Budget impact: Indian government bond yields hit highest in one year. How can it affect stock market

On Monday, February 2, Indian bond yields jumped by 8 basis points (bps) following the government's announcement of gross borrowing through government securities that exceeded expectations. The yield on the 10-year benchmark bond started at 6.740% and reached 6.778%, in comparison to the previous day's close of 6.696%.

The 10-year bond yield climbed to 6.78%, marking the highest level since January 17, 2025.

The Union Budget has estimated gross market borrowings at ₹17.2 lakh crore for FY27, which represents a 16% rise from the budget estimate for the current year, while net market borrowing is anticipated at ₹11.7 lakh crore to cover a fiscal deficit of 4.3% of GDP.

The yield could increase to 7% in the upcoming weeks, said Nomura Holdings Inc. and ICICI Securities Primary Dealership Ltd, according to a Bloomberg news article.

Vineet Agrawal, co-founder of Jiraaf, highlighted that yields are likely to stay firm over the next few months, and the RBI may step in with additional OMOs to manage volatility. In the interim, some corporate borrowers could choose to delay bond issuances until yields soften and market conditions settle.

Similarly, Elara Capital in its report stated that they see India 10-year yield gradually trending towards 6.9-7%, thus adversely impacting cost of funds for NBFCs and mid-sized banks that depend on wholesale funding sources.

“In the near term, we thus prefer well capitalised large cap private banks with steady CASA ratio. RBIs’ reaction function with respect to liquidity and yields becomes crucial hereon,” added the brokerage.

Rising borrowing costs could further pressure an economy already facing significant US tariffs, while the central bank has limited ability to reduce interest rates further to boost growth. Yields have risen even after the Reserve Bank of India intervened in the market to contain them—due to high issuance by state governments and diminishing demand from pension and insurance funds.

The central bank must increase its bond acquisitions to enhance liquidity and regularly purchase debt to indicate yield trends, stated Alok Sharma, the treasury chief at the Industrial and Commercial Bank of China in Mumbai, according to a Bloomberg news report.

Proactive management of liquidity will be necessary, or yields will only continue to rise," he mentioned in a Bloomberg news report.

How can it affect stock market?

Rising bond yields usually tend to pressure equity markets because they increase the discount rate used in valuing future cash flows, which directly lowers fair value estimates especially for high-growth, long-duration stocks, explained Prashanth Tapse, Research Analyst, Senior Vice President of Research at Mehta Equities.

Further, Tapse said that higher yields also raise borrowing costs for companies, squeezing margins and potentially slowing capex and earnings growth, while making fixed-income assets more attractive relative to equities, leading to valuation de-rating.

During Monday's trading session, the Nifty 50 rose by 0.04% to reach 24,833.65, while the BSE Sensex climbed 0.17% to 80,863.21 as of 10:27 IST. Throughout the session, both indices experienced fluctuations, with losses of 0.2% and gains of 0.3%.

According to technical analysts, immediate support is identified in the range of 24,700–24,600 (intraday lows and support from Budget day), while resistance is anticipated at 24,900–25,000 (a psychological level and prior support now acting as resistance), followed by 25,150–25,300 (an earlier consolidation area).

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.