Bond Yields May Ease Further With Macro Conditions In Place; SDLs Likely To Buck The Trend

Yields on the 10-year benchmark bonds could ease given supportive domestic conditions and the global backdrop.

Yields on the benchmark 10-year G-Sec had hardened ahead of the GST council meet amidst concerns that recent days' proposed cuts in the Goods and Services Tax revived fiscal concerns and raised fears of increased debt supply. The benchmark bond yield was at 6.448% on Tuesday as of 9:56 a.m., from 6.585% at the start of the month.

"Given the net impact of slightly over Rs 48,000 crore, based on the FY26 consumption base of net impact on GST revenues, we believe that the fiscal cost can be easily contained, especially for the central government," said Sanjeev Prasad, MD and co-head, Kotak Institutional Equities.

"We believe that the recent increase in G-Sec yields could ease marginally in the near term," he said.

Shantanu Godambe, fund manager at DSP Mutual Fund, estimates the benchmark bond yield to ease to between 6.2 and 6.26, given that domestic inflation is under control and there is limited scope for the government to slip on the fiscal path.

The government will meet market participants to take care of yields at the longer end, and the shorter end of the curve too is expected to eventually come down after seeing some flattening, Godambe said.

"The global backdrop with the weaker nonfarm payroll, expectations of a Fed rate cut and the US bond yields themselves cooling down will have some impact," Sonal Varma, chief economist at Nomura, also said. Along with Fed rate cuts, the macro outlook in the US is also important, said Varma.

Domestically, given that the hit to central finances is now being estimated to be lower than anticipated, it can be covered by the compensation cess, she said, adding that there is no additional borrowing that is needed.

Meanwhile, yields on the State Development Loans are likely to remain elevated. Like the centre, states will also lose revenue, and the impact from higher consumption is likely to help recoup revenue only partly, Madan Sabnavis, chief economist at Bank of Baroda, explained. As such, some states are likely to miss their fiscal deficit targets unless they trim spending at the cost of capex, which is not ideal at a time government capex continues to drive growth. It depends on the financial arrangements that the centre works out with the states, Sabnavis said.