The development followed heavy buying from bond traders after the Reserve Bank of India's monetary policy committee cut benchmark rates by 35 bps on August 7.
Bond yields on Friday rose across the curve as traders booked profits following a strong rally. Treasurers are concerned about the possibility of a slippage in the fiscal deficit owing to moderation in tax revenues amidst the slowdown. Corporate results for the June quarter have been very poor, leading to apprehensions that tax collections from companies would be modest.
“Bond yields rose as there is nervousness in the market regarding the possibility of the government expanding the fiscal deficit to address the current slowdown situation,” said Suyash Choudhary, head – fixed income, IDFC AMC. Dealers pointed out that higher extra-budgetary borrowings could crowd out the private sector.
The benchmark 10-year bond yield on Friday rose by 9 basis points (bps) to close at 6.49%, a near two-week high. Lower duration government bond yields, namely the five-year and the three-year papers, rose by 8-10 bps to close at 6.23% and 6.08%, respectively, on Friday. The development followed heavy buying from bond traders after the Reserve Bank of India’s monetary policy committee cut benchmark rates by 35 bps on August 7.
Experts believe the current slowdown scenario, especially in the auto sector, could directly impact tax collections. “Tax collections could be lower than expectations due to the current slowdown situation which is weighing on yields,” said Anand Bagri, head – domestic markets, RBL Bank.
Traders believe the rise in yields could be attributed to profit booking following a strong rally in bond yields. The benchmark 10-year bond yield (7.26% paper maturing in 2029) has appreciated by nearly 85 bps since April this year. “Yields rose as traders have booked profits,” said Ashish Jalan, assistant vice-president, SPA Securities.
Foreign portfolio investors remain net buyers of Indian debt so far in August. Global funds have invested nearly $150 million in the debt markets this month till August 8 on the back of an inflow of $1.2 billion in July.