Bond yields decline on lower-than-expected H1 borrowing

The financial year drew to a close with government bond yields witnessing a downward trend, driven by the government's decision to reduce its planned borrowing from the market for the first half of the fiscal year. The unexpected move has bolstered investor sentiment and contributed to the improved performance of the bond market.

The benchmark 10-year bond yield ended at 7.0556 per cent, marking a decrease from its previous close of 7.0927 per cent. Over the course of the fiscal year, the yield witnessed a decline of 26 basis points (bps), contrasting with the upward trajectory observed over the past three years, during which it rose by a cumulative 118 bps.

The benchmark bond yield registered its fifth consecutive monthly decline, shedding 30 bps for the November-March period. Moreover, it posted a decline of 12 bps for the second consecutive quarter.

The reduction in government borrowing for the April-September period, amounting to Rs 7.50 lakh crore – representing 53 per cent of the annual borrowing target – came as a surprise to the market, which had anticipated a higher figure.

Treasury officials suggest that the decrease in borrowing, particularly in shorter-tenor papers, is expected to buoy bond demand and contribute to a steepening of the yield curve. Additionally, the government's plan to borrow Rs 3.21 lakh crore through the sale of Treasury bills in April-June, also below market expectations, is projected to exert downward pressure on the ultra-short end of the curve.

Market participants eagerly await the Reserve Bank of India's (RBI) upcoming monetary policy outcome, scheduled for next week. With the central bank maintaining its key rate unchanged for six consecutive meetings and reiterating its commitment to achieving the 4 per cent inflation target sustainably, investors seek further insights into the central bank's stance.

(With Reuters inputs)