Yield on India’s 10-year government bond rose over 10 basis points (bps) to hit a six-week high on Wednesday, amid growing uncertainties about the proposed $10-billion overseas bond programme and concerns over higher borrowing from the domestic market if the offshore plan fails. In addition, talks of a fiscal stimulus have aggravated apprehensions of a bond glut this fiscal, leading to profit-taking and price corrections.
Analysts say if the government drops the overseas bonds plan and goes for a fiscal stimulus package to reverse the economic downturn, it may lead to higher domestic borrowings. Traders are also worried about core inflation edging up, which may push the Reserve Bank of India (RBI) to pause its rate-cut cycle.
Data released on Tuesday showed that core inflation rose 4.4% in July against 4.1% in June.
The 10-year bond yield rose for the fifth consecutive session and closed at 6.631%, a level last seen on 5 July, up 10.5bps from its Tuesday’s close of 6.526%. Bond yields and prices move in opposite directions.
The government is planning a series of measures, including tax cuts and targeted sops, to boost a slowing economy. The measures may include steps to boost infrastructure investments; goods and services tax (GST) relief to specific sectors, including the automobile industry; ways to further cut red tape on cross-border trade; and further improvements in the ease of doing business.
“With economic activity indicators remaining weak, speculation over fiscal stimulus is gaining traction, which is possibly reflected in the updrift in bond yields. While we don’t see scope of economy-wide stimulus, sector-specific measures, particularly to address those under strain (auto, MSMEs, real estate etc.) is likely," said Radhika Rao, an economist with DBS Bank.
Rao added that the absence of an aggressive stimulus programme, while the central bank remains focused on policy transmission, will restrain a sharper rise in yields. “Global yields also look set to remain low for longer," Rao said.
On 5 July, finance minister Nirmala Sitharaman announced in the Union budget that the government plans to raise at least part of its borrowing from the overseas market. Sitharaman also kept the gross borrowing target for the current fiscal unchanged at ₹7.10 trillion and set the fiscal deficit target for 2019-20 at 3.3% of gross domestic product, down from 3.4% envisaged in February’s interim budget.