India is contemplating a potential reduction in its borrowing this fiscal year due to the ongoing national elections, which have narrowed the government’s spending window by approximately three months. According to Kruti Chheta, a fixed-income fund manager at Mirae Asset Investment Managers India Pvt, the country’s borrowing plans may see a slight cut, with the possibility of deferring these borrowings to the next fiscal year.
The national elections, spanning seven phases since April, are drawing to a close, with results slated for June 4. Government regulations prohibit the formulation of new spending plans once elections are announced, effectively constraining expenditure. India had initially planned to borrow 14.1 trillion rupees ($170 billion) in the current fiscal year.
The prospect of reduced bond sales has already contributed to a rally in sovereign bonds in recent weeks. Factors such as a decrease in short-term borrowings, a record dividend payout by the central bank, and the inclusion of Indian bonds in JPMorgan Chase & Co.’s emerging-market index in late June have bolstered market sentiment.
Lower borrowing requirements have the potential to alleviate financial burdens for both the government and corporations, potentially stimulating economic growth in Asia’s third-largest economy.
The yield on India’s benchmark 10-year bond has witnessed a decline of 25 basis points since reaching this quarter’s high in April, settling at 6.97% on Tuesday, the lowest level since June 2023.
Efforts to reduce short-term borrowings have already been initiated, with India cutting its treasury bills by 600 billion rupees for the quarter. Additionally, a substantial dividend payout of 2.1 trillion rupees by the Reserve Bank of India (RBI), nearly double market expectations, has further fueled optimism regarding diminished borrowing requirements.
However, the Indian bond market may experience heightened volatility in the event of Prime Minister Narendra Modi’s party securing a narrower majority in the polls, warns Mirae. Chheta notes that while a majority win aligned with market consensus may lead to slight volatility, a change in regime could trigger a market selloff.
As India navigates the final stages of its national elections and awaits the election results, the bond market remains poised for potential fluctuations, with the outcome likely to shape the country’s borrowing trajectory and overall economic landscape in the coming months.
