Union finance minister Nirmala Sitharaman’s fiscal rectitude on Thursday won over the bond markets with government security prices rallying on the announcement of a 5.1 per cent fiscal deficit target for 2024-25 and a lower than expected borrowing for the year.

Yields, which move in the opposite direction to prices, on the 10-year benchmark bond fell to a day’s low of 7.03 per cent after the announcement. It finally closed at 7.06 per cent, a drop of nearly 8 basis points over the previous finish.

The gains in bond prices affected the stock markets as well as shares of PSU banks gained on anticipation that their treasury income would rise as bond yields moderate.

Sitharaman in her interim budget forecast a fiscal deficit of 5.1 per cent of GDP for 2024-25 which was lower than estimates of 5.2-5.3 per cent among economists.

The good news did not end there as she also announced lower-than-expected market borrowing for the year.

The gross and net borrowing (adjusted for maturities) was budgeted at Rs 14.3 lakh crore and Rs 11.75 lakh crore, respectively. Ahead of the budget, the street was estimating a gross market borrowing of between Rs 15.3 lakh crore and 15.5 lakh crore.
This number is also lower than the Rs 15.43 lakh crore for the current fiscal.

With yields softening, the focus has shifted back to the Reserve Bank of India (RBI) whose monetary policy committee (MPC) will begin a three-day meeting on February 6.

It is largely expected that the panel will continue to keep interest rates intact. It is also expected to reiterate the earlier stand of a sustained fall in inflation as a precondition for cutting rates.

Economists largely feel that the cuts could begin in the second half of this calendar year and that they could be nominal.

Incidentally, the lower market borrowing will come in a year Indian sovereign bonds will be introduced in JP Morgan’s Emerging Bond Index which will lead to big inflows into G-Secs and push down their yields.

“It ( the Budget) infused enthusiasm into the bond market and all interest rate sensitives with its announcements regarding fiscal prudence and subsidy reductions.

“The fiscal deficit is on a consolidation path with a projection of 5.1 per cent in 2024-25 versus 5.8 per cent for 2023-24, which is commendable,” Pranav Haridasan, MD and CEO, Axis Securities, said.

“Coupled with net borrowings of Rs 11.75 lakh crore, which is less than market expectations, the bond markets have much to rejoice.

“The overall borrowing figures were lower than the previous year, another positive from a fixed-income perspective,’’ Pranav Haridasan, MD and CEO, of Axis Securities said.

Stocks slip

Sitharaman’s last budget before the general polls disappointed equity investors. This came even as expectations were muted ahead of the announcement. Though stocks opened on a positive note, thus ignoring global cues, it witnessed volatility as the finance minister spelled out details of her proposals.

Analysts said that the street was a bit disappointed with the capital expenditure number for 2024-25 which showed an increase of only 11 per cent.

Another factor that pulled down equities was the Fed chair Jerome Powell putting water on hopes of a rate cut beginning in March.

“I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting to identify March is the time to do that,’’ he told reporters after the two-day FOMC meeting on Wednesday.

After opening in the higher ground at 71998.78, the Sensex advanced 398 points to touch a high of 72151.02.
However, profit booking soon saw the index settling lower by 106.81 points or 0.15 per cent at 71645.30.

On the NSE, the Nifty dipped 28.25 points or 0.13 per cent to 21697.45.