The Indian bond market has delivered a clear verdict – no further rate cuts are expected in the current fiscal year. This sentiment has gained traction following the government’s recent cut in Goods and Services Tax (GST), which has amplified concerns over fiscal slippage and additional borrowing.
“G-Sec markets aren’t expecting any further rate cuts. They have priced in a pause, treating 5.50% as the terminal rate. That’s why we are seeing yields rise across both medium and long-term tenures,” said VRC Reddy, Head of Treasury at Karur Vysya Bank.
The benchmark 10-year Government Security (G-Sec) yield surged to a four-month high of 6.53%, up from the 6.30–6.32% range it hovered around the Monetary Policy Committee (MPC) that held rates steady at its August 6 meeting. Longer-tenure bonds have also reacted sharply, with the 30-year G-Sec yield climbing to 7.22-7.23%, widening the spread between the two maturities to a near four-year high.
Steepening Yield Curve: A Warning from the Market
Currently, the 10-year and 30-year G-Sec spread stands at 71–72 basis points (bps). On August 14 and 15, the spread touched 82 bps, with the 10-year yield at 6.40% and the 30-year at 7.22%. Since then, the 10-year yield has firmed to 6.50–6.52%, while the 30-year continues to hover around 7.22-7.23%.
Reddy attributed the steepening of the yield curve to mounting concerns over fiscal slippages and the likelihood of increased government borrowing. He emphasised that long-duration bonds are particularly sensitive to such risks, unlike their short-term counterparts.
In a recent interview with FE, Devang Shah, Head Fixed Income, Axis Mutual Fund said, “demand-supply dynamics are currently not working in favor of the bond market, which is why we have seen a rise in yields for government bonds, especially in long bonds.”
Drivers of the Rising Yields: Fiscal Concerns and Supply Pressure
Further adding to it Gaura Sengupta, Chief Economist at IDFC First Bank, said, “The widening spread reflects the higher fiscal cost to state governments post-GST cut, and anticipated supply pressure from state bonds in the second half of FY26. This is putting upward pressure on the fiscal deficit.”
According to RBI, for the first half of FY26, the state government is expected to borrow close to Rs 5.6
lakh crore. So far the states have borrowed Rs 3.5 lakh crore till date.
Economists now expect the fiscal deficit for FY26 to rise by 20-30 bps, compared to the government’s target of 4.4%. The GST cut, while potentially stimulative in the short term, has raised questions about the sustainability of fiscal discipline.
The dealers expect the 10-year GSec to hover in the range of 6.40-6.55% until the next MPC slated on October 1. “If there is significant fiscal expansion, the yield could move towards 6.75%,” said Shah.