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Indian funds, insurers and banks have increased their positions in longer-duration bonds in anticipation of the federal government's interim budget being fiscally conservative with no pre-election spending surprises.
India's finance minister is set to present the country's federal budget for 2024/25 on Feb.1, with expectations of the government reducing its fiscal deficit by at least 50 basis points (bps) and keeping its gross market borrowings flat in the range of 15-15.5 trillion rupees ($186.47 billion).
Recent bond auctions saw bids that surpassed expectations, said Alok Singh, group treasury head at CSB Bank, suggesting the market is positioning for a favourable budget, especially for long-term bonds.
The next fiscal could see demand for government securities exceeding supply, he added.
Alongside local buyers, foreign investors have bought 446 billion rupees of government bonds in the last three months and are expected to continue purchasing ahead of the inclusion of such papers in JPMorgan's global bond index in June.
"Any gross borrowing figure above 15.50 trillion rupees could act as a negative surprise, and could see some rise in yields, but that would only be for a brief period," Vikas Goel, managing director at the primary dealer PNB Gilts, said.
The benchmark 7.18% 2033 bond yield was last at 7.15%, 3 bps down in January, even as the 10-year U.S. counterpart gained over 20 bps.
Foreign banks have net bought bonds worth 759 billion rupees since October, while private banks purchased 193 billion rupees of notes from the secondary market. The "Others" category, which includes longer-term investors like insurance companies, has net bought 444 billion rupees of bonds, data showed.
State-run banks have net sold bonds worth 308 billion rupees, but traders said that they remained aggressive bidders in the primary auction in last few weeks.
"PSU banks have gone heavily long in auctions of 10-year and 14-year papers at current levels, as many are expecting a fall in yields during the remaining two months of this fiscal," the treasury head of a mid-sized state-run bank said.
In contrast to the outlook for longer duration bonds, the market is cautious on shorter duration securities due to uncertainty over the timing of rate cuts from the Reserve Bank of India. Tight liquidity conditions despite the central bank providing cash infusions via repos, have also capped any significant decline in yields of such debt. ($1 = 83.1240 Indian rupees) (Reporting by Dharamraj Dhutia; Editing by Dhanya Ann Thoppil)