Rally in bond markets lasted just hours after analysts decoded RBI bonanza

Yields on the benchmark 10-year note ended five basis points higher at 6.53% on Tuesday

A rally in India’s bond markets after a record fund transfer from the central bank to the government lasted just hours.

Yields on the benchmark 10-year note had dropped as much as 13 basis points on Tuesday on speculation that the government will cut back on borrowings after the Reserve Bank of India said it will give Rs 1.76 trillion ($24.6 billion). By the end of the day, traders were selling the debt.

The flip came as some analysts started breaking down the components of the payment, and focused on the Rs 52,600 crore surplus capital getting transferred. That amount is lower than market estimates of as much as Rs 2 trillion. Meanwhile, traders are worried that the government will end up spending the funds on a fiscal stimulus instead of plugging a budget deficit.

“The point here is that the one-time capital transfer is quite nominal, much lower than the lower bound of the market expectation,” said Suyash Choudhary, head of fixed income at IDFC Asset Management Co. The “bigger point is whether they use it for fiscal consolidation or they use it partly for fiscal stimulus. If there is an additional stimulus program, then the market will continue to worry about meeting the fiscal-deficit target.”

The actual gain to the government will be around Rs 58,000 crore from the dividend and surplus capital, Kotak Institutional Equities estimated. That’s partly because the ballpark Rs 1.76 trillion announced on Monday included Rs 28,000 crore paid in February.

Yields on the benchmark 10-year note ended five basis points higher at 6.53 per cent on Tuesday. They have climbed more than 20 points in the past three weeks amid concerns of higher government borrowing.