India 10-year bond yield falls to 5.98% after trading in narrow range
Bond prices rose initially on Tuesday, but pared gains as concerns about the government's borrowing needs weighed on sentiment.
The yield on the benchmark 10-year bond ended at 5.98%, down 4 basis points from its previous close. The bond had traded in a narrow range of 5.98-6.04% during the session.
Bond prices initially rose on Tuesday after the Reserve Bank of India (RBI) said it would conduct a special open market operation (OMO) to buy long-dated government bonds worth Rs 10,000 crore ($1.25 billion) on Wednesday.
However, the gains were pared after the government announced a higher-than-expected borrowing target for the next fiscal year. The government said it plans to borrow Rs 14.95 lakh crore ($190 billion) in 2023-24, up from Rs 13.5 lakh crore ($172 billion) in the current fiscal year.
The higher borrowing target raised concerns about the government's fiscal deficit, which is already elevated. The government's fiscal deficit is expected to be around 6.9% of GDP in the current fiscal year, and is likely to remain elevated in the next fiscal year.
The concerns about the government's borrowing needs weighed on sentiment, and led to a sell-off in bonds in the afternoon session. The yield on the 10-year bond rose to a high of 6.05% before ending the day at 5.98%.
The fall in bond yields over the past few months has been driven by expectations that the RBI will cut interest rates in the coming months. The RBI has hiked interest rates by 225 basis points since May 2022 to combat inflation, but is now expected to pause or even cut rates in the coming months as inflation starts to ease.
The RBI is scheduled to meet next week to review its monetary policy. The central bank is widely expected to pause its rate hiking cycle, and could even signal a rate cut in the future.
The fall in bond yields has been a positive development for the stock market, which has rallied in recent months. However, the higher borrowing target announced by the government could weigh on sentiment in the coming months.
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