Narrower fiscal deficit: The net government borrowing for the upcoming fiscal year is anticipated to remain relatively stable, with foreign investors potentially absorbing around a fifth of the supply by investing $25 billion–$30 billion in government debt, according to a Treasury official at Standard Chartered. The central government is expected to target a narrower fiscal deficit of 5.3 per cent to 5.6 per cent of GDP in FY25, compared to 5.9 per cent in FY24. This could result in net borrowing ranging from Rs 11.80 trillion to Rs 12.20 trillion ($142 billion to $146.83 billion).

Foreign investors have shown increased interest in government bonds, with over $5 billion in purchases since October, coinciding with the bonds' inclusion in the JPMorgan emerging market debt index starting in June 2024. Parul Mittal Sinha, Head of Financial Markets, at Standard Chartered, predicts continued momentum in foreign portfolio investment (FPI) inflows in debt as index inclusion approaches.

Positive outlook

Standard Chartered maintains a positive outlook on the bonds, citing factors such as moderating inflation, potential monetary policy easing, fiscal consolidation, and anticipated inflows related to index inclusion. Sinha forecasts the five-year yield to ease to 6.75 per cent and the benchmark 10-year yield to fall to 6.85 per cent by the end of June. As of Wednesday, these yields were at 7.03 per cent and 7.16 per cent, respectively.

Expectations include a shift in global sentiment favouring emerging markets, a more dovish stance in Reserve Bank of India commentary during upcoming Monetary Policy Committee meetings, and continued index inclusion-related inflows in the bonds leading up to June.

Foreign investors currently hold Rs 2.14 trillion of bonds, comprising 2.1 per cent of overall outstanding securities. This figure includes Rs 1.41 trillion of bonds under the Fully Accessible Route, constituting 3.7 per cent of the outstanding issuance, most of which will be part of the index.

(with Reuters inputs)