India's 10-year bond yield falls most in four years in 2024 on demand boost

Mumbai: India's benchmark 10-year bond yield posted its steepest decline in four years in 2024 as the government's fiscal discipline and inclusion of debt in global indexes boosted demand, while investors awaited start of the domestic rate easing cycle in 2025.

The yield ended at 6.7597 per cent on Tuesday, dropping 42 basis points on-year after easing 15 bps in 2023. This is the biggest fall since the 66 bps decline in 2020.

"Government bond prices rallied steadily over 2024 despite upside surprise in inflation, tighter banking system liquidity conditions and sharp volatility in US yields that continue to be elevated," said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership.

Bond yields kicked off the year with a downward bias, which persisted as government lowered its debt supply, while robust demand from local and foreign investors meant the supply was quickly snatched up.

The government adhered to its fiscal prudence plan and lowered its fiscal deficit target as well as market borrowings, at a time when corpus with long-term investors such as insurance and pension funds rose.

India aims to reduce its fiscal deficit to 4.9 per cent of gross domestic product (GDP) for this financial year, with gross borrowing pegged at Rs 14.01 trillion.

Bonds were also boosted by their inclusion in JPMorgan's emerging market debt index in June, with their weightage rising to 7 per cent as of end-December.

Foreign investors net bought bonds worth 1.2 trillion rupees in 2024, with more than half of the purchases after June.

Indian bonds will be included in two more global indexes in 2025 - the Bloomberg Index Services from January and FTSE Russel from September - and this could lead to an aggregate inflow of $7 billion to $10 billion, traders said.

The yield curve remained largely flat through the year, as the central bank kept a tight leash on funding, while government spending was also capped due to the general elections.

2025 Outlook

Market participants are entering the new year with bets of rate cuts from the Reserve Bank of India as early as February, even as the outlook in the US remains cloudy.

In December, the Federal Reserve slashed its rate cut projection for 2025 to 50 basis points from 100 bps earlier, and markets are pricing in just 45 bps of easing.

The 10-year US yield rose 70 bps in 2024, as of 5:00 p.m. IST.

"Even as global backdrop could stay volatile and there may be more pressure on emerging market currencies, prospects of lower fiscal deficit and inflation should curb volatility in bonds that should rally more over the course of year," Upadhyay said.