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Indian government bond yields jumped on Tuesday, with the 10-year benchmark bond yield posting its biggest surge in eight months, as vote-counting trends showed that Prime Minister Narendra Modi's Bharatiya Janata Party-led alliance would win a narrower majority than was expected.
India's benchmark 10-year yield ended at 7.0382%, following its previous close at 6.9438%. The yield also witnessed its biggest single-session climb since Oct. 6.
Indian shares tanked the most in over four years, while the local currency also dropped.
"If we see a government formation with around 280-290 seats, then we may see some more volatility in bonds in coming days, and post that the focus would then shift to factors like monetary policy and July budget," said Alok Singh, group head of treasury at CSB Bank.
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Trends showed the NDA is unlikely to win a decisive majority as predicted by exit polls over the weekend. India's exit polls, conducted by polling agencies, have a patchy record as they have often got the outcome wrong.
Modi's own BJP was falling short of a majority of its own in the 543-member parliament, the trends showed. Having to depend on allies to form the government could introduce some uncertainty in policymaking as Modi has ruled with an authoritative hold in the last decade.
Market participants fear that a thin majority may force the government to undertake more populist measures in the coming months, which may impact the fiscal consolidation trajectory.
Manish Bhargava, a fund manager at Straits Investment Management, said uncertainty surrounding a convincing BJP victory could lead to a spike in bond yields, causing volatility as market participants will reassess the political landscape.
Meanwhile, the Reserve Bank of India's monetary policy decision is due on Friday, and the central bank is expected to maintain a status quo on policy rates and stance.
