Sharp Expansion In Net Borrowings On The Cards In H2

The Union Government had maintained its gross borrowing figure for H2 at Rs. 6.61 trillion. While this is only marginally higher than the year-ago levels, a sharp decline in redemptions would entail a sharper 32 per cent expansion in the net borrowings to Rs six trillion in H2. Aided by the favourable outlook for revenues and a possible undershooting of the ambitious capex target, Icra expects the GoI’s fiscal deficit to print in line with or mildly trail the FY25 RBE of Rs. 16.1 trillion or 4.9 per cent of GDP, at the current juncture. Therefore, the market borrowings appear unlikely to exceed the announced level for H2. Net supply is up 27.2 per cent at Rs. 4.75 trillion. The issuance pattern is now steadily getting skewed towards the ultra-long duration. The G-Sec curve has bull-flattened since June but near-term, Emkay sees bull-steepening bias to be reinstated, helped by lower shorter-tenor borrowing, impending rate cuts, and higher FPI positioning in the sub-7Y tenors.

However, Q4 could again favour bull-flattening led by long-only market players, especially amid lower supply. While India bonds have seen structurally improved DD-SS dynamics, analysts are watching the evolution of the rate-cutting cycle globally and, back home, are still skeptical of a sub-6.50 per cent level for 10Y in coming months. There has been no major surprise in H2 gross borrowing at Rs 6.61 trillion, with the GoI sticking to the FY25 budgeted gross borrowing target of Rs 14.01 trillion and issuing Rs 7.4 trillion in H1 versus the indicated Rs 7.5 trillion. However, this has meant that the H2 gross borrowing is a higher proportion of annual issuance versus last year. Overall, the share of the ultra-long duration segment is heavier at 38.2 per cent. Additionally, Rs. 200 billion of SGBs are spread across the 10Y/30Y tenor. These bonds can now see a steady demand from insurance firms as they can categorize them as ‘infrastructure’ investments.

No surprise in borrowings is neutral for bonds, however the near-term triggers that have led the G-Sec rally across the curve in recent weeks are likely to be reinforced in the coming months as well. G-Sec demand across domestic and foreign agents has stayed strong and it is not likely to change in the near term. That said, the curve has bull-flattened since June and has continued to stay so even after the massive 50 basis points cut by Fed last week. However, experts believe that the coming quarter could see a return of the bull-steepening theme with more juice in the shorter tenor, led by possible stance rate cut by the RBI by the year-end. However, Q4 could again favour bull-flattening led by long-only market players, especially amid lower supply. Analysts are watching the evolution of the rate-cutting cycle globally and, back home, are still skeptical of sub-6.50 per cent levels in coming months. It is fair enough to assume that India bonds/INR are strong fundamentally on supportive DD-SS dynamics, and could stay a cherry-picked play in the emerging markets.