Mumbai: Sovereign bond yields eased Monday, with the 10-year yield falling to a near-one-year low, as the record surplus dividend transfer by the Reserve Bank of India (RBI) to the government stoked expectations of lower North Block borrowing – and, consequently, a narrower FY25 fiscal gap.
A fall in government bond yields lowers borrowing costs across the economy as sovereign debt yields are the benchmarks for determining the price of corporate borrowing.
The yield on the 10-year benchmark government security closed at 6.978%, its lowest level since June 6, 2023, LSEG data showed. The 10-year bond yield had closed at 6.98% on Friday. Bond prices and yields move inversely.
Last week, the RBI transferred a record-high surplus dividend of ₹2.1 lakh crore to the government.
“Yields are at a downward trajectory after the RBI announced a hefty dividend. I think this has raised speculation that borrowing will be reduced and it is sure that it will not overshoot,” said Gopal Tripathi, head of treasury and capital markets at Jana Small Finance Bank. He predicted a tight range of 6.90-6.95% on the 10-year bond yield over the near term.
The Centre has set itself a fiscal deficit target of 5.1% of GDP for the current financial year while projecting its gross market borrowing at ₹14 lakh crore.
Government bonds were also bolstered by a resumption of overseas investment ahead of the inclusion of local debt in a JP Morgan index from next month.
“The much larger than expected dividend by RBI has led to the expectation that maybe the government will cut its borrowing and that its finances would be in much better shape. Plus, June is near and the bond (purchase) inflows will start from index inclusion,” said Vijay Sharma, senior executive vice president at PNB Gilts.
A fall in crude oil prices also improved market sentiment and spurred buying interest in bonds, dealers said. Easing crude oil prices have a softening effect on India’s inflation and trade deficit, given that the country is a major importer of transport fuels.
