After Finance Minister Nirmala Sitharaman announced lower-than-expected projections for the budget deficit and gross borrowing for the upcoming fiscal year, the Indian rupee strengthened and the rate on government bonds fell.
In early trade on Friday, the rupee gained 14 paise to 82.82 against the US dollar, helped by advances in its Asian counterparts and strong domestic equity markets. The interim budget prioritized increased capital expenditure and accelerated fiscal restructuring.
A day after the interim budget sparked robust debt purchases due to lower borrowing and deficit projections, the rates on Indian government bonds continued to decrease.
The government plans to lower its fiscal deficit from a downwardly revised 5.8% of GDP for this fiscal year to 5.1% of GDP in FY25, according to the budget announcements.
“The bond market should find significant comfort in the FY 2025 fiscal deficit number of 5.1%, which is lower than market expectations of 5.3-5.4%. Additionally, Indian bonds may attract around ₹2 trillion alone from passive FPI inflows due to their inclusion in global bond indices,” stated Jitendra Gohil, Chief Investment Strategist at Kotak Alternate Asset Managers Limited.
Indian Rupee status
Ajay Kedia, Director of Kedia Advisory said, “The local unit is likely to hold its gains amid weakness in the dollar and decline in US treasury yields. USDINR may get support at 82.60, while resistance is placed at 83.24″.
“Forecast of increase in unemployment rate and moderation in the US job creation would hurt the dollar. Additionally, strong flow of funds to the domestic bond market and softer oil prices would also support the rupee to trade higher. USDINR Feb is likely to dip further towards 82.80, as long as it trades under 83.15,” ICICI Direct added.
Bond market status
Murthy Nagarajan, Head-Fixed Income at Tata Asset Management mentioned, “The ten-year bond yields have come down to around 7.05 to 7.08 levels from 7.15 levels. Further drop in yields is expected due to flows from foreign institutional investors and expectation of India’s rating upgrade”.
Amit Goel, Co-Founder and Chief Global Strategist at Pace 360 stated, “With India’s fiscal deficit set to go down to 4.5% of GDP by 2026, India will be one of the most sustainable fiscal stories among EMs. Even the US has a fiscal deficit of more than 6% and is on a completely unsustainable path. This along with India’s inclusion in global bond indices is a complete game changer for long maturity Indian government bonds”.
