Mumbai: The 10-year government bond yield fell another 8 basis points on Tuesday to hit a three-week low after the Reserve Bank of India said it will transfer 1.76 lakh crore surplus to the government this fiscal, easing worries over the Centre’s fiscal deficit target for this financial year.

The 10-year bond yield fell to 6.398% from its Monday's close of 6.48%. Bond yield and prices move in opposite direction.

"The fiscal math looks a lot more achievable following this transfer," said Emkay Research in a note to its investors.

The transfer includes 1.23 lakh crore of surplus for 2018-19 and 52,637 crore of excess provisions identified as per the revised Economic Capital Framework (ECF) adopted at the meeting, RBI said in a statement on Monday. This was in line with the recommendations of the committee under former central bank governor Bimal Jalan. RBI’s central board accepted all the recommendations of the committee.

Analysts said the surplus amount could be either used to provide fiscal stimulus to a sagging economy, reduce off-balance sheet borrowings or meet the expected shortfall in revenue collections.

"The transfer of surplus from the RBI should help offset the expected shortfalls in various tax revenues in FY2020 and aid the government in meeting its fiscal deficit target. As a result, G-sec yields are likely to ease in the immediate term", Aditi Nayar principal economist at ICRA said.

According to a Bloomberg report, the government is likely to mull a cut in borrowings and meet its fiscal deficit aim with the fund transfer from the central bank.

On Monday, bond yields fell nearly 9 basis points after the measures announced by finance minister Nirmala Sitharaman eased fears that the government may borrow more to fund its stimulus plan.

Meanwhile, the rupee strengthened to 71.82 a dollar, up 0.28% from its previous close of 72.020, while the benchmark equity index Sensex rose 0.44% to 37,658.48 points.