(Bloomberg) -- India’s debt is set to stay the darling of investors in emerging Asia even after the first budget of Prime Minister Narendra Modi’s coalition government initially received a cool reception by the market.
The yields on the country’s benchmark ten-year bond dipped on Wednesday, and market participants including at Goldman Sachs Group Inc. and abrdn Plc cited the path of fiscal consolidation laid out by Finance Minister Nirmala Sitharaman as positive.
Hopes for an eventual credit rating upgrade remain alive and the steady stream of inflows linked to the inclusion of India’s securities in JPMorgan Chase & Co.’s flagship emerging market gauge is likely to continue apace, they said.
“The budget is generally a positive for India’s macro stability, and as such also for continued inflows” into bonds, according to Michael Wan, a senior analyst at Mitsubishi UFJ Financial Group, Inc. “Lower government debt to GDP over the medium term is a positive.”
Spurred by index-related inflows, the South Asian country’s rupee bonds have outperformed all but the local currency debt of Argentina and South Africa this year, returning 5.4% in US-currency terms, according to Bloomberg-compiled data.
But a punishing setback for Modi’s party in last month’s parliamentary election triggered fears of a pickup in spending to placate allies. Although Sitharaman outlined vast outlays on unemployment and projects favored by allies in her budget on Tuesday, the headline figures were in line with previous pronouncements. She laid to rest fears about an abandoning of fiscal discipline.
India’s ten-year bond sold off on Tuesday after officials disappointed traders expecting a bigger reduction in debt sales. But it later recouped the decline.
The administration announced plans to borrow 14.01 trillion rupees ($167 billion) in the fiscal year ending in March 2025, slightly below the figure proposed in the interim budget in February.
“Although net borrowings were only revised marginally lower, there is room for actual net borrowings to realise lower than what was penciled in,” said Jerome Tay, a fixed-income fund manager at abrdn Plc in Singapore. “This provides further tailwind in addition to index inclusion and benign inflation which makes demand and supply dynamics favourable for India.”
Overall, Sitharaman promised prudence. She cut the deficit target for the current fiscal year to 4.9% of gross domestic product from 5.1% previously, and said that from 2026-27, the goal will be to have a continued decline in the deficit relative to output.
“India is heading in the right direction in terms of fiscal consolidation,” Gene Fang, sovereign risk analyst at Moody’s Ratings, said. “It’s a question of how fast it can go.”
--With assistance from Nasreen Seria and Anup Roy.
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