Bond market sees best day in 2 months after S&P upgrades India's rating

Business Standard

a day ago

Government bond prices surged on Thursday after global rating agency S&P upgraded India's sovereign credit rating from 'BBB-' to 'BBB' — the first upgrade since 2007 — recognising the government's resolve to maintain fiscal discipline alongside a strong infrastructure drive.
The yield on the benchmark 10-year government bond fell by up to 10 basis points during the day but gave up some gains towards the end of trading due to profit booking. Bond prices and yields move inversely.
The rupee, which depreciated 0.14 per cent to close at 87.56/$ compared to 87.44 in the previous session, trimmed some losses after the rating upgrade announcement.
The benchmark yield declined to 6.38 per cent before settling at 6.40 per cent, compared to Wednesday's closing of 6.48 per cent. This was the largest single-day yield drop in two months.
'The yield on the benchmark 10-year bond fell due to the rating upgrade and later there was some profit booking,' said a dealer at a primary dealership. 'Now that the yield has fallen below the 6.40 per cent mark, we might see 6.35 per cent soon,' he added.
Market participants said they had expected a dovish pause or a hawkish cut, but the domestic rate-setting panel kept the policy repo rate unchanged at 5.50 per cent while projecting inflation for the first quarter of the next financial year above the RBI's target of 4 per cent, thereby diminishing expectations of an additional rate cut.
Experts said the bond market rally after the rating upgrade was driven mainly by positive sentiment, expectations of stronger foreign inflows, and recognition of India's improved fiscal discipline — not by expectations of lower government borrowing.
They noted that the government is expected to meet its 4.4 per cent fiscal deficit target, but weak direct tax collections (particularly corporate tax) and only a moderate cash surplus mean there is little scope to reduce borrowing or the supply of government bonds. However, indirect tax collections, such as goods and services tax (GST), remain strong, and any fiscal support for exporters is likely to have limited cost. Therefore, a significant increase in borrowing is also not expected.
'The reaction of the bond market is a positive sentiment created by the rating upgrades, but I don't think it reflects the fact that the market expects a cut in borrowing — that will depend on domestic dynamics like tax collection and how the government manages expenditure. Right now, we don't expect any extra borrowing, but at the same time we don't see scope for them cutting G-sec supply,' said Gaura Sen Gupta, Chief Economist, IDFC FIRST Bank.
Expectations of increased government bond supply in the latter half of the current financial year, on the back of a 50 per cent US tariff on Indian goods exports, had pushed yields higher over the past week. However, S&P said the tariff's overall impact would be minimal and is unlikely to hinder India's long-term growth prospects.
'The rating upgrade from S&P is a significant positive for India, validating the country's long-standing case for an upgrade and reinforcing the India growth story,' said Madan Sabnavis, Chief Economist, Bank of Baroda.
'S&P has also noted that India will not be severely impacted by US tariffs. While the upgrade will not affect the Indian government's borrowing costs, since it does not borrow overseas, corporates with high domestic ratings could see their cost of funds in international markets decline by 5–10 basis points. The G-sec market's reaction was a one-off, driven by S&P's praise for the government's fiscal consolidation efforts,' Sabnavis added.