The Indian bond market strengthened owing to the domestic Consumer Price Inflation data released this week, and CPI inflation in the US pointing to a Fed rate cut.
The benchmark 10-year government bond yield ended the week at 6.98 per cent from 7.01 per cent yield last Friday.
Though the benchmark yields were expected to remain stable the softer-than-expected inflation data for May, led to a slip in bond yields on June 14, 2024, with the 10-year yield touching 6.9 per cent. Further tracking its US peer that dipped on the back of lower US inflation data, the Indian bonds touched 6.98 per cent on Friday.
The U.S. The Federal Reserve kept interest rates unchanged at 5.25 per cent to 5.50 per cent range this week. The projections have been revised to one rate cut this year, down from the previous forecast of three cuts.
Reserve Bank of India's recently transferring a record dividend of Rs 2.11 trillion, is expected to keep yields stable, also giving room for the government to continue with its fiscal consolidation goals.
In the upcoming week, six state governments plan to conduct an auction of state government securities through the Core Banking Solution (E-Kuber) system on June 18, 2024, to raise a total of Rs 9,500 crore.
The indicative yield for T-bills currently stands at 6.83 per cent, 6.99 per cent, and 7.01 per cent for three-month, six-month, and 364-day durations, respectively. In the 1-2 year tenure, the 5.22% GS 2025 indicates a yield of 7 per cent.
Moving on to longer tenures, 7.37% GS 2028 (4-5 year tenure) and the 7.10% GS 2034 (9-10 year range) both show indicative yields of 6.99 per cent and 6.98 per cent respectively.
The debt market, according to analysts, appears to have a more optimistic outlook after Prime Minister Narendra Modi's Bharatiya Janata Party retained key positions in the new coalition government. Though market participants feel welfare spending may increase they don't forecast additional borrowing, keeping rise in bond yields in check.
The Consumer Price Index (CPI) inflation currently stands at 4.75 per cent, slightly lower than market expectations of 4.89 per cent, while food inflation remains around 8.90 per cent. The Reserve Bank of India earlier this month raised its real GDP growth forecast for the current financial year 2024–25 (FY25) to 7.2 per cent from 7 per cent earlier.
Market experts anticipate that the upcoming full-fledged Budget in July that outline fiscal policies, spending priorities, and borrowing plans will be the new decisive factor in bond markets. They are focused on fiscal deficit targets and economic reforms and are keen on a fiscally prudent budget that could support lower bond yields.
