Indian bonds reversed gains after the government disappointed traders expecting a bigger cut in debt sales.

The administration plans to borrow 14.01 trillion rupees (US$168 billion) in the fiscal year ending March 2025, Finance Minister Nirmala Sitharaman said on Tuesday. That’s slightly lower than 14.1 trillion rupees estimated in a Bloomberg survey and proposed in the interim budget in February.

New Delhi also forecast a narrower fiscal deficit of 4.9% of gross domestic product, versus 5.1% in the interim spending plan. This is the first budget from the government after Prime Minister Narendra Modi won a third term in elections last month, and signals the government is sticking to a prudent fiscal policy.

Traders were expecting a bigger reduction in borrowings to act as a catalyst for more bond gains boosted by their inclusion in JPMorgan Chase & Co’s emerging-market index. The US$1.3 trillion bond market will now look toward the central bank’s policy decision in August for any signs of dovishness.

Bonds rallied initially on the lower fiscal deficit number, with the yield on the 10-year bond dropping by as much as four basis points to 6.93%, the lowest since April 2022. They reversed gains after the finance minister announced a modest cut in borrowings.

“The borrowing numbers have not changed much in spite of fiscal deficit being lower at 4.90%, so yields are up,” said Puneet Pal, the head of fixed income at PGIM India Mutual Fund.

The 10-year yield was steady at 6.97%, while the 5-year yield was down one basis point at 6.92%. The rupee hit a new all-time low of 83.7175 per dollar.

Net borrowing, adjusted for maturities, will be 11.63 trillion rupees, compared with 11.7 trillion median expectation in a Bloomberg survey.

Traders were watching whether the federal government sticks to a path of fiscal prudence after Modi’s party lost majority in elections, and had to depend on allies to run the coalition government.

Bonds have advanced in recent months amid accelerated foreign inflows following the inclusion of Indian sovereign notes in JPMorgan Chase & Co’s emerging-market index. Foreigners have snapped up about US$12 billion worth of the notes since the September announcement.

“It is not that the market has got a negative surprise,” said Murthy Nagarajan, the head of fixed income at Tata Asset Management. The fiscal deficit will be lower at 4.5% the next year, which is good for long term, he said.

New Delhi cut its borrowings via treasury bills by about 500 billion rupees in the current fiscal year, according to budget documents.

As the government reduced the borrowings via treasury-bill issuance, that explains the muted cut in gross borrowings, said Gaura Sen Gupta, the chief economist of IDFC FIRST Bank.

  - Bloomberg