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MUMBAI: Indian government bond yields were marginally lower in early trades on Monday, as improvement in government tax collections aided sentiment that a stronger fiscal position would deter additional supplies of bonds into the markets.

The benchmark Indian 10-year government bond yield was at 7.2399% as of 0440 GMT, after ending at 7.2260% on Friday.

The yield rose 10 basis points last week, its biggest such move since week ended June 3.

India’s advance tax collection for the first half of the financial year stood at 2.95 trillion Indian rupees ($37.03 billion), up 17% on-year, while the net direct tax collections were up 23% on-year to 7.01 trillion rupees as on Sept. 17, the finance ministry said.

“The higher (tax) collections give some confidence that fiscal position is strong, and the government may not resort to any additional borrowing for this fiscal (year),” a trader with a state-run bank said.

Bond yields inch up ahead of debt sale, index inclusion bets stay

“However, central bank policy decisions hold the key for near term.”

India aims to borrow a record 14.31 trillion rupees on a gross basis through sale of bonds in this financial year, out of which 5.86 trillion rupees is set for October-March.

Last week, ICICI Securities Primary Dealership forecast a risk of additional borrowing of around 800 billion rupees, while expecting states to borrow below budgeted estimate.

A further fall in yields was expected to be curtailed, as traders remain focussed on policy outcomes from global central banks, including the US Federal Reserve on Wednesday. The two-year US yield stayed near a 15-year high, sharply higher than the 10-year yield.

The two-year yield typically reflects interest rate expectations.

At present, market expects a one-in-five probability of a 100 basis points rate hike by the US Fed.

Last week, bond yields had jumped, as traders turned cautious with rate hike fears gripping the market in the absence of any development on the much-anticipated inclusion of local bonds in global indexes.

Sentiment was also cautious after the Reserve Bank of India in its monthly bulletin, said, “frontloading of monetary policy actions can keep inflation expectations firmly anchored and reduce the medium-term growth sacrifice.”

The central bank’s next policy decision is due on Sept. 30.

The country’s retail inflation has remained above the central bank’s upper tolerance level for eight straight months, while the RBI raised interest rates by 140 basis points during May-August to tame prices.

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