MUMBAI, Sept 1 (Reuters) – Indian government bond yields are expected to start the month with a marginal upside, as underlying sentiment remains cautious on worries over demand as well as fiscal slippage from the government’s tax cut proposal.
The benchmark 10-year bond yield is expected to trade in the 6.55%-6.59% range, after ending at 6.5678% on Friday, a trader with a private bank said. The yield rose 19 basis points in August, its biggest monthly leap since September 2022.
“Demand weakness has already heightened, resulting in a sharp move to 6.57% from 6.40% in the 10-year bond yield in just two weeks. The latest growth data has done little to assuage these concerns,” the trader said.
Bond yields have been on an uptrend after the government announced plans to cut goods and services tax (GST) rates, fuelling fears that it could borrow more in the second half of the year.
The proposal of a two-rate tax structure of 5% and 18%, with some luxury and “sin goods” such as cigarettes taxed higher at 40%, has broadly been accepted by states, but they are now wrangling to protect revenues after the tax changes.
The GST council is scheduled to meet this week, and any clarity would emerge only after that.
Meanwhile, bond traders are calling for the Reserve Bank of India’s intervention as a sharp drop in institutional buying has pushed yields higher, threatening to stall monetary transmission.
India’s economy unexpectedly expanded 7.8% in the April-June quarter, picking up from 7.4% in the previous three months, and higher than 6.7% expected in a Reuters poll, which may ease pressure on the central bank to immediately cut rates.
India’s overnight index swap rates are expected to be little changed after rising in the previous session.
The one-year OIS rate ended at 5.52%, while the two-year OIS rate ended at 5.5050%. The five-year OIS rate ended 5.7850%. KEY INDICATORS: ** Benchmark Brent crude futures were 1.4% down at $67.20 per barrel, after easing 0.7% in the previous session ** Ten-year U.S. Treasury yield was at 4.2260%; two-year yield at 3.6230% ** RBI to conduct three-day variable rate reverse repo auction for 500 billion rupees (Reporting by Dharamraj Dhutia; Editing by Sonia Cheema)
