The yield on the 10-year benchmark bond closed above 7 per cent for the second consecutive session on Wednesday at 7.017 per cent. On Tuesday, the yield had closed at a 14-month high of 7.05 per cent.
Given a slim chance of the Central government breaching the fiscal deficit target for 2017-18, bond market experts believe the yields might remain at elevated levels. One reason the markets expect the government to borrow more than planned amount, in the current year, is the Rs 20,000 crore potential loss of revenues following a sharp cut in GST rates for a host of items.
DK Joshi, chief economist at CRISIL, believes the government will stick to the target of 3.2 per cent since it has been fiscally conservative. “We had expected the yield to be at 6.7 per cent this year but we are in the process of revising this upwards,” Joshi said. However, Joshi observed there had been no substantial rise in inflation, only a slight pick-up. The consumer price index (CPI) inflation for October came in at 3.58 per cent, up 30 basis points over the 3.28 per cent in September.
The government has so far borrowed Rs 4.46 lakh crore of the budgeted Rs 5.8 lakh crore for the fiscal year 2018 leaving close to Rs 1.34 lakh crore of borrowings over the next four-and-a-half months.
Shashikant Rathi, head of treasury and markets at Axis Bank, said while a number of reasons had contributed to the rise in yields, if the government reassured markets it would not breach the deficit, yields would stabilise. “The central bank might adopt a neutral stance,” Rathi said.
Ananth Narayan, a money market, expert believes worries regarding over-supply will continue to persist for some time. FE