India benchmark yield may ease to 6.85% as rates near peak - Citi

A cashier checks Indian rupee notes inside a room at a fuel station in Ahmedabad

MUMBAI (Reuters) - Indian government bond yields are expected to fall, with the 10-year yield easing to 6.85% in the medium term, their lowest level since March, Citi Research said.

"Bonds have so far lagged the move in swaps and are typically late to react to shifts in policy cycle. Nevertheless, bond yields are likely to come off too, and likely on a steeper curve," analysts Samiran Chakraborty and Gaurav Garg said in a note.

The foreign bank expects New Delhi to target a fiscal deficit of 5.8% of gross domestic product for the next financial year ending March 2024, implying a supply of around 15 trillion rupees ($184.68 billion). That's "better than market expectation median of INR16 tn (trillion), and can imply easing of yields post facto," the analysts said.

The government aims to maintain a fiscal deficit of 6.4% this fiscal year, with a gross borrowing target of 14.21 trillion rupees.

"Also, with overall easing of policy rate hike pressures, easing of inflation and skew of risk-reward in favour of fixed income again, bond yields are likely to push down," the analysts said.

India's 10-year 7.26% 2032 bond yield was at 7.32%, nearly unchanged this month, after testing a low of 7.26%.

Citi expects the Reserve Bank of India to hike repo rate by 25 basis points in February, though India is nearing the peak policy rates for this cycle.

India will present its budget for the next financial year on Feb. 1, with an 11-12% likely increase in capital expenditure and overall expenditure of around 6.5%-7%.

Expectations of fiscal deficit and borrowing targets in

trillion rupees for FY24

Brokerage name Fiscal deficit Centre Centre State State

(% of GDP) gross net gross net

Goldman Sachs 5.9 16.8 13 8 5.3

Barclays 5.8 - - - -

Citi Research 5.8 15 10.6 - -

DBS 5.9 15.5 - - -

Societe Generale 5.5-6 - - - -

ICICI Bank 5.9 15.75 - 8.5 -

ICRA 5.8 14.8 10.4 9.6 6.8

($1 = 81.2220 Indian rupees)

(Reporting by Dharamraj Dhutia; Editing by Dhanya Ann Thoppil)