New GST rates: Govt bonds rally as revenue loss concerns subside

Government bonds rallied as the estimated revenue loss from GST tax cuts came in lower than expected, easing fiscal concerns. The yield on the benchmark 10-year bond eased to 6.49%

Government bonds rallied on Thursday after the estimated revenue loss from tax cuts on multiple items came in far lower than market expectations. The yield on the benchmark 10-year bond eased by 5 basis points to 6.49 per cent, compared with 6.54 per cent in the previous session.

 

The government estimated a net revenue loss due to the GST rate rationalisation of Rs 48,000 crore, or 0.14% of GDP, while the new category of sin/luxury tax would provide additional revenue of Rs 45,000 crore.

 

“Static calculations have been made using the FY24 consumption basket as the base. This would ease some of the fiscal slippage concerns in the bond market,” said economists at Emkay Global.

 

 

“The uncertainty around the GST rate rationalisation has dissipated, which was a relief for the bond market. The abolition of cess is also a positive for consumption,” a trader at a private bank said.

 

The lower-than-anticipated fiscal impact has helped ease concerns about additional government borrowing, contributing to the positive response in the bond market. However, despite this relief, market participants remain cautious due to persistent fiscal uncertainties.

 

“The yield on the benchmark 10-year government bond is expected to trade in the range of 6.50 per cent, with good buying seen at 6.55 per cent,” said a dealer at a primary dealership.

 

Experts noted that on the revenue front, downside risks persist for income tax collections, which are tracking significantly below target levels. Between April and August 11, income tax revenues declined by 7.5 per cent year-on-year, compared with the budget target of 21.6 per cent growth based on FY25 actuals. Collections are expected to improve after the mid-September tax filing deadline; however, full-year receipts are likely to fall short of the target. Corporate tax collections are also lagging, growing by just 2.9 per cent year-on-year in FYTD26 (April–August), against the budgeted growth rate of 9.7 per cent. Meanwhile, GST collections could also undershoot the Budget Estimate, as growth momentum has slowed in recent months. Notably, these trends were observed before the recent tax cuts came into effect.

 

“Taking a more holistic view of the Centre's fiscal deficit, we expect the 4.4 per cent of GDP target to be met. On the revenue side, downside risks persist for income tax collections, which are tracking significantly lower than target levels,” said Gaura Sen Gupta, Chief Economist at IDFC FIRST Bank. “In case there is full pass-through of the tax cuts, headline CPI inflation could be lower by 1.0 per cent (over 12 months). The actual impact could be lower, at around 0.6 to 0.8 percentage points, assuming partial pass-through. The FY26 CPI estimate is revised down to 2.4 per cent from 2.7 per cent previously,” she added.

 

The Reserve Bank of India’s Monetary Policy Committee’s recent decision to maintain current interest rates, combined with its upward inflation forecast of above 4 per cent for the first quarter of the financial year 2026-27, has weighed on investor sentiment. The yields on the 10-year government bond hardened by 22 basis points until Wednesday in the second quarter.

 

The government’s borrowing programme for the second half of the fiscal year, amounting to Rs 6.8 trillion, continues to be closely monitored by traders.