MUMBAI: The Indian government has lowered its planned gross market borrowing by 120 billion rupees ($1.44 billion) for the financial year ending March 2025, Finance Minister Nirmala Sitharaman announced in the federal budget on Tuesday.

The government aims to borrow a gross of 14.01 trillion rupees, down from 14.13 trillion rupees announced at the time of the interim budget in February.

In the previous financial year, the government borrowed 15.43 trillion rupees. It also aims to reduce its fiscal deficit to 4.9% of gross domestic product (GDP), down from 5.1% in interim budget.

Why it’s important

Government borrowings are one of the key drivers for bond yields, which have fallen since the start of this financial year.

India’s government finances have also come into sharper focus this year as local currency bonds have been included in JPMorgan’s emerging market debt index.

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Foreigners bought $8 billion worth of bonds on a net basis in 2024, and the outlook on government finances is being watched keenly by offshore investors.

Market reaction

Government bond yields eased briefly, with the benchmark 10-year bond yield easing to 6.9260%, lowest since April 2022.

However, yields reversed immediately as cut in borrowing was below what many market participants were anticipating.

The benchmark bond yield was at 6.9723%, against 6.9633% previous close.

Key quotes

We aim to reach fiscal deficit below 4.5% next year. From 2026-27 onwards, our endeavor will be to keep fiscal deficit such that central government debt as a percentage of GDP will be on a declining path, Finance Minister Nirmala Sitharaman said.

“There is some position adjustment as a kneejerk reaction as some investors were expecting a larger cut.

Overall budget is positive with priority given to fiscal prudence.

I expect benchmark bond yield to ease to 6.90%, with an upside cap of 7.00%,“ said VRC Reddy, treasury head at Karur Vysya Bank.

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“The long-end yields may see some selling pressure, while short-term yields could ease. Still, the benchmark bond yield is likely to top at 7.02%,” said Vijay Sharma, senior executive vice president at PNB Gilts.