MUMBAI: Indian government bonds sold off in January, with the 10-year bond yield suffering its worst fall before the federal budget in four years as investors fretted over supply outpacing demand.
Finance Minister Nirmala Sitharaman will unveil the budget for next fiscal year on Sunday, with investors expecting a record 30 trillion rupees of combined central and state gross borrowings.
Bonds fell despite the Reserve Bank of India injecting 2.9 trillion rupees ($31.6 billion) into the banking system through debt purchases and foreign exchange swaps, the highest monthly infusion in the current fiscal.
On Friday, the benchmark 10-year 6.48% 2035 bond yield ended little changed at 6.6963%.
The yield rose 11 basis points in January, the biggest monthly rise since August, and the sharpest pre-budget jump in four years.
In the budget, the government should consolidate its debt-to-GDP ratio to 55%, resulting in a fiscal deficit of 4.3% of GDP, Anurag Mittal, senior executive vice president and head fixed income, at UTI AMC, said.
“Assuming 70% of fiscal deficit being funded by market borrowings, we expect a net borrowing of 11.8 trillion rupees and gross borrowing of 17.3 trillion rupees.”
The median in a Reuters poll of economists pegs the borrowing at 16.3 trillion rupees. States are set to raise about 13 trillion rupees on a gross basis, according to economists.
OIS rates jump
India’s overnight index swap rates rose the most in a year in January, underperforming bonds, as offshore investors continued adding paid positions, triggering stop losses.
The one-year OIS rate ended at 5.5550%, up 10 bps this month, while the two-year rate ended at 5.7050%, up 15 bps, both logging their biggest rise
since December 2024.
The five-year OIS rate rose 24 bps to 6.1625%, in its biggest monthly rise since October 2024.
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