak of 7.44 per cent.

By July, bond yields began an upward climb, influenced by market expectations of further rate hikes by the US Federal Reserve. Further, announcements regarding Incremental Cash Reserve Ratio (I-CRR) implementations contributed to this fluctuation. The decision to include India in the JP Morgan GBI EM Index was announced starting from June 2024 with an eventual 10 per cent index weight by March 2025. Currently, the yield on India's 10-year benchmark government bonds is at 7.21 per cent.

Outlook For 2024

Many factors hint at a potential downward trajectory for Indian bond yields offering a buying opportunity for bond investors. The anticipated shift in the US Federal Reserve's policy is a factor that can influence Indian bonds positively. Rate hikes have peaked, signalling an imminent rate-cutting cycle amidst inflation cooling down with slower global growth.

Pankaj Pathak Fund Manager, Fixed Income, Quantum AMC said India's bond market benefits from robust tax collections, fiscal consolidation plans, and inclusion in JP Morgan Global indices. He added that India's inclusion in global indices will attract an influx of foreign funds—around USD 25-40 billion. Additionally, fiscal consolidation by the Centre aims to decrease government bond issuances, decreasing supply.

"After expanding the fiscal deficit to 9.2 per cent of GDP during the pandemic shock in FY2020-21, the government has been on a path of fiscal consolidation. The government has set a target to bring down the fiscal deficit to under 4.5 per cent of GDP by FY2025-26 from the budgeted 5.9% fiscal deficit target for FY 2023-24. Assuming the government will stick to this fiscal plan, the net issuance of government bonds would decrease by around Rs. 1.6 trillion over the next 2 years," he said.

"Domestically, demand-supply dynamics in the bond market are looking more favourable with robust tax collections, the government’s fiscal consolidation plan and India’s inclusion in the global bond index," Pathak added.

According to Pathak with a high starting yield and expectation of a fall in bond yields, investors should consider long-term government bonds. Also given the expected fall in bond yields, Dynamic Bond Funds with flexibility is more suited, he said. "However, investors need to have a longer holding period of at least 2-3 years to ride through the intermittent volatility. Investors with shorter investment horizons and low-risk appetites should stick with liquid funds," he added.

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