Bond Yields Surge to Highest Level Since July 2024 Amid Fiscal Worries and Inflation Pressures

Bond yields surged on Friday after the government cut excise duties on auto fuels, sparking fiscal worries alongside inflation pressures from high oil prices and increased state government borrowing supply, said market participants. The yield on 10-year benchmark bond ended at 6.94, up 7 bps from the previous close, the highest since July 2024. The uncertainty over duration of the ongoing West Asia war has led to further rise in crude oil prices, which hovered around $ 110 per barrel on Friday, up 2.6%. Consequently, the government cut the special excise duty on petrol and diesel to ease the burden on oil marketing companies (OMCs). According to a report from State Bank of India , the centre’s revenue will be hit by at least Rs 2.1 lakh crore from the cut in excise duty cut on diesel and petrol. Notably, this number will increase if we consider higher production levels next year, it said. Besides this, record state bond supply during the week pressured the market. States borrowed Rs 54,834 crore at Tuesday’s auction and Rs 39,991 crore on Friday, totaling far more than the earlier indicated Rs 59,985 crore for both auctions. “A combination of fiscal worries from cut in excise duties and higher state bond supply weighed on the market. Buying interest was absent, pushing yields sharply higher even on low volumes. We might see 6.95% holding if there is no escalation; but any new developments can drive yields to even 7.10%,” said a dealer at a primary dealership. “The bond market was supported well by the RBI’s liquidity measures earlier. The yield curve has already adjusted to the new reality, pricing in impact on both the inflation and the fiscal position of the government. The huge supply from states got bid at a record spread, moving the yield curve higher,” said Alok Singh, treasury head at CSB Bank . He added that a quick resolution of war can keep the yields below 7% otherwise it may see a breach of 7% as well.