MUMBAI: Indian government bonds tumbled on Monday, wiping out gains from S&P’s rating upgrade last week, as proposed tax cuts reignited fiscal concerns and stoked fears of heavier debt supply.
The benchmark 10-year bond yield ended at 6.4968%, up nearly 10 basis points from Thursday’s close of 6.4003%.
Bond yields move inversely to prices.
Prime Minister Narendra Modi on Friday announced sweeping changes to the goods and services tax (GST) regime which will make daily essentials and electronics cheaper from October.
The tax cut plan, however, entails a fiscal cost given GST is a major revenue generator. IDFC First Bank says the cuts will cost states and the federal government $20 billion annually.
“People are not comfortable buying bonds amid so much uncertainty,” said Debendra Kumar Dash, senior vice president of treasury at AU Small Finance Bank, “There is growing fiscal concern, constant VRRR auctions by the central bank, and no clarity on a potential US-India trade deal.”
While bond market participants rapidly sold positions, the government is optimistic that the country’s fiscal deficit target can still be achieved.
Meanwhile, Economists at UBS Securities see lower GST rates having a disinflationary effect, creating room for more central bank interest rate cuts.
“With underlying inflationary pressures remaining benign…we see space for the terminal repo rate to fall to the 5.0-5.25% range,” Tanvee Gupta Jain, Chief India Economist at UBS wrote in a note.
Rates
India’s overnight index swap rates rose on Monday as mounting fears of fiscal pressure and heavier government bond supply prompted traders to pay across the curve.
The one-year OIS rate was up 3 bps at 5.54% and the two-year OIS rate INR2YMIBROIS=CC was up 4 bps at 5.5%. The liquid five-year OIS rate INR5YMIBROIS=CC rose 6 bps to 5.7275%.
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