MUMBAI, June 13 (Reuters) - Investors are likely to

await clarity on India's fiscal consolidation path in the

forthcoming government budget before propelling the next leg of

a bond market rally, a top Citi India executive said.

The benchmark bond yield was at 6.99%, down

19 basis points so far in 2024 on lower supply and strong

foreign inflows.

"Once the market has clarity that fiscal consolidation will

continue, we think the 10-year benchmark can easily go down to

6.80-6.85%," Aditya Bagree, head of markets at Citi India said,

adding that beyond that, traders will look for signs from the

Reserve Bank of India, as well as the Federal Reserve for

potential rate cuts.

The Fed kept policy rates unchanged with the interest rate

dot plot projecting only one rate cut in 2024, down from three

signaled in March.

While India's recently concluded national elections

delivered an unanticipated outcome, Citi expects global

investors to maintain their positive outlook.

"Structurally India is a great macro story... Investors may

take a pause and see how the final budget comes in July, but we

do not think structural story changes," Bagree said.

The RBI's record surplus transfer also gives the

government a buffer and the question is if the government uses

that space for fiscal consolidation or for increased spending,

Bagree said.

"Our view is, there is enough fiscal buffer to not put the

5.1% fiscal deficit target at risk."

The new government has no plans to increase its fiscal

deficit target, Reuters reported earlier this week.

Foreign inflows into Indian bonds, and their inclusion in

JPMorgan's index are also likely to help, said Bagree.

Citi anticipates another $20 billion of inflows into bonds

this financial year, in addition to around $10 billion that has

already come in after the inclusion announcement in September.

While inflows are expected to help drive India's balance of

payments surplus to over $50 billion this fiscal year, gains for

the rupee are not certain as the RBI may use the flows to

further build its foreign exchange reserves, Bagree said.

But the central bank's growing FX pile that stands at a

record $651.51 billion also gives it significant firepower to

limit volatility, ensuring that the risk of any significant

depreciation is limited, he added.

"When we talk to clients today, India is on everyone's

radar," Bagree said.