While equity investors where coming to terms with the changes delivered in capital gains tax, the budget’s strong push to fiscal prudence had the bond markets cheering.

Across tenors, long-term government securities have continued their pre-budget trajectory of heading to lower yield levels.

In particular, the finance minister’s assertions on fiscal deficit for FY25 and FY26 as also lesser gross and net market borrowings than in the previous year have been welcomed.

Yields soften further

In her budget speech the FM reiterated that the fiscal deficit for the current financial year would be 4.9 per cent and that for FY26 would be 4.5 per cent. Moreover, the gross market borrowing by the Centre would be ₹14.01 lakh crore and the net borrowing is expected to be ₹11.63 lakh crore. Both these figures are much lower than FY24 borrowing figures. Together with the fact that tax giveaways haven’t been much in terms of large slab expansions and a higher equity LTCG levy, have meant that the Budget is fiscally prudent and is seeking to keep inflation under check.

At the other end, the recent spike in food inflation leading to the overall CPI rising has meant that the RBI may not cut rates in a hurry.

To be sure, yields on securities maturing in 2030 and 2034 and 2039 had gone well below the 7.1 per cent mark after the interim budget. Subsequently, the yields have softened further and are now a tad below the 7 per cent mark. The 10-year G-sec is now available at yields close to 6.97 per cent, according to data from the CCIL. The yields on government bonds maturing in 2030 and 2039 are now at 6.96 per cent and 6.99 per cent, respectively.

The inclusion of Indian securities in JP Morgan’s Bond index started from last month. Over the course of June 2024 to March 2025, about $23 billion inflows are expected. Bloomberg is also reportedly considering addition of Indian gilts in its emerging markets local currency index.

These moves are likely to push yields down further, even if interest rates hold firm for the foreseeable future.

What bond investors must do

A decline in bond yields of longer-tenure securities would mean a rally in bond prices as they share an inverse relationship. Indeed, the best of gilt funds have delivered 8-9 per cent returns in the last one year and have been among the best performers.

Given the softening of yields and reasonable liquidity levels, there is unlikely to be upward trigger to short-term rates. Hence investors can consider gilt and constant maturity funds from a longer term perspective.

Like equities, bonds too can be considered from a goal-based perspective.

Investors can consider directly investing in G-secs maturing in 2033 and 2037 (for 7 per cent yield) or gilt funds for reasonable yields and potentially healthy capital appreciation. Coupons on g-secs more than ₹10,000 would attract TDS from October 1, 2024.

ICICI Prudential Gilt, SBI Magnum Gilt and Nippon India Lakshya Nivesh are funds that invest in g-secs and carry no credit risks. These funds which have average maturity profiles of 7-19 years can be good choices.

The yield-to-maturity for these schemes is healthy at around 7.17-7.23 per cent levels, among the best in their categories.

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