Indian government bond yields are anticipated to exhibit an upward bias as the new month commences, primarily driven by persistent concerns surrounding demand and potential fiscal slippage stemming from proposed tax cuts. After closing at 6.5678% on the last day of the previous month, the benchmark 10-year bond yield is projected to fluctuate within the 6.55%-6.59% range. The previous month witnessed a significant increase of 19 basis points in the yield, marking the most substantial monthly rise since September 2022.
Several factors contribute to this upward pressure. Weaker demand conditions have already led to a notable increase in the 10-year bond yield, climbing from 6.40% to 6.57% within a short two-week period. Recent growth data has done little to alleviate these concerns. Furthermore, government proposals to reduce Goods and Services Tax (GST) rates have fueled apprehensions about increased government borrowing in the latter half of the year. The proposed GST structure, featuring rates of 5% and 18%, with higher taxes on luxury and "sin" goods, has been generally accepted by states, but revenue protection negotiations are ongoing, adding to the uncertainty. The GST council is scheduled to convene this week, and clarity is expected to emerge thereafter.
Market participants are also closely monitoring the Reserve Bank of India's (RBI) actions. A sharp decline in institutional buying has exerted upward pressure on yields, potentially hindering monetary transmission. While India's economy experienced an unexpected expansion of 7.8% in the April-June quarter, surpassing the previous three months' 7.4% growth and exceeding Reuters' poll expectations of 6.7%, this may reduce immediate pressure on the central bank to implement rate cuts.
Concerns about fiscal slippage may also contribute to the upward bias. Government debt and deficits generally have an effect on government bond yields. If government debts and/or government deficits increase, then government bond yields will rise.
Several factors influence Indian government bond yields, including inflation, interest rates, and fiscal policy. Higher inflation typically leads to higher yields as investors demand more compensation for the loss of purchasing power. Central bank policies, especially those set by the Reserve Bank of India (RBI), play a significant role in determining yields. A higher fiscal deficit often results in increased government borrowing, pushing yields upward. Global economic conditions, such as fluctuations in US Treasury yields, can also affect Indian yields.
The interplay of these domestic and international factors is creating a complex environment for Indian bond yields. While the recent economic growth figures may temper expectations of immediate rate cuts, concerns about demand, fiscal policy, and global cues are likely to keep yields under upward pressure in the near term. Market participants will be closely watching for any interventions from the RBI and the outcomes of the GST council meeting for further direction.
