Bond yields jump 10 bps on GST cut proposal, wipe out rating upgrade gains

The 10-year bond yield rose 10 basis points to 6.50 per cent on fiscal worries over GST cuts, reversing gains from S&P's sovereign rating upgrade earlier last week

Government bond yields surged on Monday as proposed cuts in the Goods and Services Tax (GST) revived fiscal concerns and raised fears of increased debt supply.

 

The yield on the benchmark 10-year government bond rose by 10 basis points — its sharpest single-day rise since 6 October 2023 — to settle at 6.50 per cent, against the previous close of 6.40 per cent. The benchmark yield has risen 21 bps since the 50 bps reduction in the policy repo rate by the Reserve Bank of India’s rate-setting panel on 6 June.

 

Prime Minister Narendra Modi announced GST rate rationalisation during his Independence Day address on Friday.

 

The government plans to scrap the 12 per cent and 28 per cent slabs and move to a two-tier GST structure of 5 per cent and 18 per cent, with a higher 40 per cent slab reserved for select sin goods.

 

Government bonds wiped out all gains accrued on Thursday after S&P’s upgrade of India’s sovereign credit rating from ‘BBB-’ to ‘BBB’. Bond markets were shut on Friday for Independence Day.

 

“There is fear of an increase in supply of bonds, and uncertainty in the market,” said a dealer at a state-owned bank. “There is technical support at 6.50 per cent (yield on the benchmark 10-year bond),” he added.

 

The new tax proposal will be placed before the GST Council for approval in its September or October meeting.

 

“The revenue loss to the Centre and states is estimated at ₹1.8 trillion (0.5 per cent of GDP) for 12 months. The Centre’s net loss (after transfers to states) is estimated at 0.15 per cent of GDP, while the states’ loss is estimated at 0.36 per cent of GDP. The relatively lower burden on the Centre is because states receive not only SGST but also 41 per cent of CGST,” IDFC First Bank said in a report.

 

S&P’s rating upgrade was based on recognition of the government’s resolve to maintain fiscal discipline alongside a strong infrastructure drive.

 

Meanwhile, the rupee appreciated by 21 paise to settle at 87.35 per dollar, compared with the previous close of 87.56, tracking equities which rose 0.84 per cent on the GST cut proposal.

 

“Rupee gained supported by expectations of a GST reduction likely to be announced around Diwali, with GST Council and PMO meetings lined up to provide a fiscal boost,” said Jateen Trivedi, Vice-President and Research Analyst – Commodity and Currency, LKP Securities.

 

“The move comes as policymakers look to cushion the economy amid lingering pressure on exports from US tariff issues. Rupee range can be seen between 87.00 and 87.75,” Trivedi added.

 

The local currency has depreciated by 2.15 per cent in the current financial year, and by 1.99 per cent in the current calendar year. In August so far, the rupee has appreciated by 0.24 per cent.