India bond investors eye small rise in government borrowing, expect yields to decline
MUMBAI, Jan 29 (Reuters) - The Indian federal government's market borrowing is seen rising marginally in fiscal year 2025-26, which investors expect will be easily absorbed given the improving banking liquidity and strong inflows into insurance and pension funds.
India's budget for the next financial year starting April 1 will be announced on Saturday. A Reuters poll of economists forecasts a fiscal deficit of 4.5% of GDP and a gross borrowing of 14.28 trillion rupees (about $165 billion).
For 2024-25, the government budgeted to borrow 14.01 trillion rupees from the bond market.
"Over the years the pressure of absorbing government bond supply has abated due to increasing demand from long-term investors," A Prasanna, head of research at ICICI Securities Primary Dealership, said.
"Since the last few years, we have seen share of household savings going into insurance and retirement products is rising, which is contributing to demand. So the demand situation should remain strong going ahead," he said.
Bond yields have eased over last few days on bets that the central bank will cut rates on Feb. 7 after it announced a host of liquidity measures.
Investors expect the rally in bonds to continue after the budget unless borrowings are significantly higher than expected.
"I expect the gross borrowing to be largely unchanged from the current year, which will not have any negative impact on the market," Vijay Sharma, senior executive vice president at PNB Gilts, said.
The borrowings could be lower if New Delhi chooses to switch bonds with the central bank.
ICICI Securities Primary Dealership expects such bond swaps worth 1 trillion rupees, which would lower the borrowing to 13.30 trillion rupees.
GREEN BONDS
Despite the limited interest, investors expect green bonds will continue to be part of the borrowing, although they hope for an elongation of duration.
"Given lack of demand in 10-year green bond, we expect cut in supply of 10-year green bonds and the same portion can be increased for 30-year green bonds," said Rahul Bhuskute, CIO, Bharti AXA Life Insurance
Bhuskute expects green bond supply in the range of 350 billion rupees to 400 billion rupees against the 117 billion rupees issued this year.
"There is natural demand for long-term green bonds from insurance companies as there is very little issuance from state-run companies and corporates that gets categorised as infrastructure, beyond the 10-year segment," said Ketan Parikh, head-fixed income, ICICI Prudential Life Insurance.
($1 = 86.5170 Indian rupees)
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