India's local currency sovereign bonds are set for a strong rally after the federal government announced a plan to curb its budget deficit and borrowings for the fiscal year beginning in April.

The lower supply of government bonds will meet strong demand from foreign buyers who have bought $6.3 billion in such securities in the last three months ahead of India's inclusion in global bond indexes.



The benchmark 10-year bond yield posted its biggest single-session fall in nine months on Thursday.

The 10-year yield is at 7.02%. It last traded below 7% in June.

Bonds worth 1.20 trillion rupees ($14.48 billion) were traded on Thursday, the highest single-day volume in four years, data from India's clearing corporation showed.



Indian government debt will be included in JPMorgan's global bond indices from June. Analysts expect inflows of $15-25 billion into these bonds over a 10-month period as the country's weight in the index climbs to 10%.

Foreign buying hit a monthly record of $2.4 billion in January.

Their buying along with steady purchases from domestic banks, insurers and funds will mean demand for bonds will be higher than supply for the first time in years.

The budget announced planned market borrowings of 14.13 trillion rupees for next year, below the current year's and lower than expectations.

More than a sixth of the government's net borrowing will be absorbed by foreign investors, said Nomura, which expects inflows of around 2 trillion rupees in the next financial year.


Strong foreign demand for Indian bonds and an increase in their ownership would allow commercial banks which are currently the largest holders of such securities to meet rising credit demand and support India’s high growth


Maneesh Dangi, director at Macro Mosaic Investing And Research, expects 10-year yields to move towards 6% over the next one to three years as "favourable global macros and high valuation will help".

B.Prasanna, head of treasury at ICICI Bank, expects the benchmark bond yield to be at 6.75%, if not lower, by the July-September quarter. ($1 = 82.8625 Indian rupees)

(Reporting by Dharamraj Dhutia Editing by Vidya Ranganathan and Gareth Jones)