Budget impact: Bond yields likely to drift lower. Here’s what should be your fixed income portfolio strategy

Indian rupee traded flat on Wednesday, a day after plunging to a record low, while the government bond yields continued to wobble around the flatline after the Union Budget 2024 proposed to cut government borrowing and reduce fiscal deficit.

Rupee was at 83.69 against the US dollar, nearly unchanged from its previous close at 83.6875. The local currency hit a record low of 83.7150 on Tuesday. The benchmark 10-year yield was at 6.9673% compared with its previous close of 6.9695%.

The Union Budget 2024 projected fiscal deficit for the current financial year at 4.9% of GDP compared to 5.1% target in the interim budget. The Gross borrowing and net borrowing is ₹14.01 and ₹11.63 lakh crores, which is lower by ₹12,000 crore.

Finance Minister Nirmala Sitharaman has assured the total debt to GDP ratio will be on a declining trend in coming years and the government is targeting a fiscal deficit of 4.5% or lower in the next financial year.

Analysts believe this is a long term positive and expect the benchmark bond yield to fall going ahead amid improved macros.

“With FY25 likely to see support from an anticipated ease in monetary policy across key economies and with India’s inclusion in the JPMorgan EM bond index, we expect the 10-year g-sec yield to drift lower towards 6.80 - 6.50% levels by March 2025,” Amnish Aggarwal, Director – Institutional Research at Prabhudas Lilladher Pvt. Ltd. said.

Despite stable domestic long term macro fundamentals, the Indian bond market witnessed heightened volatility in the last few months in line with global markets taking cue from mixed global macro signals, uncertain central bank policies across developed markers and rising geopolitical tensions.

The 10 year G-sec yield eased from 7.35% in October 2023 to 7.00% in March 2024 after which it saw increasing volatility and is trading in the broad range of 6.95% - 7.20%.

Analysts at Tata Mutual Fund believe we may have a pleasant surprise, with borrowing lower than what is targeted and expect the 10-year yields may trade in the band of 6.90% to 7% in the coming months.

However, the medium to longer term trend continues to suggest a softening trajectory. Hence, analysts believe that the fixed income portfolio allocation can remain tilted towards duration through active and passive strategies to capitalize on the evolving scenario while acknowledging the short-term volatility in yields.

Fixed Income Portfolio Strategy

Motilal Oswal Private Wealth (MOPW) reiterates its view to have a duration bias in the fixed income portfolio so as to capitalize on the likely softening of yields in the next 1-2 years.

It suggests 65% - 70% of the portfolio should be invested in combination of Actively & Passively managed debt strategies to capitalize on duration and accrual as per the evolving fixed income scenario and Equity Savings funds/Conservative multi asset funds which aim to generate enhanced returns than traditional fixed income with moderate volatility through a combination of equities, arbitrage, fixed income, commodities, REITs/InvITs.

To improve the overall portfolio yield, 30% – 35% of the overall fixed income portfolio can be allocated to select high yield NCDs, Private Credit strategies & REITs/InvITs, MOPW said.

For liquidity management or temporary parking, MOPW suggests investments can be allocated to Floating Rate (min 9-12 months) Arbitrage / Ultra Short Term (minimum 6 months) / Liquid (1-3 months) / Overnight (less than 1 month) strategies.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.