Indian government bonds declined Wednesday, the final trading session of 2024, as quarter-end positioning and the Reserve Bank of India's selective bond purchase strategy weighed on market sentiment. The benchmark 10-year yield rose to 6.5849% as of 10:50 a.m. IST, up from Tuesday's close of 6.5786%, with bond yields rising as prices fell.

Quarter-End Positioning Dampens Demand

Market sentiment turned cautious on the year's last trading day, contrasting with earlier expectations of gains. Quarter-end positioning by institutional investors has reduced buying interest, while traders await clarity on key policy developments that could impact future bond performance.

"OMO support hasn't stopped the selling because the market's risk appetite is still weak," noted a trader at a private bank. "Selling may persist until there's clarity on a U.S. trade deal and Bloomberg index inclusion for FAR (fully accessible route) bonds, which could revive foreign inflows."

RBI's Selective Bond Purchase Strategy

The Reserve Bank of India's decision to focus on short-term notes rather than the former benchmark 10-year securities in its open market operations has tempered market optimism. The central bank is scheduled to purchase bonds worth up to ₹50,000 crore on Monday, with the specific securities announced Tuesday.

Traders had hoped the RBI would include the 6.33% paper maturing in 2035, which would have helped bondholders reduce positions. The central bank's selective approach has reduced the expected support for longer-duration securities.

Policy Uncertainty Weighs on Sentiment

Despite ongoing negotiations, New Delhi has been unable to finalize trade agreements with the United States or European Union this year, as initially planned. This uncertainty, combined with questions about Bloomberg index inclusion for fully accessible route bonds, continues to impact foreign investor sentiment.

Interest Rate Environment Remains Stable

India's overnight index swap rates showed stability as traders sought directional cues amid the mixed market signals. The rate structure reflects cautious positioning ahead of the year-end close.

Record State Borrowing Calendar Expected

Market participants are closely watching for the announcement of the state government's January-March borrowing calendar, expected by week-end. The quarterly issuance is anticipated to reach a record ₹500,000 crore, which could influence near-term yield movements as markets transition into 2025.

The combination of quarter-end positioning, selective central bank support, and policy uncertainties has created headwinds for government bonds as 2024 trading concludes, marking a shift from earlier optimistic expectations.

India's government has proposed a comprehensive reform agenda aimed at transforming the country's economic landscape. These proposed reforms span taxation, labour regulations, maritime governance, and international trade agreements, potentially creating a foundation for sustained economic expansion.

Proposed GST Simplification and Tax Relief

The government is considering implementing significant GST reforms, which could include streamlining the tax structure to a two-slab system. This simplification, if implemented, may deliver benefits to consumers and businesses while aiming to maintain fiscal stability.

Income tax reforms are also under consideration, which could provide relief to the middle class. The government is exploring the possibility of replacing the Income-tax Act of 1961 with a modern Income Tax Act, potentially reducing litigation and improving compliance transparency.

Proposed Labour Market Transformation

The government is working on fully implementing the Labour Codes, which would consolidate 29 fragmented laws into four comprehensive modern codes. This reform, if enacted, could create a clearer framework for businesses while enhancing worker security and benefits.

Proposed Business Environment and MSME Expansion

The government is considering significant ease of doing business reforms to remove regulatory barriers across multiple sectors. Quality Control Order reviews are being conducted, which could potentially eliminate mandatory compliance for numerous product categories, particularly benefiting MSMEs and exporters.

A proposed MSME definition expansion is under consideration:

Potential International Trade and Investment Liberalization

India is exploring ways to strengthen its global economic position through strategic trade agreements and FDI reforms. The government is considering allowing 100% FDI in Indian insurance companies, which could attract foreign capital and enhance market competition.

Key trade agreements under negotiation include:

Proposed Sectoral Modernization Initiatives

The government is considering several maritime legislations to modernize India's shipping governance. These proposed laws aim to replace Acts from 1908, 1925, and 1958, potentially reducing logistics costs and strengthening port governance.

The SHANTI (Sustainable Harnessing and Advancement of Nuclear Energy for Transforming India) Bill is under consideration, which could mark a shift in nuclear policy, potentially allowing private and foreign participation in designated civilian projects while maintaining government control over strategic operations.

Potential Legal System Overhaul

The government is exploring the implementation of the Bharatiya Nyaya Sanhita (BNS), which would replace the Indian Penal Code of 1860. The proposed framework aims to address contemporary challenges including cyberterrorism, organized crime, economic sabotage, and gender-based violence.

Jan Vishwas reforms are being considered, which could potentially decriminalize numerous minor offences and eliminate outdated laws. The Securities Market Code Bill is also under discussion, which could unify India's securities market laws into a single framework.

These proposed comprehensive reforms, if implemented, could position India for economic growth, enhanced global competitiveness, and progress toward long-term development goals through transparent governance and expanded opportunities across various sectors.