The demand for Government Securities (G-Secs) could outstrip supply once these securities are included in key global bond indices, leading to a significant thaw in G-Sec yields in FY25, say experts.

Also, what could accentuate demand for G-Secs is that long-term investors such as pension funds, provident funds and insurers, are building up substantial corpus due to inflows, which must be invested.

“Yield of the 10-year benchmark paper right now is at 7.16 per cent level. I don’t see it moving up to 7.25-7.30 per cent levels in FY24 as there are no headwinds and we are in a rate softening environment,” said Ajay Manglunia, MD & Head, Investment Grade Group, JM Financial.

He expects yield of the 10-year paper to trade in the 7.10-7.25 per cent range till March-end 2024.

• Also read: G-Sec yields decline, tracking US Treasury yields

“If large foreign portfolio investor inflows come (due to inclusion of G-Secs/Gilts in global bond indices), the yields may go down….I see the 10-year yield stabilising at 6.50-6.75 per cent level in FY25,” per Manglunia’s assessment.

Inclusion of Indian gilts in JP Morgan’s Government Bond Index-Emerging Markets (GBI-EM) could attract investments aggregating about $23-25 billion in a phased manner beginning June 2024.

Further, inclusion of Indian Gilts in Bloomberg’s emerging market local currency index from September 2024, could draw inflows of about $3 billion.

Quantum Mutual Fund, in a report, said the demand-supply dynamics in the bond market in likely to change significantly over the next two years.

“The government has been on a path of fiscal consolidation with an aim to bring down the fiscal deficit to 4.5 per cent of GDP by FY 2025-26.

• Also read: RBI permits lending and borrowing of G-Secs

“It is on the path to achieve its fiscal deficit of 5.9 per cent of GDP for the current financial year. Based on the glide path, the fiscal deficit target for FY25 should be around 5.3 per cent of GDP, per the report.

With this fiscal deficit target, the mutual fund estimated that the government’s gross market borrowing will be ₹80,000 crore lower than past year at around ₹14.6-lakh crore.

“Given the healthy growth trend in bonds demand from long term investors like Insurance companies, pension funds, PFs etc, we expect the total government bond supply to fall short of demand over the next two years,” the report said.

Foreign portfolio investments

The mutual fund noted that foreigners investors are under invested in Indian bond market with only 1.61 per cent of total outstanding government bonds owned by them (as of September 2023).

“FPIs have been consistently buying Indian government bonds eligible for FAR (Fully Accessible Route) in 2023. We expect the pace of FPI buying to increase substantially over the coming month,” Quantum said